supply chain leader: reaping the rewards of innovation (issue 4)

Ideas & Innovations from i2 TechnologiesIdeas & Innovations from i2 Technologies

October 2007October 2007

The Supply Chain Results CompanyTM

• Cycle-Time Optimization

• Demand Sensing

• Risk Management

• Lean Manufacturing

PlusInterview with GM’s Adriana Karaboutis

James Champy on Change-Initiative PitfallsBurt’s Bees on Sustainable Supply ChainsManaging in High-Growth Environments

• Cycle-Time Optimization

• Demand Sensing

• Risk Management

• Lean Manufacturing

PlusInterview with GM’s Adriana Karaboutis

James Champy on Change-Initiative PitfallsBurt’s Bees on Sustainable Supply ChainsManaging in High-Growth Environments

i2 Senior Director,MarketingBeth Elkin

EditorVictoria Cooper

Art DirectorPeter Klabunde

Circulation ManagerSangeeta Bajaj

Contributing WritersLauren BossersMichael CohenCynthia FuscoElizabeth GreerJon KempDeborah NavasTom Smithyman

Editorial Advisory BoardSanjiv Sidhu –

Founder and Chairman of the Board

Pallab Chatterjee – Interim Chief Executive Officer

Hiten Varia – Executive Vice President,Global Customer Operationsand Chief Customer Officer

John Cummings – Senior Vice President and Chief Marketing Officer

Chuck Kramer – Senior Vice President, Retailand Consumer Industries Sector

Aditya Srivastava – Senior Vice President andChief Technology Officer

Kelly Thomas –Senior Vice President,Manufacturing Sector

Razat Gaurav –Vice President, Global Logistics

October 2007 Vol. 2, No. 2

Reproduction of this magazine in whole or in part in any medium is prohibited without written consent of the editor. Contact: [email protected].

© Copyright 2007, i2 Technologies, Inc. This magazine is available online at www.i2.com.

In This Issue

Supply Chain Leader / October 2007 1

Cover storyShort Product Life Cycles Demand Innovation Throughout the Business

by Pallab Chatterjee

Page 4To compete today, consumer goods manufacturers must focus not only on innovationsin product development but also on meaningful changes in four key areas of the business—technology, process, partnerships and market strategy.

Features

Case studiesPage 22 Cooper Tire Rolls Out New Systems for Better Demand Fulfillment, by Lauren Bossers 0 Customer-Centric Approach Drives Global Growth for Tata Steel, by Elizabeth Greer

ColumnsPage 10 Cycle-Time Optimization: From Concept to Cash Register Faster—and More Profitably,

by Gurdip Singh and Chuck Kramer Page 20 Order Fulfillment: Using Order Management to Get Closer to Your Customers, by Rajat Bhargav Page 39 Risk Management: New Technologies Help Identify and Mitigate Risks, by Darren Ward and Anand Iyer

DepartmentsPage 3 Perspective: Innovation Through People, Process and Technology, by Sanjiv Sidhu Page 12 Interview: Inside Supply Chain Globalization at GM. An interview with Adriana Karaboutis, by Victoria Cooper Page 32 Opinion: What are the top priorities in supply chain management for your business? Interviews with Burt’s

Bees, AMR Research, ADTRAN and i2, by Michael Cohen Page 36 Focus: Protecting Revenue Through Supply Chain Risk Management, by Ravi Vancheeswaran of

ON Semiconductor Page 45 Viewpoint: Changing the Way You Work and Think About Your Business. An interview with James

Champy, by Victoria Cooper Page 48 Inside i2: Winners of the 2007 Global Ken Sharma Award for Excellence, by Tom Smithyman

Page 17

There’s Power in POS Data—Not Just for Retailers, but for Suppliers Too by Mohan Balachandran and Jim Morganstern

Page 42

The “Lean” Challenge inDemand-Driven Value Chains by Aamer Rehman and Kelly Thomas

Retailers’ new emphasis on inventory at the shelf level adds a new level of customer service.Essentially, it’s vendor-managed inventory—though not at the distribution center.

In the extended enterprise, thematerial-control techniques usingthe traditional manual/visual methods are no longer sufficient tosynchronize material flow.

Page 24

Managing Supply Chains inHigh-Growth Environmentsby Gaurang Pandya and Venky Nayar

Five key areas must be specificallyaddressed for high-growth markets:organization, supply chain design,planning, demand shaping and managing transitions.


Perspective by Sanjiv Sidhu

Companies have been grappling for the past twodecades with what will drive the evolution of supply chainmanagement. At General Motors (see Interview, page 12),Adriana Karaboutis suggests that it’s people (for domainexpertise), and business reengineering expert James Champymaintains that it’s process (see Viewpoint, page 45).

You would think that we at i2 would cite technology.But we don’t. When I cofounded i2 with Ken Sharmaalmost 20 years ago, we were focused on process innovation.In fact, we embedded many processes in our software. Butsoftware alone cannot drive change. The companies thatreceive the full range of benefits from their softwareimplementations also implement business process changes.

What is our approach to supply chain innovationtoday? I like to think of it as the analysis of extremes. Weencourage i2 employees to envision our customers at atheoretical level of best performance, or what we wouldcall extreme performance.

Let’s take inventory as an example. We might ask,“How can a customer reduce its inventory by half?”Instead of contemplating moving from $100 million ininventory to $50 million, we suggest finding ways toachieve near-zero inventory—which would be consideredextreme performance. Thinking about that near-zero state helps us to understand with greater clarity the firstprinciples and process changes required to support ourgoal—in this case, inventory reduction.

When thinking about the processes required to effectsuch a step-level change in performance, we ask our peopleto think about what technologies might not only supportnew processes but also be the catalyst for them. At i2, webelieve that technology should focus on supportingadvanced processes—those that make a company moreagile. When this is the case, process innovation is symbioticwith what technology is capable of doing. The result isgreater agility, or “managing in the face of variability.” Inother words, today’s advanced processes help companiesmanage risks, exceptions, demand and other variablesresulting from market and competitive forces.

Enhancing iterative capabilityInnovations in supply chain management have come,

in large measure, from the ability to iterate multiple scenarios at high speed, enabling businesses to make better-informed decisions faster, as problems arise. As an example,say your demand level is at 100, but your supply is at 80.

What should you do about the disconnect? Should youproduce more to meet the demand or, through a combi-nation of promotion and production, achieve a demand/supply balance of 90-90? Which approach will be moreprofitable for your business?

Problems like this arise every day in supply chain management, and innovative processes and technologiescan support the iterative process needed to solve them.

We used a unique combination of process and technologyinnovation to create an agile demand/supply managementprocess for Panasonic, for example. As Mike Aguilar,Panasonic’s senior vice president of supply chain strategicinitiatives, explained, “When Panasonic took on the projectof shifting our emphasis from supply to demand andshifting our forecasting to a point-of-sale system, we hadtwo choices. We could go through the traditional processof buying software and installing it inside our company…or we could have i2, which has extensive software develop-ment and consulting services, perform the data capture andanalysis for us. We decided to ‘rent’ both the software and i2’sexpertise in forecasting analysis. We were able to get thisproject going in just a few months rather than a few years.”(Supply Chain Leader Interview, Spring 2006, pages 6–7.)

Through this approach, Panasonic achieved increasedrevenue and inventory performance in a short time. Whilewe know that profound change is not a short-term propo-sition, we also appreciate that early successes are importantin overcoming the resistance to change inside companies.i2 Operations Services is helping more and more companieslike Panasonic move from a less desirable to a more desir-able end-state of best practices and process excellence inthe timeframe demanded by increasing globalization andcustomization.

Besides driving greater and faster process and technologyinnovation, the approach we take with i2 Operations Servicescreates a greater synergy among people, process and tech-nology. It’s my belief that it isn’t just the functional wallsthat need to come down inside companies. It’s also thewalls separating these three interlinked engines of highperformance.

Innovation Through People,Process and Technology

Sanjiv Sidhu is the cofounder of i2 andthe chairman of the board.

Contact: [email protected].

Supply Chain Leader / October 20074

Short Product Life CyclesInnovation Throughout

Short Product Life CyclesInnovation Throughout


he consumer goods marketplace has always been fastpaced and unpredictable. After all, selling retail productsis based on understanding the current needs of end users,then rapidly developing new offerings that address thoseneeds before they inevitably change. Add the challengesof maintaining high product quality and generating strongprofits, while managing increasingly complex supply chainsfrom end to end, and it’s easy to see why so many consumergoods manufacturers struggle to achieve lasting success.

Recent trends have made the consumer goods market-place even more difficult to navigate. Product life cycleshave been slashed dramatically. The Internet’s increasingimportance as a retail sales channel has increased com-petition, often from smaller companies whose Web sitesmight look very similar. In addition to leveling the playingfield, the Internet has also contributed to an increase inprice transparency, enabling consumers to make quickpurchasing decisions based solely on price. The result?Today, prices are dropping faster than ever following an initial market launch, even on the most exciting,innovative products.

Causing prices to fall even faster—and even lower—is the rapid commodization of products today. Even the most groundbreaking technologies or designs arequickly copied or advanced by competitors. The majorityof trendy products become obsolete quickly, as they arereplaced with “new and improved” concepts that captureshoppers’ attention.

This rapid pace has led to an even greater demand fornew products by both retailers and consumers. Retailersare continually adding new shopping seasons, as well asdemanding customized products that help differentiatetheir stores in a crowded marketplace. In addition, today’sconsumers expect to see products that are customized to their exact preferences, or that reflect the latest fashion trend.

CYCLES CONTINUED on Next Page . . .

Demandthe BusinessDemandthe Business

By PallabChatterjee

To compete today, consumergoods manufacturers mustfocus not only on innovationsin product development butalso on meaningful changes in four key areas of the business—technology,process, partnerships and market strategy.

T


Facing so many demands from the marketplace—andthe pressure to manage a global supply chain at a break-neck pace—manufacturers often struggle merely to keepup. Many companies design and introduce products sorapidly that they don’t have a genuine understanding ofthe real-world risks, payoffs and rewards associated witheach new product, let alone of setting and achieving long-term strategic goals. They make enormous investments indesign, tooling, manufacturing and inventory, often with-out a well-defined plan for maximizing profitability overthe entire product life cycle. Often, the life cycle endsbefore the manufacturer has a sound sense of the product’sultimate contribution to the business.

Why do many consumer goods businesses—even thosewith qualified executives, state-of-the art facilities, globalresources and successful retail partners—struggle to achievea profit today? And why do so many new products—eventhe truly revolutionary ones—fail? The answer is simple.While companies are focusing on innovation in theirproduct designs, too often they are trying to support thesefast-moving, revolutionary products with an outdatedsupply chain that can’t keep up.

Competing in a fast-paced, unpredictable retail market-place means operating with a global supply chain that isdesigned to deliver the seemingly impossible combinationof speed and risk management. But powerful new tech-nology solutions are available to help manage complex,end-to-end supply chains that stretch around the world.To fully leverage these technologies, consumer goodsmanufacturers will have to tailor their global supply net-work, and their individual business processes, to theunique demands of today’s marketplace.

The new-generation supply chainMost consumer goods supply chains were simply not

designed—and have not been adequately updated—tosupport the success of products with short life cycles.

“New-generation” products used to be launched everyfew years. But today new innovations seem to come everyfew months, especially in trend-conscious categories such aselectronics and apparel. Too many businesses are strugglingto adapt their old, “every few years” business models to therealities of launching new products much more frequently.

In addition, supply chains have become increasinglycomplex, with raw materials suppliers and manufacturingfacilities around the world contributing to the ultimateprofitability of every product. Overwhelmed by the sheervolume of supply chain information available, manufac-turers often choose to focus their attention on the upfrontactivities associated with product design, instead of gainingstrategic insights across the end-to-end product life cycle.To compete in the current marketplace, they’ll have to re-examine their overall approach and take a fresh look at every business process. They’ll need to have in placethe best possible information, as well as the best processesand technologies, to make rapid decisions that are trulyinformed—not just best guesses.

In other words, businesses will need to support theirproduct differentiation by innovating across the enterprise,with business and supply chain processes that match thespeed and counteract the uncertainty of today’s market-place. When innovation occurs across the business,completely re-invented business models will emerge.

To create a new-generation supply chain that will support a company’s short- and long-term success, mean-ingful change must take place in four key areas—technology,process, partnerships and market strategy. (See Viewpointon page 45 for James Champy’s insights into resistance tochange inside organizations.)

Most consumer goods supply chains werenot designed to support the success ofproducts with short life cycles.

Optimize Across Cost, Price Realization and Volume for Entire PLCDesign Source Mfg Decision Distribution End of Life

• Product Marketing

• Reuse Strategy

• EngineeringCustomizations

• Portfolio Timing

• Product Delivery

Excellence

• Launch Readiness

• Supplier Quality

• Material Cost

• Demand Volume

• Price Termsand Conditions

• Flex Capability

• Time Zone vs.Global: where to produce forwhich market for what device

• ManufacturingModel

• Demand vs.Capacity

• Inbound

• Outbound

• Conversion Cost

• Service/Returns

• Disposition

• Markdown

• Reuse

• Cannibalization


Technology innovation: look beyond the businessTo keep up with the incredibly fast pace of technology

development, consumer goods manufacturers may have to look beyond their own organization. Most businessesinvest heavily in internal product development, but mayoverlook the opportunity to acquire existing technologiesdeveloped by smaller companies. As consumers demandincreasingly inventive products, manufacturers may findthat their own internal development efforts cannot keeppace—and that they need to consider more innovativeways of maintaining their technology leadership.

A number of companies have emerged as leaders inthis area, including Cisco, which has continually expandedits business model and global supply chain to include specialized technology companies that complement its ownstrengths and strategies. Both the open-source approachof Linux and Microsoft’s independent software vendornetwork have demonstrated that the Internet can beleveraged to create a global community of experts whocontinually contribute to product improvements. Theseexamples should inspire consumer goods manufacturersto explore similar innovations in their own technologydevelopment efforts.

Process innovation: reinvent the supply chainNearly every manufacturer has a process improvement

initiative in place, but the vast majority of these initiativesare too narrow—focusing on a single metric that may notbe related to larger strategic goals. And, while consumergoods manufacturers have invested in sophisticated tech-nology solutions, these tools cannot fulfill their potentialunless the end-to-end supply chain is configured in themost efficient manner. To support shorter product lifecycles, nearly every process within the supply chain must bereviewed to ensure that it is operating at maximum speed

and cost effectiveness. Broad supply chain innovations areneeded, as well as a new level of visibility into every cornerof the global supply chain. Processes must change fromthe beginning to the end of the total product life cycle,from prototype development to end-of-life liquidation.

Pioneers in process innovation include Toyota, whichrevolutionized automotive manufacturing with its tightcontrol of the total supply chain—resulting in high quality,short lead times and outstanding cost efficiencies. Dell isknown for its innovative strategy of selling computersdirectly to consumers, generating enormous profits byeliminating inventory. These kinds of groundbreakingprocess innovations could help consumer goods manu-facturers differentiate themselves in the marketplace, aswell as significantly improve their profitability.

Partnership innovation: join forcesTo increase their chances for success, and share both

the risks and the rewards of today’s fast-paced market-place, a number of manufacturers are working with otherbusinesses—including customers, suppliers and evencompetitors—to create a new ecosystem that supportstheir mutual success.

An extraordinary example of this kind of partnershipapproach is the Wi-Fi Alliance, a group of industry lead-ers—including Motorola, Sony, Nokia and Intel—thathave joined to enforce product quality and compatibilityby creating a certification program for wireless devices.This effort supports the success of each member’s products,as well as promoting thought leadership and a commit-ment to quality across the entire product category.

Another innovative partnership between GeneralMotors’ OnStar and the communications industry has

CYCLES CONTINUED on Next Page . . .

Benchmark Life Cycle Cost Components

• Engineering• Platform/Software• Direct Materials

Cost• Manufacturing/

Conversion Cost:Direct Labor,Indirect Overhead,Outsourcing,Tools and Dies,Scrap

• Marketing/DemandGeneration Cost

• Promotions• Operator/Channel

Subsidy (Price Protection)

• Sales and OperationsCost: Sales Comps,Planning Costs

• Process and ActivityCost:Order Management,Inquiries, VMI

• Freight:Inbound/Outbound,Expedite

• Inbound/Inter-Facility Freight:Plant to DC,DC to DC

• Warehousing:Receive, Store, SpecialServices, Pick, Ship

• PromotionalPackaging:Operator-SpecificPackaging and Labeling

• Outbound Freight:Truck Load, LTL,Parcel, Air

• Warranty• Returns (cost

of poor quality):Freight,Processing

Cost to Produce

Cost to Marketand Promote

Cost to Sell

Cost to Fulfill

Cost of After- Sales Support

Design LiquidateSell


led to dramatic growth in the demand for integratedcommunications and data systems in automobiles. Bypartnering to promote both the importance and the availability of OnStar services, these companies havemade OnStar’s telematics technology the industry standard.It is now being licensed to many other automakers.Achieving success in today’s challenging environmentmay require consumer goods manufacturers to explorestrategic partnerships like these.

Market innovation: make the saleConsumer goods manufacturers must also innovate

through their ability to understand the end users of theirproducts. By achieving far greater insight into consumers’needs and desires, manufacturers can design products thathave a greater probability of success, minimizing the risksthat are inherent in short-life-cycle products.

Marketing success stories such as the Motorola RAZRand the Apple iPod were both based on generating andmeeting unprecedented demand from the marketplace.While neither of these products featured new or dramati-cally different technologies, their appealing, slim designs—as well as marketing campaigns that addressed end-userneeds—resulted in breakthrough sales.

Dramatic success stories like these may be the exception.But every consumer goods manufacturer can be inspiredby them to achieve a better understanding of marketplaceneeds, as well as to develop winning launch strategies thatgenerate excitement and increase demand.

Plan-do-check-act—at warp speedThe task of innovating in these four key areas—tech-

nology, process, partnerships and market strategy—mayseem daunting enough, but consumer goods manufacturersface yet another imperative if they want to succeed in thenew era of short product life cycles. Most businesses alsoneed to change their foundational culture and philosophy,matching the speed of the marketplace with a correspondingsense of urgency and agility across the business. Simplyput, they must take the traditional plan-do-check-actcycle to warp speed.

With product life cycles squeezed to their limits, con-sumer goods executives can no longer form committeesand conduct months-long studies when a product fails toperform as expected. Instead, they must create a new wayfor the business to react immediately to changes in salesvolume, new pricing pressures or other critical trends thatcan mean the success or failure of their products.

Consumer goods manufacturers need to ensure notonly that they are making decisions quickly, but also thatthey are making the correct decisions to support eachproduct’s success in the marketplace. As product lifecycles are compressed, each individual decision assumesmore weight and carries farther-reaching consequences.In fact, a wrong decision made early in the product life

cycle can mean the ultimate failure of the product, nomatter what the business does to counter that mistake as the life cycle continues.

Making intelligent, correct decisions quickly might seemlike an impossible challenge, and there is a long history of failed product launches to support this conclusion. Theanswer lies in making decisions that are based on real-world data and information—from suppliers, customers,end users and every part of the business itself—as well asbasing decisions on a logical, predetermined set of criteria.(See Opinion on supply chain priorities, page 32.) At eachstage of the product life cycle, the business must gatherthe most recent insights needed to make truly informeddecisions about the product’s future. Even though themarketplace will always be unpredictable, the businessmust respond in predictable and pre-defined ways thatmaximize its profit margins, and minimize its financialrisks, throughout the end-to-end product life cycle.

For example, during the typical life cycle for a trendynew product, there will be a time when point-of-sale dataindicate a drop-off in cash-register sales—often in antici-pation of a new, competitive product that is about tolaunch. Instead of holding a series of panicky meetings,and rushing to make an ill-informed decision, businessesmust learn to react in a way that has been determined tomanage margin squeeze and extend a specific product’sprofitability as long as possible. Meanwhile, other businessactions might be triggered, such as expediting the launchof the new product that will replace the current one, sothat the organization can boost the chances of its long-term success.

Because every consumer goods business operates withits own set of selling channels, profit margins, transporta-tion and distribution systems, inventory and materialsconstraints and supply networks, these decision criteriamust be customized to each business. In fact, a separateset of decision criteria should be established for everynew product to address the unique challenges associatedwith that particular offering. Businesses face dramaticallydifferent challenges when they are introducing an entirelynew product genre, versus an improved technology platformor a new product model—and their decisions should bebased on an entirely different set of criteria. (See sidebar,“Ensuring Continuous Product Innovation” on next page.)

It may be tempting for consumer goods manufacturers,already overwhelmed with the demands of today’s market-place, to install a “one size fits all” decision solution. But thisapproach overlooks the nuances of each new product, andthe distinct market environment in which it will be launched.

As product life cycles are compressed,each individual decision assumes moreweight and carries farther-reaching consequences.

As product life cycles are slashed, consumer goodsmanufacturers face two challenges: managing the profit-ability of each individual product and ensuring that thereis a continuous stream of new offerings to support long-term profitability and growth. Too often, manufacturersbecome so focused on a winning new product that theyare caught unaware when demand suddenly—andinevitably—shifts.

Ongoing product launches cannot simply focus onnew technology platforms or models that are merelyupdates of a successful product. While these can represent asignificant revenue stream, consumer goods manufacturerscannot lose sight of the importance of launching newproduct genres that will revolutionize the entire categoryand dramatically alter the competitive landscape.

Each of these three kinds of product introductions—genres, platforms and models—must be managed in different ways to ensure their profitability, as well as tosupport the long-term success of the business.

New product genres, which are typically launched everytwo to three years, represent a breakthrough capability ineither technology or design. Some examples of successfulnew product genres include Apple’s iPhone, Nintendo’sWii gaming console and the wireless BlackBerry devel-oped by Research in Motion.

Since these kinds of product introductions have thepotential to redefine the category, they are typically thefocus of significant investment. Consumer goods manu-facturers are certainly justified in betting significantresources on the success of a new product genre, but theycannot afford to grow complacent. Even the most revolu-tionary new offering will be replaced eventually, andmanufacturers need to start looking toward the nextgenre almost immediately. After all, every one of their

competitors will be focusing substantial resources onlaunching the next category-changing innovation.

New product platforms represent an opportunity formanufacturers to introduce technology enhancements toexisting genres, refreshing consumer demand levels every12–18 months. New platforms create an ongoing revenuestream and help to support a position of technology lead-ership. However, manufacturers must ensure that eachplatform launch signifies a meaningful technology upgradethat current users will perceive as valuable. Successfulplatform innovations include Microsoft Windows NT,the introduction of the 1080p HDTV video mode andthe launch of three-megapixel camera phones.

New product models can help a successful genre continueto generate revenue, as well as address previously untappedconsumer preferences. Introducing an additional productcolor or an innovative feature every 3–6 months helps drivecontinued cash-register traffic and win new consumers.Product models are often based on fashion trends, so theymust be brought to market quickly. The colorful array oflaptops, cell phones and MP3 players that are continuallyintroduced demonstrate the marketing and sales power of new product models.

In many fast-moving categories, such as electronics,lasting retail success comes from maximizing the financialcontribution of individual product life cycles and fosteringongoing product development to ensure a continuousflow of new genres, platforms and models. Manufacturerswho focus too narrowly on one area—for example, con-stantly introducing new product colors and features,instead of anticipating the next category-changing genre—will miss a larger opportunity for long-term market leader-ship and profitability.

–Pallab Chatterjee

Ensuring Continuous Product Innovation

Pallab Chatterjee is i2’s interim chief executive officer.

The new supply chain modelWhile the new world of short product life cycles has

brought enormous success to many companies—includinginnovators such as Motorola and Apple—the majority of consumer goods manufacturers today are simply notprepared for this new market reality. Most experienceuneven results, at best, as they struggle to adapt their old ways of doing business to a new, demanding andcompetitive landscape. Overall, there are far more failedproduct launches today than enormously successful ones.

There will always be a certain level of inherent riskwhen trying to devise and launch new-generation productsthat are aimed at the ever-changing needs of fickle con-sumers. But manufacturers can maximize their chances ofsuccess by rethinking their supply chain, and their overallbusiness model, to support the new way they need to dobusiness today.

New-generation supply chain solutions can help man-ufacturers increase visibility and control across the totaldesign-launch-sell-liquidate life cycle of their products, aswell as provide critical support for their ongoing decisionsabout price volumes and market attributes. But leveragingthese solutions to their fullest potential usually requires asignificant effort to innovate across the global supply chain.

By matching every part of their business model andsupply chain to the challenges and competitive impera-tives of the marketplace, consumer goods manufacturerscan significantly increase the success rates for individualproducts, as well as their long-term revenues and profits.



profits, greater differentiation and increased loyalty.However, retailers are discovering that there is enormousfinancial risk in assuming responsibility for the entiredesign-to-shelf process. Retailers may wield significantpower when purchasing finished goods, but that powerdisappears when they become the designer and the man-ufacturer—and there is no longer anyone to accept theirproduct returns. Every private-label strategy represents a tremendous financial investment, with no guarantee of success.

Cycle-time optimization, always a strategic imperative,plays an absolutely critical role in the private-label businessmodel. To accurately predict and capitalize on fashiontrends and regional preferences, retailers must drasticallyreduce cycle times so that they can delay decisions asclose to the start of the selling season as possible. Thismeans taking a close look at every aspect of their supplychains, as well as rethinking their traditional relationshipswith supply chain partners.

Beyond business as usualTo design and deliver private-label products, retailers

must extend their traditional supply chains to includeraw-materials suppliers and manufacturing organizationsaround the world. In this new model—which requiresretailers to assume the risks associated with raw materials,manufacturing and inventory—retailers must view eachsupply chain process as an opportunity to cut time and costs.

Retailers need to realize that information sharing andvisibility—both within their own businesses and acrossthe supply network—can lead to faster cycle times, lowercosts, increased margins and higher revenues. By fosteringcollaboration, retailers can collapse individual processtimes, drive out unnecessary costs and turn the concept-to-market cycle into a series of parallel, not sequential,steps that move products continuously and quickly towardthe cash register.

Closer inter- and intra-enterprise collaboration alsoenables retailers to maximize their forward visibility,since any constraints can be more easily identified andaddressed. Retailers can also track any changes in demandforecasts or materials reservations, increasing their agilityand responsiveness. And, by sharing the same cycle-timemetrics across the global supply chain, retailers can ensure

From Concept to Cash RegisterFaster—and More Profitably

Cycle-Time Optimization by Gurdip Singh and Chuck Kramer

For retailers, achieving growth year after year used tobe fairly straightforward. The formula for success seemedsimple: aggressively open new stores. But, in today’sincreasingly crowded and diverse marketplace, a one-dimensional strategy based on rapid store expansion is notenough to guarantee growth in either revenues or profits.

Retail space is at a premium today, and consumers enjoymore shopping options than ever. They are often able tocompare prices on the same product across multipleshopping channels, such as online and catalog, versusphysical store location. Channel blurring has added toshoppers’ choices, while eroding their loyalty to any singleretailer. For example, as mass merchants have begun tosell groceries, and grocery stores have begun to sell gas,consumers can choose from a seemingly unlimited number of options for these common purchases.

This enormous range of choices has resulted indemanding shoppers. Consumers today expect not onlylow prices, but also product assortments that are customizedto their specific preferences—creating new pressures forretailers to custom-tailor their store assortments to diverselocal markets.

To differentiate themselves in an increasingly crowdedmarketplace, and offer truly unique products, many retailershave turned to private-label product strategies. By design-ing and manufacturing products, retailers can leveragetheir own customer knowledge to create one-of-a-kindofferings that are customized to the needs of their localstores, while also maximizing their profit margins.

Given the potential payoff, it’s not surprising that in-house brands are growing in both popularity and influence.In fact, a recent study by AMR Research states, “Surveyresponses show consistent growth in private-label pene-tration from 2006 to 2008. 37% of total sales were derivedfrom own-brand products in 2007 and [this category] isexpected to grow by 11%.” (AMR Research Report,April 2007, “The State of Fast-Moving Consumer GoodsRetailers: the 2007 Technology and Process Review,” byMike Griswold and Fenella Sirkisoon.)

Private-label products offer the potential for higher

Singh Kramer

37% of total sales were derived fromown-brand products in 2007, accordingto AMR Research.


ongoing improvements in overall time and cost performance.

Optimizing cycle times: five key areasCompeting in the private-label marketplace requires

retailers to embrace collaboration and visibility in everypart of the business. Through i2’s work with both retailersand manufacturers, we have identified five key areas inwhich enhanced visibility and collaboration can eliminatemonths in private-label cycle time.

1. Integrated design and demand planning.Typically, a private-label sourcing team learns of newproduct designs and associated raw-materials needs aboutsix months before the beginning of a selling season. Buti2 has discovered that 8–10 weeks can be taken out of the product development cycle by sharing informationabout designs at a much earlier stage. Buyers can activelycollaborate with designers, as well as with a core group ofsuppliers, to choose the most cost-effective materials andmanufacturing processes. Instead of being presented withfinal designs, and then scrambling to line up materialsand manufacturing facilities, buyers become part of a fluiddesign process that considers materials and manufacturingcosts up front.

In addition, the forecasting team has a much greateropportunity to study market trends and create accuratedemand projections when specific product-design infor-mation is shared earlier. By sharing forecast informationas early as possible, retailers can minimize risk and maxi-mize responsiveness across the supply network.

2. Strategic sourcing. Early notification also allowsbuyers to consolidate orders for raw materials acrossnumerous products, pre-position materials that may bedifficult to find and create flexible supplier contracts thatinclude options to purchase additional materials—orwithdraw from contracts—as demand projections shift.While actual purchase orders are not formalized untilcloser to the selling season, buyers can gain an earlierunderstanding of supplier costs and capacity constraints.Products are manufactured and brought to market faster,and profitability is enhanced through strategic suppliernegotiations that make the most of purchasing investments.

3. Integrated manufacturing planning. Private-labelproduct teams can cut significant cycle time by usingearly design specifications to choose the most cost-effectivemanufacturer, as well as to plan exactly how products willbe made and shipped. For example, the sourcing team canweigh the positive financial implications of manufacturingin large quantities against the costs associated with carryinginventory. If the sourcing team partners with a core group

of suppliers, team members can also use this preliminaryinformation to position multiple products and raw materialsacross vendors, ensuring high capacity utilization and aconstant flow of product through the supply chain.

4. Dynamic inventory utilization. Similarly, buyerscan work with multiple raw-materials suppliers to allocatematerials in the most timely and profitable manner. Theprivate-label buying team can consider such factors asmaterial costs and capacity levels to make more strategicdecisions about acquiring raw materials, and to ensurethat materials are shipped just in time to keep the overallsupply chain running efficiently and profitably.

5. Flexible distribution. A flexible approach to thedistribution process can save significant time and costs byallowing retailers to analyze data on prices, profit marginsand capacity constraints at various supplier facilities—andmake more fluid decisions about how to move productsthrough the supply chain. At most companies, such decisionsare made on a product-by-product basis by individualsourcing managers, but i2 helps retailers gain visibilityacross all their private-label offerings. This ensures thatthe right assortments will hit the right stores at the righttime, and in the most cost-effective manner.

Sharing information across the networkWhile many retailers may be initially reluctant to

share so much of their strategic information with theirglobal supply network, it is the only way to achieve thedramatic time and cost improvements that today’s newretail environments demand.

It’s also the only way to manage the financial risk anddemand uncertainty that come with private-label strategies.By fostering greater collaboration with worldwide partners,retailers can delay critical decisions until closer to thestart of the selling season. When retailers can make moreintelligent and timely decisions about their private-labelofferings, they maximize their chances of selling productsat full price—and minimize the real financial risks associ-ated with excess inventory and markdowns. The tangibleresults are lower inventory levels, higher rates of in-stocksand faster inventory turns—leading to significantlyenhanced profitability.

Gurdip Singh is vice president of services for i2’s Retail

and Consumer Industries sector, and Chuck Kramer is

the senior vice president for that sector. Adam Hatch also

contributed to this article.

For more information, contact [email protected].

Interview by Victoria Cooper


How did you get into the field of supply chain management?

My career has been in and out of IT—I received mydegree in computer science and electrical control systemsfrom Wayne State University—but I’ve always been fasci-nated by the complexity of supply chain issues. As supplychains become longer due to globalization, the problemsget even more complex.

I’ve worked in IT as well, in the supply chain businessorganization. At various automakers, I ran productionscheduling as well as worked on the IT side. My businessprocess knowledge has definitely helped me in this role atGM, lending to more credibility on the operations side ofthe business. The supply chain organization here centersaround processes, and the IT people work in lockstep with

Inside Supply Chain

Adriana Karaboutis is the process information officerfor Global Purchasing and Supply Chain (GPSC) atGeneral Motors. She has been with the company for threeyears and reports to both the group vice president andchief information officer, Ralph Szygenda, and the groupvice president of GPSC, Bo Andersson.

Karaboutis is responsible for GM’s IT innovation andmodernization for purchasing, order fulfillment, supplyoperations and logistics worldwide. The systems she isresponsible for support the more than $100 billion thatGM spends for direct and indirect materials as well as forinbound and outbound logistics.

In this interview, conducted by Supply Chain Leadereditor Victoria Cooper in Detroit in early August, Karaboutisdescribes the impact of globalization and digitization onGM’s IT strategy for global purchasing and supply chain.

Scaling to different markets around the world calls for innovation and flexibility in the systemsthat support the business processes. Here’s what GM is doing to meet the challenge.

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the process leaders. I believe GM has a history of integratingtechnology and business processes very effectively.

Is on-time delivery still one of GM’s primary areasof concern?

Today more than ever—with the globalization of thecompany—delivering parts and vehicles on time is critical.We source, build and sell across the globe, and the accuracyand timely delivery within the supply chain of finishedproduct is critical for our suppliers, plants and dealers.Order-to-delivery (OTD) time is something we watchvery closely to meet each market’s specific demands. Forexample, in California people typically want a car “rightnow.” The market pattern is to buy off the lot. Peoplewant to see the car, feel the car and drive the car quickly.Outside the United States and in other parts of the country,the buying pattern may be different: ordering a vehiclemight be expected to take 25–30 days. In Germany, forexample, you see a significant amount of build-to-orderrequests. So, while delivering on time is still very importantto us throughout the supply chain, build-to-order, or OTDtimes, are designed to meet specific market demands byregion or country.

If you think about globalization and what we’re tryingto support in the supply chain and our global systems,we’re looking at a “produce anywhere, source anywhere,build anywhere, sell anywhere, service anywhere” kind ofparadigm. It’s not all about regional build and sell anymore.Now the globe is the footprint for all of our processes.From a systems perspective, this presents a new set ofchallenges around flexibility, speed and global availabilityof our systems.

What is the biggest challenge of globalization forGM, in your view?

GM is handling globalization extremely well. We arecurrently looking at our emerging-market strategies andworking from an IT perspective to ensure that we havecost-effective, scalable global solutions that will supportthe business in these markets. Bo Andersson, our GroupVP of Global Purchasing and Supply Chain, is looking tosource parts at “best-shore locations, ” so we need to makecertain that we provide systems capability so he can makethe best-informed decisions, based on best total landed

cost, very quickly. Bo makes purchasing decisions 24/7through buying organizations that are strategically placedaround the globe. These organizations buy for all vehicleplatforms around the world.

If we don’t provide 24/7 systems availability for thesebuyers with near real-time information, we will fail theorganization. Equally, we need to have supply chain systemsin place to support the release and movement of partsfrom suppliers to plants and of vehicles from plants todealers—seamlessly.

GM has no boundaries—geographical, structural ororganizational. And we want to use our entire supplierand manufacturing base to address global demand. So,our systems need to follow the same paradigm: global,seamless, cost-effective and scalable.

What are your major IT initiatives right now?

Our IT initiatives align strategically with GM’s busi-ness goals. In GPSC, we’re currently working to standard-ize on global systems that are in our “bill of IT,” which is similar to a “bill of material” for vehicles. By reducingregional-specific systems, we ensure that we will havecommonality around the world, that we can releaseupgrades to our systems and that all regions will benefitimmediately from these upgrades. This allows us to be ina much stronger position to react to business processchanges and requirements.

Simultaneously, we’re focusing on bringing all of ourlogistics systems in-house––these systems were historicallypart of a joint venture––as well as creating new functionalityaround best total-landed-cost analysis, steel purchasing,resale systems and overall modernization of our legacy systems.

What will be your next areas of focus?

We are going to continue working on our legacy mod-ernization with an eye toward creating the fastest, lowest

INTERVIEW CONTINUED on Next Page . . .

Globalization at GM

GM has a history of integratingtechnology and processes veryeffectively.

Interview (Continued)


As part of our strategy, we are commonizing on a stan-dard suite of supply chain software from i2 as the basis formost of this new functionality. Our objective is to leveragea common backbone and move away from custom codewhere it makes sense to do so.

We have very solid global systems in the core purchas-ing and supply chain functions. We’re looking to improvethese systems while delivering the new functionality that Imentioned earlier.

Could you elaborate on your use of one platform?

While we’re using the i2 Agile Business ProcessPlatform for functionality within i2 applications, we’realso using other methods for our legacy system modern-izations. Essentially, we are determining, system by system,the best approach for moving into the future.

cost systems for our emerging markets that align with ourbill of IT. Also, visibility tools are becoming more and morecritical with our expanding supply chain, and we need tostreamline the number of order management systems.

What did you inherit when you came into your role?

I inherited some very robust, solid systems that weredesigned extremely well to serve our current environment.Unfortunately, I inherited a lot more of them than weultimately want! That’s why we’re looking to retireregional applications that have duplicate functionalityaround the globe as we modernize our legacy environments.We have an excellent materials management system and aworld-class purchasing system. These are the cornerstones ofour GPSC suite. We are continuing to improve these froman architectural perspective and working to make them“lighter” and less monolithic in some areas. I also inheritedmultiple order management systems, and this is an areawhere some strong convergence needs to happen globally.We have a very strong agenda in this space. It involves com-ponentizing the order management systems into servicesand taking advantage of service-oriented architecture.

What has happened with electronic data interchange(EDI)? Is it still useful?

We’re very strong in EDI. Covisint is our strategicpartner for EDI, and it supports GM globally.

What about the 1990s purchasing portals GM gotinvolved in?

Our purchasing portal is our own in-house portal thatserves us well. GM SupplyPower is a solid portal thatserves as a gateway for suppliers to access GM’s Web-based systems. It’s a common system for GM to meetsuppliers’ needs across all process areas. We will continueto use it into the foreseeable future.

What are some examples of the new functionalityand capability GM wanted?

In addition to bringing our logistics systems back intoGM with our systems integrators, we are working on newfunctionality in the areas of supplier capacity planning and control, best total-landed-cost analysis tools, vehiclevisibility tools, and new metrics and reporting capabilities.Also, we’re working on a new steel purchasing application.

GM has no boundaries –– geographical,structural or organizational.

Andi Karaboutis is sitting in GM’s 2007 Pontiac Solstice.


The i2 system is a decision-based tool set. You can gointo particular solutions and pick the modules that workfor you. So, my first point of call is i2 for several purchasingand supply chain applications. I have found the i2 suite tobe the most robust at this point. But, if there’s anotherproduct that is best for us in a particular area, we certainlywill go with it. We have a good commercial agreementwith i2 that allows us the flexibility to engage quickly onnew projects. It has taken all the noise of negotiations out

of the way. As Bo Andersson always advises, “Focus ongetting systems delivered quickly, efficiently and at thebest cost. Avoid getting caught in redundant planning,talking, reviewing and contracting cycles that do not addvalue to the business.”

How do you rate GM in its systems sophistication?

If you look at GM as a business, we have one of themost complex supply chains of any company in the world.We have $86 billion worth of direct materials purchasedglobally, and 2,000 inbound trucks a day and 2,800 out-bound. We have more than 175 manufacturing facilities in33 countries. The supply chain is daunting. I believe oursystems rank among the best in the industry for managingthis complexity and providing seamless capability withzero disruption to the daily manufacturing process.

Our challenge is that we still have too many systems in regional applications. I mentioned the bill of IT earlier.Each process area has a bill of IT, and the bill dictateswhat systems are designated for every element of theprocesses. The goal is for these systems to be standardizedand deployed globally. In GPSC I have a little more than300 systems; however, my bill of IT dictates that I shouldhave much less than that number, after I’ve completedglobal rollout and alignment.

What are the biggest challenges today compared tothose of a few years ago?

The extended supply chain and globalization of ourbusiness dictate that we must have flexible, scalable, low-cost, high-performing systems. Real-time information atpeople’s fingertips with increased collaboration capabilityis a must. In order to get there from here, we have tomodernize our legacy systems, develop new functionalityand work with the business to drive business processalignment globally. I don’t believe we’ve ever had this levelof demand from our systems capability at any time in thepast. We have a lot of opportunity ahead of us.

From an IT perspective, we’re relying on standardizedwork and our basic focus on bill of IT as the cornerstonesfor what we do going forward. Each year we set objectivesfor improvement against this bill and then execute. TheIT organization operates as a global matrix organization at GM. We operate an outsourced model and look to oursystems integrators to deliver projects with us.

What has been critical for us in GPSC is the purchasingand supply chain expertise that our people have. We’vefound that unless you have domain expertise, you’re notgoing to be successful in commonizing processes or inestablishing supporting systems that hold up those processes.

INTERVIEW CONTINUED on Next Page . . .

Ralph Szygenda, our CIO, runs IT so that each process area has a bill of IT,like a bill of materials.

Interview (Continued)


What are the core processes you are focusing on nowwithin the supply chain organization?

Our key focus is on supplier footprint optimization,or what we call SFO. This refers to sourcing to the bestsuppliers globally based on performance, quality, pieceprice and capability to meet GM’s needs. Bo Andersson isvery focused on that. We’re trying to provide the best toolsto enable quicker decisions with more supporting data.The best total-landed-cost tool, the supplier capacity control tool, the vehicle and part visibility tool, as well asthe others I mentioned above are all new capabilities we’redeveloping to support globalization within the business.

What do you think of as innovation in supply chainmanagement?

Clearly, the next level of real-time collaboration andseamless support of the global environment is what weneed to focus on within the supply chain in support of ouremerging-market strategies. Ralph Szygenda has alwayspushed the information systems and services organizationto execute today’s needs while stretching us to innovate,transform and re-engineer our systems landscape for 5–7 years out.

Real-time information at people’sfingertips with increased collaborationis a must.


There’s Power in POS Data––Not Just for Retailers, but for Suppliers TooThere’s Power in POS Data––Not Just for Retailers, but for Suppliers Too

Improving customer experience at the shelf“Moving consumer product is becoming more like what

happens in the fashion industry,” explains Lora Cecere,research director for AMR Research. “The newest realityfor retailer marketing centers on improving consumers’experience at the heart of the store, where the criticalencounter with product takes place—at the shelf.” Thedeclining consumer impact of traditional marketing mediasuch as television, newspapers and magazines has refo-cused retailer attention to the store shelf and rack level,wooing customers by enhancing their in-store experience.”

In the interest of keeping shelves perpetually stocked,“retailers want to both sense and shape demand in realtime,” Cecere says. “Although nearly all consumer productsmanufacturers have used POS data for monthly categorymanagement, the new shelf-centric reality requires seeingmore granular data on a daily basis.

“For instance, account teams need to be able to look atthe entire Wal-Mart map daily, see the out-of-stocks aswell as anticipate them and immediately get down to workwith their merchandisers on resolving the issues. For retailersdetermined to prevent out-of-stocks and to conduct pro-motions that intimately connect to demand fluctuations,lag times are no longer acceptable,” Cecere explains. “Theability to use POS data in real time is absolutely key toeffective response.”

The execution of effective response, however, increas-ingly devolves to the consumer products manufacturer.Wal-Mart, for instance, has tasked its suppliers to worktoward higher and higher shelf-rate levels while reducingexcess inventory in the supply chain.

POS DATA CONTINUED on Next Page . . .

By Mohan Balachandran and Jim Morganstern

The old techniques for meeting customer and marketdemand—forecasting from historical data and holdinginventory—are no longer effective for consumer goodsmanufacturers dealing with increasingly high customer-service expectations. Traditional forecasting processes notonly tie up capital but are riddled with errors whenapplied to short-term demand and supply issues like shelfreplenishment.

And the increasing retailer/supplier need for timelyvisibility into store-level demand drives the developmentof new technologies—systems that employ point-of-sale(POS) data and intelligent, exception-based scenarios fortuning retail supply networks to market demand.

Visibility is the issue du jour in this era of rapidlymoving products, and the ability to understand shelf-levelevents as they take place is critical to rapid response.Historically, POS demand information has not been visibleto consumer products manufacturers in real time. The dataaspects of category management were typically contractedto third-party market-research firms like ACNielsen andIRI. These firms submitted reports including data on brandperformance and issues such as out-of-stocks—usuallytwo to four weeks after the fact, or longer, depending onthe amount of replenishment inventory on hand.

POS data have played a part in category managementsince the 1980s, when Wal-Mart first put its Retail Link®supplier network in place. “Generally, POS data weresomewhat dirty at first, but are a lot better now becauseretailers are using the data for their own replenishment,”says Larry Lapide, director of the recently launchedDemand Management Solutions Group at the MITCenter for Transportation and Logistics. “But evencleaned up, the data are still not very usable as-is for con-sumer products manufacturers who need to harmonizethat data with their own language and systems.”


why at the store shelf. It turned out there was an issuewith SKU sizes that weren’t appropriate for Asian women,and consequently the larger-size products only sold bymarkdowns. This is exactly the sort of disconnect thatwould be solved by POS data.”

Even with a 98 percent fill rate, the fine print can revealcostly fluctuations. Wal-Mart shelf fill rates are measuredeach Friday, revealing a weekly average across all storelocations. Consequently, demand variability by day or bystore is invisible. Most consumers shop on weekends, andif stock levels fall below 98.5 percent on Saturdays orSundays, proportionally more sales are lost.

An analysis i2 performed shows that even with a 98percent in-stock average over the weekend, 277 storesowned by one retailer would be out of stock of a particularSKU on Sunday. To take effective action, companies needdaily analysis by SKU and by store, and also need to evaluate how important each store is in terms of SKUsales. To obtain the data manually, they would have tolook at every SKU, at every store, every day.

Taming the data deluge“The biggest stumbling block with POS data is that

there’s lots of it,” notes Lapide. “As every shopper knows,product proliferation is epidemic on retail shelves. And,as every CP manufacturer knows, this SKU proliferationcreates data-tracking headaches of the first order. A typicalCP manufacturer might sell 500 SKUs through 4,000 Wal-Mart and Sam’s Club stores, tracking such functions as POS,must-arrive-by dates, fill rate, etc. The aggregation of allthe data can amount to 90 million pieces of data per day.

Sales-reporting tools traditionally used in operationalplanning are built to analyze trends and changes in largeamounts of data by storing the data in a repository andproviding pre-defined reports, drill-down capabilities, andad hoc tools for searching and mining the data. The toolsare designed this way because the user does not know, atthe outset, the relevant data to analyze.

As a result, replenishment teams still find themselvesdrowning in data, spending far too much time trying toidentify replenishment issues from retroactive informationthat isn’t operational. Analyzing demand-driven POSdata, on the other hand (specifically by identifying anddetermining the root causes of exceptions), provides a newlevel of immediacy and accuracy formerly unavailable toshort- and longer-term planning.

“From a forecasting perspective, POS data give advancewarning to enable response to change sooner,” saysLapide. “The data have been used on an ad hoc basis inoperational planning, but that’s beginning to change. i2has been one of the companies more involved in this areaover the last four or five years.”

The downstream challenge The benefits of demand-driven, POS-based business

intelligence do not stop at the shelf. Analysis of down-stream demand data also yields long-term demand-sensingand demand-shaping strategies. These strategies enablesuppliers to use consumer demand signals to quickly takeaction as new opportunities arise, improving categorymanagement and increasing brand equity as well as profits.

Leading consumer brands continue to be plagued withissues like stock-outs in one location while sufferingexcess inventory in another. While consumer productsmanufacturers have employed a variety of approaches tomore proactively manage fast-moving retail channels, theyare still falling far short. All errors—whether due to stock-outs, inventory build-ups or other process breakdowns—are costly to retailers and suppliers alike.

Compounding consumer products manufacturers’production and extended supply chain pressures, retailers’new emphasis on inventory management at the shelf leveladds a new level of customer service. Essentially, it is vendor-managed inventory (VMI)—though not at the distributioncenter, where the manufacturer’s retailer teams traditionallyare required to manage inventory and replenishment.Instead, it’s at the store level.

Wal-Mart (among other retailers) monitors supplierperformance on an ongoing basis through a weekly score-card, grading suppliers on a wide range of metrics, fromon-time delivery and in-stock levels to more recent initia-tives, such as the environmental impact of the packagingused. Other big-box retailers, as well as grocery, consumerdrug, home improvement and electronics centers, all contribute to increased velocity and complexity.

According to Lapide, “Using POS data to supportVMI is another permutation of the retailer / consumerproducts manufacturer, co-managed inventories relation-ship at Wal-Mart and elsewhere. Historically, retailers andconsumer products (CP) manufacturers have been peeringinto a black hole regarding day-to-day shelf performance.During the months-long lag times, any demand fluctua-tions—by day, location, context [weather anomalies, etc.]—are obscured by the bleeding down and building up of in-ventories, making it impossible to track potential shelf trends.

“Also, you tend to get a bullwhip affect in the distribu-tion channel,” Lapide continues. “Small changes at theshelf level are exaggerated as they move upstream, so youhave to look at your own shipments much longer to seethrough the noise.”

The pitfalls of shelf blindness are legion. “We justresearched this problem with an apparel manufacturer ofseasonal products,” Lapide adds. “They knew what theyshipped—by size, color, style—to a West Coast distributioncenter, but they had not collected data on what sold and


The ultimate benefitThe beauty of new tools for handling POS data is that

manufacturers now have the means to preemptively sensedemand at the shelf level—shifting the whole fulfillmentparadigm from what has happened to what is happening.“In redefining processes to better serve shoppers at the shelf,manufacturers must focus on demand sensing by keyaccount,” according to Cecere, in her recent AMR ResearchReport “Shouldn’t You Be Minding the Store?” (May 2007).

Cecere cites recent manufacturer pilots that illustratethe sort of benefits achieved using downstream POS dataand focused account teams. A major distributor changedpre-determined routes and fixed delivery frequencies todynamic routing based on daily POS data. The three-monthpilot resulted in an 8.2 percent increase in sales. In anotherpilot, a consumer electronics company took over shelfreplenishment for a major electronics retailer, reducing 18weeks of inventory by more than half and improving in-stock positions by 4.3 percent, with a reduction in mark-downs due to overstocks.

Daily demand sensing is most critical to the success ofnew-product introductions and promotions. Cecere notesthat 50 percent of new-product introductions fail becauseof poor execution. “Out-of-stocks double or sometimeseven quadruple in heavily promoted categories at peakshopping,” she says. “The synchronization of getting product to shelves is absolutely critical.”

For Lapide, a big issue is early indicators. “When youfirst put the product out in the channel, it typically doesn’tsell immediately at the shelf. You need real-time informa-tion from the retailer to know the point at which it takesoff in order to keep product in the pipeline. POS databecome the leading real-time indicator for introductionsas well as promotions, allowing retailers and others in thesupply chain to react to changes daily.”

Finally, well-planned and coordinated shelf-level execution based on real-time downstream demand data isonly the beginning in realizing the full potential of cus-tomer-centered merchandizing. POS data represent onestream of a number of possible cross-channel interactionswith assortment, allocation, space, pricing and promotionaldata that, when integrated together, can bring unprecedentedgranularity, timeliness and responsiveness to category-management decision making.

The Demand-Sensing Advantage The Platonic ideal for shelf replenishment would

involve a POS-linked supply network that auto-matically analyzes all store SKU activity from a point-of-purchase prompt in real time. If retailers and consumer products manufacturers aren’t there yet, anew breed of technology, operating to preempt supplychain and replenishment issues behind the scenes, hasbrought them significantly closer.

i2 POS Demand Sensing is designed to enableconsumer goods companies to reduce stock-outs,excess inventory, forecast variances and related problems at the store-shelf level to increase sales and improve customer service. The solution appliesbusiness rules to analyze retailer-provided, point-of-sale data to proactively identify and resolve revenue-impacting business exceptions—exceptions that todayare causing an untold number of disruptions, includingorder fill-rate errors, insufficient or erroneous supplyto stores, late receipts or misaligned Retail Link® (in the case of Wal-Mart) parameters.

Until recently, the large volume of daily POS datamade it extremely difficult to identify and “sense”individual SKU performance, or “see” the store-shelflevel with any precision. Following retailer and supplierrules, the software first determines whether an issuehas an internal supply chain cause, such as a missedmust-arrive-by date or low fill rate. If no internal causeis found, the software will then look for store-relateddemand causes, such as incorrect replenishment settings,forecast variances or on-hand adjustments.

Root-cause analysis is key to accurate demandsensing and rapid exception resolution. i2 POSDemand Sensing drills down into the relevant datasurrounding exceptions by SKU, store and relatedwarehouse, and provides response options and resolutionguidance—whatever is necessary for the decision-maker to understand and resolve the issue before itimpacts the customer.

Mohan Balachandran is a vice president in i2’s Retail

and Consumer Industries sector, and Jim Morganstern

is a senior director for solutions strategy in that sector.

Freelance business writer Deborah Navas also contributed

to this article.

i 2 S O LU T I O N S


Executives can see the symptoms every business day.The most serious of these symptoms is poor service quality,which can be measured by declining satisfaction ratings,increased customer churn and the failure to meet agreed-upon service-level commitments.

That’s why many forward-looking organizations nowrecognize a pressing need to refocus their energies ontheir customers. Executives increasingly realize the needfor better supply chain visibility, improved analytics andfaster, more responsive customer service.

Fulfill expectationsThe bottom line for customers: they expect to receive

what they ordered, when it was promised. Despite thatfact, most companies don’t have processes and systems inplace that enable them to achieve differentiated fulfillmentoperations. According to Aberdeen Group, leading enter-prises use order fulfillment to continually raise the serviceperformance bar versus the competition. However, only15 percent of the companies Aberdeen surveyed reportedhaving an order fulfillment process that extends acrossthe value chain. And only 21 percent of respondentsdescribed their customer service strategy as proactive andfocused on continuous improvement. (Aberdeen Group:“Next-Generation Order Fulfillment: Paving the Road toSuccess,” March 2005.)

How does a company recognize a poorly functioningorder management system? Here are a few of the troublesigns:

• Pricing or brand messages across products, services or distribution channels are inconsistent.

• ERP and IT bandwidth constraints limit the ability to fulfill orders quickly and efficiently.

• Order fulfillment costs are growing as a percentage of revenue.

• Excessive inventory-holding costs have a negativeeffect on cash flow and profitability.

• Material delays affect fulfillment, service-level agreements and customer satisfaction.

• Buyers, sales reps, logistics staff and call centers cannot easily share information.

• Making or meeting promise dates for unanticipatedcustomer orders is difficult.

• It is difficult or impossible to monitor and managekey suppliers.

• Customer-service representatives must access multiple

Using Order Management to Get Closer to Your Customers

Order Fulfillment by Rajat Bhargav

To compete and win in today’s competitive market-place, aggressive companies have opened a number ofpromising and profitable new distribution channels. Inaddition to traditional brick-and-mortar stores, electronicdata interchange, catalogs and mail order sources, a growingnumber of sellers now also take orders from Web-basedcustomers and mobile buyers, as well as build-to-orderand engineered-to-order customers. The proliferation ofdistribution channels has allowed many companies topenetrate new market segments and to create and growlucrative new revenue streams.

Yet those exciting new sales and distribution channelshave also created significant challenges. The newer Weband mobile channels are faster and more dynamic, andare therefore riskier and less predictable than traditionalchannels. While that dynamic nature can add considerableagility to an organization, the technologies needed toestablish and manage those channels are new and unfa-miliar to many firms.

Just as many companies were exploring these innova-tive new distribution opportunities, many were also expe-riencing successive waves of mergers and acquisitions.Those changes opened even more opportunities, but themost common approach of creating separate channelprocesses and systems also tended to create a proliferationof enterprise resource planning systems and other infor-mation technology (IT) systems that were complex, siloedand difficult to manage. Those calcified back-end structuresadd cost, risk and inefficiency to any distribution network.They prevent companies from planning and executing theaccelerated product life cycles demanded by today’s markets.

Companies in a number of industrial sectors havespent the past few years addressing the shortcomings oftheir legacy infrastructures, working diligently to drivegreater speed and efficiency throughout their supplychains. Those efforts have yielded many positive results,from accelerated inventory turnover to reduced waste andimproved bottom-line profits. But for too many companies,those inward-looking efforts have also led to a loss offocus on the single most-important asset any companyhas—its customers.

Bhargav

An integrated approach links every element of order fulfillment, from capture to invoice and final settlement.


systems to provide information on the status of anorder or shipment.

• Customers, sales and opportunities have been lost.

Ask the tough questionsWhen evaluating an order-management system, cus-

tomer service and supply chain managers should considerthe solution’s ability to rationalize numerous complexactivities. Can it provide real-time order promising,allocation management and re-balancing? Does it performchange management, credit modeling and order validationand brokering? Can the solution handle integrated pricing,shipping, invoicing, returns and the myriad of other variables that constitute a successful fulfillment system?

An integrated approach links every element of orderfulfillment, from capture to invoice and final settlement.Modern order fulfillment is ideally suited to the needs ofcompanies that sell through multiple, complex channelsand systems. The best of this new generation of technolo-gies can efficiently capture, process and fulfill orders fromstores, telephony, electronic, Web and other sources—allwhile presenting customers with a single, consistent andpositive buying experience.

When enacted as part of a larger collaborative effortacross the value chain (which may include collaborativereplenishment, demand management and transportationbidding), a true end-to-end approach to order fulfillmentcan help present a single and more responsive face to customers across various processes, locations, businesslines and IT infrastructures.

Recognize the hurdles Of course, executives who are responsible for complex

supply chains also understand that there are costs andrisks associated with any significant IT initiative. In thepast, the rigid nature of legacy systems often preventedthe optimum use and re-use of legacy infrastructures.Companies have attempted to modernize and updatetheir order processing systems, only to have sometimesoverly ambitious efforts stall due to inadequate planning,the tremendous complexity of multi-channel fulfillmentand simple organizational inertia.

Fortunately, the software industry has learned fromthose earlier setbacks. i2 has deep experience with threefull generations of order management and fulfillmenttechnology across virtually every business sector. Fromthat wealth of knowledge, we have identified the follow-ing key steps that determine the success or failure of anorder management initiative:

1. Begin with a clear, enterprise-wide understandingof all strategic, technology and company-specific aspectsof order fulfillment in a multi-channel environment.

2. Leverage a flexible architecture capable of preservingthe company’s investment in legacy infrastructure.

3. Adopt a phased, incremental approach that gains anearly win (for example, in a selected channel or businessunit), and then expand the initiative to other channels,units or locations in a carefully planned rollout.

4. Then, leverage the benefits.A streamlined order management and fulfillment system

begins by introducing standardization and consolidation.Those basic changes drive down costs while helping companies accelerate inventory turn, optimize the use of assets and boost the productivity of service associates.More efficient fulfillment shortens the product develop-ment and introduction cycle, reducing risk and makingcompanies more responsive and competitive. Product-oriented companies are also using improved order manage-ment to make their supply chains more visible, to improvepartner performance and to make better business decisions.

Most importantly, better order management helpsorganizations get closer to their customers. When ordersare fulfilled quickly and reliably, customers notice.Companies reap the benefits of greater customer satis-faction through higher rates of retention. Those crucialcustomer-facing improvements translate naturally intoincreased sales and market share, new revenues andimproved profits.

Rajat Bhargav is a director of solutions strategy at i2.

Jim Caudill also contributed to this article.


Evolving Capabilities in Order FulfillmentRecord Keeping• Revenue accounts• Customer base• Price lists• Service history

Order Fulfillment• Inventory visibility• Sourcing and availability• Shipment execution

Collaborative Replenishment• Customer collaboration• Auto replenishment• Liability management• Exception management

For more than nine decades, the Cooper Tire andRubber Company has provided the world’s motoristswith a full line of tires and rubber products. The companyhas maintained a simple distribution goal: positioning theright product in the right place, at the right time, at thelowest possible cost. But achieving that goal wasn’t so simple,given that Cooper’s 25-year-old legacy replenishmentmainframe system ran just once a week. Every Mondaymorning, inventory planners would receive a new reportthat reflected customer orders and available inventory.

“You could see that there was a problem with gener-ating reports only on a weekly basis,” says Bob Sager,Cooper’s manager of supply chain research and design.“If we received a customer order on Monday, and the customer service representative did not come over to thereplenishment area to inform our planners of the order,they were unaware of it until the next week.”

In addition, Cooper faced increasing complexity in itsproduct offering. The company was constantly addingmore SKUs, and warehousing more SKUs in additionallocations. As that complexity grew, many believed that toprovide the same level of customer service, higher levelsof inventory would be required. It was evident that newprocesses and tools were needed to remedy the situation.

Distribution and replenishment planningWith several i2 solutions already implemented,

including those that addressed transportation manage-ment and advanced planning and scheduling, CooperTire was confident that i2 had both the solution and theresources necessary to help the company achieve its goalsfor distribution and replenishment planning.

“The world that we were moving into was one that Idreamed of, but had never experienced,” says Tim Rupright,Cooper’s inventory planning administrator. “The i2 con-sultants really had the ability to understand our business,to communicate what we needed to do, and to train us on what the system was capable of doing.”

Today, i2 Distribution and Replenishment Planner(DRP) serves as Cooper’s daily execution system, executing

replanning functions every night. The solution is used toplan the movement of inventory across the company’sentire North American distribution network.

After using this system for approximately six months,the Cooper/i2 team took a hard look at what was andwasn’t working. The team began a continuous improve-ment project aimed at fine-tuning the system, evaluatingthe utilization of existing tools and processes, identifying15 areas of improvement and developing an action planfor those improvements, all of which focused on improv-ing fill rates and inventory turns. Cooper has realized asizable reduction in finished-goods inventory and outsidestorage costs with the system.

“The management at Cooper views DRP as a com-petitive weapon,” Sager says. “The whole idea around thedaily rebalance of supply to demand makes us more com-petitive because we can handle complexity and be moreresponsive to customer demand. In the past, if somethinghappened yesterday, we weren’t able to respond to it today.We can now.”


Cooper Tire Rolls Out New Systems

CASE STUDY

“In the past, if something happened yesterday, we weren’t able to respond to it today. We can now.” – Bob Sager


for Better Demand FulfillmentMaster data management

Shortly after deciding to implement DRP, Cooperalso realized it needed a better mechanism for maintainingits legacy mainframe information, as well as the newinformation that was required for the new i2 planningsystems.

“We had a choice to build our own infrastructure, orto go with i2 Master Data Management, and we chose i2MDM,” Sager says. “We use i2 MDM to store, maintainand clean the data that we send out to our planning systems.”

In the past, making adjustments to the replenishment-system data required users to go to many sources, andchanges were often manual and done by the informationtechnology department. i2 MDM serves as a single sourceacross multiple systems, where changes can be made atany scale by the user. It enables Cooper’s planners tomanipulate criteria to change behavior in DRP based on business needs.

“I have difficulty envisioning DRP functioning with-out MDM,” says Rupright. “We can use MDM to makeadjustments to the replenishment system, and the resultsare visible the next day. It’s an iterative process that ispretty amazing.”

Distributed inventory managementIn addition to having redundant versions of its master

data, Cooper also maintained five versions of inventoryon its mainframe (which corresponded to the systems thatused inventory). As a result, the company faced challengesin achieving one accurate picture of inventory. This situa-tion was exacerbated by the fact that inventory was alsovalued in differing units of measure—by the pound or bythe unit.

“The mainframe lost its transaction detail after twoweeks, and this made it very difficult to go back anddetermine why an issue happened without havingdetailed data,” says Craig Durliat, Cooper‘s manager ofoperation accounting. “In addition, the system was veryNorth American-focused, and, as we started growing,we needed a more global footprint of the inventory.”

To tackle these challenges, Cooper Tire implementedi2 Distributed Inventory Management (IMx) to help getits inventory system off the 30-year-old legacy inventorymainframe and assimilate into IMx all of its ties to order

management, finance and the other integrated supply chainprocesses. IBM served as Cooper’s systems integrator onthis project.

“The IBM team came on board and really helpedmanage the inventory management project—not just the implementation of the IMx software. All inventoryprocesses were looked at and either redesigned or redevel-oped,” Durliat says. “And that part of the IBM partner-ship, plus the experience of i2’s resources on the supplychain side, were critical to the success of the project.”

Cooper Tire uses IMx to post inventory, sales andproduction activity every day. The system enables thecompany not just to look at units, but also to validate thedollar value of those units.

“That ability helps us determine whether we have goodcontrol over our inventory, from a unit standpoint and atrend standpoint, as well as from a financial perspective,which is very important in this world of Sarbanes-Oxley,”Durliat says.

End-to-end visibilityThrough its IMx implementation, Cooper not only has

a single, real time, accurate view of actual inventory today,but also a projected inventory view—positioning the com-pany to support demand fulfillment. Increased visibility intoinventory enables Cooper to quickly determine the cause of inventory problems and to implement processes thatcan prevent the same problems from occurring again.

By integrating all instances of inventory onto the IMxsystem, Cooper has removed approximately 400 programsand 100 jobs from its mainframe, and it has reduced thenumber of inventory reports from 140 to 50.

“As users, we are much more self-sufficient with inven-tory transactions through IMx,” Durliat says. “It’s easy toaccess the data, the detailed transactions are there andanalysis is simplified.”

Having an integrated and flexible supply chain hasallowed Cooper to improve its response to demand—ultimately better serving the end consumer and improvingthe company’s bottom line. “The initial implementationsgot us part way there, but it was the continuous-improve-ment activities and increased planner experience that produced the biggest returns and allowed us to achieve our stated goals,” Sager says.

— Lauren Bossers

Managing SupplyChains in High-GrowthEnvironments

Managing SupplyChains in High-GrowthEnvironments

by Gaurang Pandya and Venky Nayar


Emerging markets in the Asia-Pacific region—includingChina, India and Southeast Asia—have become a keydriver of the global economy. Already representing someof the world’s largest markets, China and India—eachwith populations over 1 billion—average annual economicgrowth of more than 10 percent. By 2030, China is projected to be the single largest market in the world,with India the third-largest.

While companies in the United States and Europehave certainly recognized the value of these Asia-Pacificcountries for cost-effective outsourcing—with Chinaknown for manufacturing and India primarily for services—only a few Western businesses have achieved any successin capturing the potential of these markets.

As the rapid growth of these countries’ economiescontinues, an increasing number of Western manufacturershave begun to view the Asia-Pacific region not simply asa supply source, but as a growing demand center. ManyWestern businesses have engaged in mergers or acquisitionsthat have served the dual purpose of gaining a foothold inAsia-Pacific, while also managing the competitive threatposed by Asia-Pacific manufacturers who are exploringthe global marketplace themselves.

Whatever strategy Western manufacturers employ,entering these expanding markets brings unique challenges.In many ways, the Asia-Pacific region represents anentirely different world—with its own business rules,government regulations, transportation and logistics challenges and a consumer population that is far morefragmented and diverse than in either the United Statesor Europe.

In addition, the Asia-Pacific region has not historicallyplaced an emphasis on end-to-end supply chain manage-ment. Concepts that have been widely embraced in moremature markets—such as integration across functions,demand-driven supply models and visibility across theend-to-end value chain—have not been broadly intro-duced in this region. And, while technology solutionsmay exist in some facilities that serve as suppliers to

Western businesses, they are primarily focused on simplecost minimization. Even if the most sophisticated tech-nologies were deployed within Asia-Pacific businessestoday, they would be unable to deliver meaningful resultsuntil core supply chain philosophies are more widelyadopted.

As a result, capitalizing on the huge potential of Asia-Pacific markets will require a significant effort on the partof Western businesses. But that effort comes with anopportunity for dramatic growth in both revenues andprofits. The first step is gaining a clearer insight intothese emerging markets.

Understanding the Asia-Pacific opportunityOne of the single-biggest deterrents for businesses

entering the Asia-Pacific marketplace is the high cost ofoperating a supply chain there.

Some of the region’s challenges, including its over-whelmed transportation and logistics infrastructure, arebeing addressed. Recognizing that an outdated and insuf-ficient infrastructure represents a barrier to economicgrowth, many Asia-Pacific countries are investing inimproved air transportation, seaports, railways and high-ways. However, manufacturers accustomed to the sleekertransportation systems—as well as lower logistics and distribution costs—in the United States and Europe willexperience a certain degree of culture shock, at least inthe short term.

Western manufacturers will also see a significant dif-ference in service costs. Markets in the United States andEurope are relatively homogeneous, keeping service costsdown, but populous Asia-Pacific countries are extremelydiverse in language, culture, income level and productneeds. To compete successfully in these countries, muchhigher levels of service and personalization are required todeliver the customized products that address extremelyheterogeneous market segments.

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Special attention must be paid in fivekey areas: organization, supply chaindesign, planning, demand shaping andmanaging transitions.


An additional challenge is identifying local supplynetworks in the Asia-Pacific region and successfully integrating these companies into the end-to-end supplychain. Many Western manufacturers already partner withAsia-Pacific suppliers, but there are still language, tech-nology and cultural obstacles to overcome, as well as alack of the industry standards, protocols and businessmetrics that are common in the United States and Europe.

There is certainly an opportunity to gain significantsales revenues by competing in Asia-Pacific markets; thekey is to control costs and ensure profitable growth. It isimperative that manufacturers understand and address thesupply chain challenges involved, as well as balance theirdomestic demand with the often enormous potential ofthe Asia-Pacific region.

Fortunately, some pioneering businesses have alreadytaken the bold step of entering high-growth internationalmarkets, paving the way for other manufacturers. Bystudying the successes and failures of these risk-takingcompanies, manufacturers in the United States and Europecan maximize their own opportunities for growth andprofitability as they prepare to compete in the promisingAsia-Pacific marketplace.

Five keys for success The Asia-Pacific region offers its own unique challenges,

but it is not the first fast-growing market that has repre-sented a target for international expansion. Based on itsexperience in helping manufacturers successfully adapttheir supply chains to high-growth global opportunities,i2 has defined five key steps for succeeding in a rapidlyexpanding marketplace.

1. Put the right organizational structure andtalent in place. The Asia-Pacific region, like many fast-growing markets, has not historically placed an emphasis on broad, end-to-end supply chain management. Instead,companies have focused more narrowly on individualtransactions, and the daily operational demands of keep-ing pace with an explosively growing marketplace. For thisreason, manufacturers must create a local organizationalstructure that emphasizes the importance of supply chainmanagement. In nearly every instance, a vice president ofsupply chain must be appointed, along with an associatedstaff. This new function should report to the chief financial

officer, the chief operating officer or the head of the business.This will help the supply chain—historically viewed as acost center—to be seen as a well-managed profit center,with clearly defined performance metrics and service-level agreements with other functions.

In addition to establishing the right organizationalstructure, businesses entering high-growth markets needto focus on attracting, developing and retaining the personnel required to manage a complex, diverse and fast-moving supply chain. In many growing markets,employees drawn from the local community might have a better understanding of regional business practices orgovernment regulations, as well as personal relationshipsthat may be leveraged for the good of the organization.But it is equally important to source talent globally toensure that processes and knowledge can be transferredacross all parts of the worldwide business—and that thebest employees will remain with the business over thelong term, supporting worldwide growth.

2. Match the supply chain design to the globalopportunity. Every manufacturer faces a difficult transitionwhen changing from a single-site business serving domesticmarkets to a truly global business—with multiple manu-

facturing locations, a variety of transportation modes,diverse cost structures and highly differentiated markets.Decisions about where to source materials, where to manufacture and where to sell products are suddenly muchmore complex. Careful consideration must be given to riskmanagement strategies, and to weighing the service andmargin implications of various market results—so thatsupply chain strategies are “stress tested” before being putinto practice. (See risk articles on pages 36 and 39.)

It may seem logical to match the overall supply chaindesign to what is perceived as the largest opportunity inthe new market—for example, by building new factoriesin India or China. However, businesses must consider the demands of the global marketplace to ensure that all market opportunities will be leveraged. This means firstgaining an understanding of the costs and drivers associatedwith every global supply chain activity, from sourcingthrough distribution. Manufacturing facilities should belocated where they can maximize their contribution toprofitability, whether that means being close to raw-material

The Asia-Pacific region has not historicallyplaced an emphasis on end-to-end supplychain management.

The Asia-Pacific region has not historicallyplaced an emphasis on end-to-end supplychain management.


sources, taking advantage of low-cost labor or becomingpart of the consumer communities they will serve.

Manufacturers also need to understand the diversityof consumer needs in fast-growing markets, such as theAsia-Pacific region, to make intelligent decisions aboutwhich promising segments to focus on, as well as whichchallenging segments to avoid. There is a natural focus on China and India in particular—each of which is quitediverse—but manufacturers must also consider smaller,up-and-coming markets such as Vietnam.

3. Balance global and distributed planning.One key difference between Western businesses andAsia-Pacific companies lies in the degree of centralizedcontrol that has traditionally been exerted across the end-to-end supply chain. Manufacturers in the United Statesand Europe are accustomed to tightly controlling all businessprocesses and supply chain partners; however, this philos-ophy is not always embraced in international markets.Even though local supply chain organizations need flexi-bility and autonomy to succeed, manufacturers need to balance this with global control. A certain degree of centralized control ensures that the worldwide business isoperating under a single strategy, that key lessons and

knowledge are broadly shared, that common metrics areapplied and that there is no unnecessary duplication ofresources or business processes.

Ultimately, there is no universal answer. Each manu-facturer must work to achieve the correct balance betweenglobal control and regional autonomy that is largelydependent upon the culture of the country in which man-ufacturers are doing business. In weighing centralizedversus localized planning, executives must also considersuch factors as the corporate culture, the impact onstrategic objectives, customer service implications, theimpact on costs and profits and the efficiency and effec-tiveness of decision-making processes.

Even if they choose to empower their internationalbusiness units, manufacturers must still create and managea global business planning process—including sales andoperations planning—that aligns and synchronizesregional metrics with corporate goals.

4. Understand and shape consumer demand.Entering a fast-growing market, especially one as diverse

as the Asia-Pacific region, requires manufacturers todevelop a systematic way to gather information about con-sumer needs and then apply this information to their mostimportant supply chain decisions. Manufacturers need toensure that they are offering the right products, at theright price, at the right time, to the right consumer groups.This is a basic tenet for any business, but it is especiallytrue when a manufacturer enters a new international marketplace, in which little may be understood about thereal-world needs and purchasing values of end users.

Once products are launched into the market, demandshaping—which is commonly associated with the retailenvironment—emerges as a critical concept in all consumermarkets. By linking key business processes to point-of-saleinformation, manufacturers can make intelligent decisionsabout markdowns that protect their profit margins whilealso ensuring a steady stream of revenue. In a diverse,heterogeneous market, demand shaping should be doneat a very granular level, to maximize profitability acrossevery market segment.

5. Manage transitions with flexible tools.Manufacturers typically arrive in a new international market ready to apply the tools, processes and strategies

that have proven successful in their domestic businesses.But, in addition to language and cultural obstacles, theyoften encounter local supply chain partners with tech-nology platforms that are outdated and underutilized, aswell as business processes that will not easily mesh withtheir existing operations.

A flexible technology architecture that overlays existingsystems is critical in enabling manufacturers to managetransitions and business changes, facilitate rapid technol-ogy deployment and adoption, integrate many individualprocesses and platforms, and reduce the total cost of ownership. Disparate operations data, legacy systems andtechnology platforms, can be unified by implementing aservice-oriented architecture that allows a high level ofvisibility and collaboration across international partners.A flexible technology architecture can not only enablecurrent business processes, but also ensure that processescan change as rapidly as the business changes.

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Manufacturing facilities should be locatedwhere they can maximize their contribution to profitability.

Manufacturing facilities should be locatedwhere they can maximize their contribution to profitability.


A success storyThese five keys for success can best be illustrated by

describing how one consumer goods manufacturer usedthese strategies to successfully enter not just one, butmultiple fast-growing global markets—where today thecompany holds a significant leadership position.

In the mid-1990s, this manufacturer was primarilyknown as a regional supplier of product parts and com-ponents to larger companies, before it embarked on anambitious strategy of entering fast-growing markets underits own brand name. In doing so, the company implementedeach of the five steps described above, including creatinga series of regional business units that placed an emphasison supply chain excellence. It devoted a significant per-centage of supply chain employees to ongoing improve-ment initiatives. The manufacturer also recruited heavilyin each new market, combining local talent with expertsfrom its domestic operations to create a staff that is custom-tailored to regional needs.

While each regional business unit operates with a high

degree of flexibility, the business has established a global center that ensures visibility and integration across the worldwide supply chain. The business has installed a set of best-practice systems and processes that ensure thespeed, efficiency and consistent high quality needed toserve fast-growing markets located in different corners ofthe world. There is also a global process innovation teamthat ensures objective performance monitoring, measure-ment and continuous innovation throughout the company’sfacilities to ensure that performance remains at peak levels.

A service-oriented technology architecture supportsthis global collaboration, enabling geographically diversebusiness units to leverage one another’s strengths, as wellas participate in global production and distribution plansthat consider the capacity and cost constraints of everyplant. Customer needs can be met by a number of plants,depending on the current state of local market demand,production capacity and work-in-process inventory ateach of the company’s regional facilities.

Sales, manufacturing and transportation plans are synchronized daily, and the flexible, multi-platform tech-

nology architecture addresses inputs from such diversefunctions as marketing, forecasting, research and develop-ment and procurement. No matter where in the worldemployees are located, they share a single view of end-to-end supply chain activities, as well as a common perspectiveon the key issues and opportunities facing the business.

As a result of its aggressive efforts to enter and dominatehigh-growth markets around the world, this manufacturertoday holds a global leadership position in eight key productcategories. This once little-known supplier to domesticindustry is now recognized by major retailers and businesspublications as a world leader in its product categories.

Now that it has reached a position of market leader-ship, the company is making a strategic move from beinga supply-driven business to implementing a demand-driven supply chain model. i2 is currently working withthe company to focus on closer customer collaboration,greater end-user knowledge, more accurate forecastingand more effective demand shaping to drive even greaterrevenues and profits.

Maximizing your investment in growth marketsNot every business can expect to realize this kind of

dramatic success when entering fast-growing markets, butmanufacturers can certainly improve their chances forsuccess by developing a sound understanding of supplychain issues early in the process.

While it is easy to focus only on the potential newrevenues offered by high-growth global markets, it is critical that companies plan for profitable growth—andthat means putting in place the right organization, supplychain design, global planning capability, market under-standing and technology architecture before significantcapital investments are made. Of course, speed is of theessence in serving fast-growing markets, but much moreimportant is the ability to make intelligent decisions thatwill increase the chances for profitable growth over boththe short and long terms.

Gaurang Pandya is a director of solutions marketing and

Venky Nayar is a senior solutions architect at i2.


In a heterogeneous environment, demandshaping should be done at a very granularlevel to maximize profitability across everymarket segment.

In a heterogeneous environment, demandshaping should be done at a very granularlevel to maximize profitability across everymarket segment.

steel’s selling price, steelmakers have become adept atdesigning highly effective supply chain networks, includingphysical plant locations, transportation modes, storagecapacities and material-handling capabilities. Today,steelmakers are slashing logistics costs by placing manu-facturing plants close to iron-ore suppliers, while locatingfinishing operations near key consumers.

Centralized planning Because their supply of materials is rigid, and their

manufacturing base fragmented, steelmakers are enor-mously affected by even small changes in demand. Theirhistoric lack of flexibility and responsiveness has resultedin periods of undercapacity and high prices—followed byperiods of global overcapacity and declining prices. Today,steelmakers are managing demand fluctuations moreeffectively by installing centralized planning groups thatfine-tune both the quantity and price of products in everyinternational market to ensure that demand and supplyvariations are managed profitably.

Consumer outreach Traditionally, steelmakers sold products only to industrial

customers, but modern manufacturers are exploring newsales channels that place them closer to the consumer.Through increased online sales, retail outlets, processingservice centers and branded products, steelmakers areexpanding their consumer knowledge, positioning themto more effectively shape and respond to market demand.

Flexible technology architecture As industry consolidation continues, and customers

demand better product quality and higher service levels,steel manufacturers are realizing the value of a flexible,service-oriented technology architecture. From linkingexisting systems to increasing visibility across the supplychain, new-generation technology tools are designed tomanage the complexities of globalization. Leading steel-makers are using service-oriented architectures to create a significant competitive advantage.

Regardless of industry, manufacturers focused onhigh-growth markets can learn from the global steelindustry. Steelmakers have overcome significant challengesby changing traditional ways of doing business andembracing new concepts to help manage exponentialmarket growth. (See Tata Steel case study, page 30.)

Historically, steel production was considered a nationalasset, with each country fiercely protecting its own inter-ests. For this reason, the steel industry was traditionallyfragmented, dominated by a handful of large, publiclyowned companies. But increasing global competition hasdriven the industry toward consolidation and privatization.Today, the typical steelmaker operates multiple manufac-turing locations and services a global marketplace, oftenthrough strategic partnerships.

Another significant shift has been a geographic one.Due to mounting environmental and cost pressures, steel-making has shifted from the United States and Europe tothe Asia-Pacific region. China is now the world’s largestproducer and consumer of steel.

Following are some areas in which steelmakers haveexcelled as they have adapted to meet exploding world-wide demand.

Market-driven organizationIn traditional industries such as steelmaking, it seems

only natural to focus on internal operations. But today’sprogressive steelmakers are turning their attention out-ward, toward the marketplace. Steel manufacturers arematching their new sales and marketing orientation withdedicated supply chain functions that manage key processessuch as product-mix planning, demand management andorder fulfillment.

Strategic supply chain designSince transportation costs represent 5–15 percent of


Successfully Managing Growthin the Steel Industry

Today’s progressive steelmakers areturning their attention outward, towardthe marketplace.

Industry Overview

The steel manufacturing industry has never been knownfor being particularly responsive to market needs. In fact,until recently, the industry has been plagued by extremelylong lead-times, poor customer service and high levels ofmanufacturing inefficiencies. But there’s a quiet revolutiongoing on, serving up more change in the last decade than in the 150 years preceding it. The use of leading-edgetechnology has driven business efficiencies, and continuedglobalization has created further economies of scale, withboth fueling rapid industry consolidation.

Tata Steel, the flagship of India’s $22 billion Tata Group,is Asia’s first and India’s largest private-sector steel company.One of the lowest cost producers of steel in the world, itwas ranked fifth in the Asian BusinessWeek 50 performers in 2005, and has twice topped the “World-Class Steel-makers” list issued by World Steel Dynamics, a leadingsteel information service. Tata recently purchasedThailand’s Millennium Steel and Singapore’s NatSteelAsia, and in January 2007 announced the acquisition ofAnglo-Dutch Corus Group in a $12 billion transaction.

“Before we started looking at supply chain optimization,we suffered from all of the typical problems manufacturersface: non-optimized asset utilization, long cycle times,disparate IT systems and lack of visibility into demand,orders and shipments,” says Anand Sen, vice president ofTata’s Flat Product Division. “We knew that we simplycouldn’t meet our strategic objectives by maintaining thestatus quo.”

Customer satisfactionCustomer satisfaction was a real issue at Tata Steel.

When orders were placed, customers were promised a duedate that was not based on hard data, plant capacity or raw-material availability. Orders were delivered when promisedonly about 50 percent of the time. To make matters worse,customers would generally not receive advance notice iftheir order would not be ready as promised, and this lackof communication burdened customer resources down theline, in the finishing and distribution channels.

The plant would often scramble to address the needsof high-priority customers, further alienating customerswhose orders may have been just as important but lessurgent. Without any method to analyze forecast versus

actual performance, it was impossible to design improve-ments in the overall delivery system.

Realizing that its industry-leading position was hang-ing in the balance, Tata started the improvement processby articulating its strategic drivers: improved customer satisfaction and higher asset utilization. To address cus-tomer needs, the company conducted an exhaustive surveyto establish detailed customer requirements. The surveyyielded three imperatives. First, provide an accurate promiseas to when the order would be delivered. Second, in theevent that the order due date would be missed, notify thecustomer early in the process—not at the point of themissed delivery. And third, accurately project a reviseddelivery date so that the customer could modify its schedulesaccordingly.

Business process reengineeringAfter mapping the entire supply chain process in great

detail, Tata engaged in an extensive business process re-engineering effort. The objectives were to evaluate thegaps in current supply chain processes with respect toindustry demands, to redesign the processes to achieve adominant service position and to identify the IT enablersthat could make this happen. “We saw the relationship withi2 as a critical partnership,” says Biswajit Roychowdhury,chief of planning for Tata’s Flat Steel Division. “Our final


Customer-Centric Approach Drives

CASE STUDY

Tata’s strategic drivers were improvedcustomer satisfaction and higherasset utilization.


Global Growth for Tata Steel

decision to go with i2 Sales and Operations Planning,i2 Factory Planner and i2 Material Allocator was the culmination of a long process of due diligence and includedall members of executive management.”

The business issues Tata wanted its process reengineer-ing and IT implementation to address included:• Optimizing inventory investment, including raw materials,

work-in-process and finished inventories• Maximizing the value of supplier relationships• Improving the accuracy of price and volume forecasts• Determining the best product mix• Making reliable customer delivery promises• Utilizing key assets optimally• Prioritizing orders for key customers• Improving quality and product yields through better

scheduling decisions• Improving transportation efficiency

Tata Steel completed its technology implementation earlier this year and has seen significant improvementsalready in critical areas. Most importantly, 85 percent oforders are promised within the desired delivery week and do not require any manual intervention or adjustment—up from 50 percent. “Sometimes it’s even as high as 92percent,” asserts Roychowdhury. “Now, when we under-stand that an order is in jeopardy, we have the tools inplace to troubleshoot the order and can often take corrective

action to fix the problem before we even have to notifythe customer.” In addition, late orders running in the production line have been reduced to less than 10 percent,and order booking efficiency has risen to above 80 percent.

Forecasting capabilityTata’s forecasting ability has also improved dramatically.

Prior to implementing supply chain software, the companyhad no systematic insight into how to evaluate the accuracyof its forecasts for demand as well as for raw materials.Now, it has the tools to analyze its forecast predictionsagainst actual results, enabling root-cause analysis capa-bilities to identify what has caused the differences.“Improving our ability to forecast allows us to use due-date-based planning, which helps us to meet demand withhigher utilization of assets,” says Roychowdhury. “Also,instead of manually balancing resources as before, we cannow automatically identify bottlenecks deep in our processes,and take corrective action to increase our overall productionefficiency, thus realizing the benefits of continuousimprovement. In support of our strategic objectives, oursupply chain data are fully integrated with the rest of Tata Steel’s business infrastructure, so we’re able to scaleeffectively as we grow.”

The new-generation software from i2 has given Tataplanners several capabilities they lacked prior to imple-mentation. Planners can now project business over a year’stime and monitor performance against those projections.They can also make product-mix decisions based on profitoptimization goals and take orders as late as possible withpostponement strategies. Tata’s planners can also refresh theexpected time of arrival with up-to-the-minute information.

PrognosisThe rapid pace of change in the steel industry—and,

for that matter, in heavy industrial manufacturing in general—is not expected to slow down. Stoked by theseresults, Tata executives are optimistic. “We’re shifting frombeing order-takers in a relatively controlled pricing envi-ronment 20 years ago to being sophisticated marketersadroitly negotiating the profitable space between supplyand demand across multiple markets on an almost dailybasis,” says Sen. “Someday, we’ll be able to predict not justthe delivery date, but the actual hour that our truck will bepulling up to a customer’s warehouse. It opens up a wholeworld of possibilities.”

— Elizabeth Greer


education and problem solving with our supply base.Members of our vendor-management team are part

of the core teams that develop new products and initia-tives. In that process, we have regular multi-disciplinarymeetings with our product development people so we candiscuss the impact of proposed products on our ability tosource materials from best-in-class supply partners whouse the sustainable approaches we’re looking for. It’s notjust an analysis based on cost and quality; it’s a differentlens looking into all these other factors and the sustain-ability of the supply partners’ practices.

The benefits of this approach, beyond the mostimportant—which is taking care of the planet—is that ifyou build a truly sustainable supply chain, it is more resilient.That will allow us to continue to grow as a business.

Focus on continuous improvementOn the customer side, we have just undertaken a

core-process engineering review of our forecasting anddemand processes. We had a multi-disciplinary teamworking to develop the methodology, and we have sincerolled out new practices and protocols. Even in the firstfew months of the new approach, we have seen somedramatic improvements in communications and inunderstanding prioritization so we can run the businessin a coordinated manner.

We’re asking better questions about our processes,and we are expanding the relationships with our customersso we have a better understanding of their needs andpriorities. We don’t want to overproduce; not just becauseof cost issues, but because of the implications for wastedenergy and resources by having excess inventory.

Over the coming year we will bring on board a newdocument management system we’re calling WAX, forworkflow automation express. This will become our“central nervous system,” helping us better manage ouroperations and reduce paper.

On the manufacturing side, we make all of our productsin the United States, and our continuous-improvementengineering team has led and implemented a number oflean initiatives in recent years. Our supervisors are nowbecoming coaches too—we have self-directed workteams on some production lines, helping to raise theskills and abilities of our employees. We are piloting thisapproach now and expect to see a great evolution in theyears to come.

Opinion by Michael Cohen

Tony QuartararoExecutive Vice President,Supply Chain,Burt’s Bees

We are very comfortable with the progress we’ve madein the last few years implementing lean manufacturingand developing our employee-involvement culture. Thenext supply chain challenge is taking our philosophy ofdoing business upstream to our supply partners.

As a company, we value the Earth and we understandthat the sustainability of our planet is core to our future.So we’re interested in doing things right, with our eyeon the greater good. Of course, this is not always theeasy way to do things. We are now actively engaged inbetter understanding all of our process streams—notonly where our materials are coming from, but how theyare made, how are they packaged and how much energyis used in their manufacture. Is it renewable energy?What is the waste? We look at all the elements involved.

We have set a very aggressive goal as a company thatby the year 2020 we will be the greenest personal carecompany on the Earth, generating zero waste and using100-percent renewable energy. That is a mind-numbinglyaggressive goal, but it’s core to our DNA as a company.

To get there, we are focusing time and effort on oursupply partners. We want to do business with like-mindedcompanies who value the Earth. We have a lot of suppliersknocking on our door every day looking to do businesswith us, but we will only work with companies that weknow are doing things the way we would do them.

We have recently hired a supply chain sustainabilitydirector and increased the number of professionals workingin our vendor management program to help us buildthose relationships with our supply partners. We are nottaking an ivory tower approach in this; we’re looking toeducate and be an agent of change so that our supplypartners see the value of being green and sustainable.Our quality audit team works hand-in-hand with oursuppliers and our vendor-management team to assist in

What are the top priorities in supply

If you build a truly sustainable supplychain, it is more resilient.


We looked at outsourcing manufacturing, and,because of our explosive growth (20 percent a year), wedo use outsourced partners for some products to meetdemand. But in general we want to make all of our ownproducts. We feel there is a multitude of benefits tokeeping our manufacturing in house.

None of this is easy to do, but it’s our corporate philosophy, and we’re seeing tremendous growth andprogress. Like a flywheel, doing business in ways thatvalue the Earth and our people, it takes time to build upmomentum. But just like that flywheel, once it getsgoing, it generates a lot of power.

Mike GriswoldResearch Director, Retail,AMR Research, Inc.

One of the biggest issues for retailers over the next fewyears is the continued globalization of their supply chainsas they source more and more products overseas. Thischallenge will prompt some companies to make significantinvestments in people, processes and systems to manageand improve visibility across a growing supply chain.

It will be important for retailers to improve their end-to-end visibility if they are going to maintain the rightmix of products in their stores and capture the real valueof collaborations with suppliers enabled by greater infor-mation sharing. (See POS Data article, page 17.)

Many retailers share point-of-sale (POS) data withtheir suppliers and have done so for quite some time. Thenext step is enhancing and integrating that data into fore-casting and demand planning processes. Retailers want tosee what the POS data mean to their forecast and howthey can adjust that forecast and send the appropriatedemand signals back through the supply base. As the sup-ply chain extends, and lead times grow, the skills of fore-casting and demand planning become more important ifretailers want to keep the right products in the right storesat the right times.

Traditionally, retailers have left much of this analysis tothe manufacturers and the suppliers, but now they want todevelop more of that capability internally. That translatesinto a human resources challenge for companies because

retailers will need to invest in recruiting and, most impor-tantly, retaining employees with skills in forecasting, opti-mization and supply chain planning. To keep talentedpeople with those skill sets, retailers must stay current withthe technology. People with those skills are in demand andwill move on if they are not challenged or not working withleading-edge technology.

We are also starting to see an evolution in data sharing.Beyond just sales information, some retailers are beginningto share customer-loyalty data with their suppliers. Inaddition to what products have been sold, customer-loyaltydata show the basket of products a particular customerbuys together. Retailers can track the impact of out-of-stocks, or promoting various products, to see the effect onthe overall assortment of items a customer buys. Customerdata can be segmented by geography and other parametersto help retailers optimize product assortment store by store.

I think working together around product-assortmentplanning will be the next big win-win collaborationbetween retailers and suppliers.

Getting the internal house in orderWhile the value of these deeper collaborations across

the extended supply chain can be captured by some, thereality is that most retailers are not ready to look exter-nally yet. In the past few years, many retailers have gonethrough mergers and acquisitions, and now have a lot ofwork to do on their own internal visibility issues. Manyretailers are dealing with disconnected and incompatiblesystems within their own company. Before they can reachout to enhance communication and collaboration withtheir suppliers, they need to get their internal systems andprocesses working together. That’s going to require signifi-cant investments for some companies.

Another major supply chain challenge we see stemsfrom retailers pushing to become more focused on cross-channels. They want to expand their Web, catalog and store sales operations, but those channels don’t necessarilyoperate with the same systems. This causes supply chain

OPINION CONTINUED on Next Page . . .

chain management for your business?

Working together around product-assortment planning will be the next big win-win collaboration betweenretailers and suppliers.


their sales to end users look like and so on.On top of that, the inventory information we do have

now can hide, or at least disguise, the real consumptionnumbers. We don’t necessarily know if a demand fluctua-tion is real, or if someone is stuffing the channel for somereason. We can easily get burned by someone going onvacation. For example, during the course of regular opera-tions we’ll see that an ordering trend has a different curveand we won’t know what’s behind that change. So we’llassume it’s real demand, and we will build new stock todeal with that increase, but sometimes it will turn out tobe a false demand signal. What may have happened wassomeone had gone on vacation and ordered more stock tocover for a week or two. That sort of thing happens all thetime, given the current state of our information andprocesses.

Greater visibility and VMITo try and get access to better customer sales data,

we’re working on pilot projects to develop weekly reportsfrom two of our key distributors, and at the same time toincrease our visibility into their inventories and theirpipelines. We expect this effort will provide us with a better understanding of real consumption, and we canadjust our production accordingly.

Another priority for ADTRAN is establishing morevendor-managed-inventory (VMI) programs with our keysuppliers. Better use of VMI can help us ensure that a lotof our standard items are readily available, while removinginventory from our books.

We do have a global supply chain. More than half ofour products are manufactured in Asia by our electronicsmanufacturing-services partners, and we have very goodrelationships and strong collaborations with them. Wehave a quick-turn chain; we can change our productionschedule in the current week, even though we’re manufac-turing most of our products halfway around the world. Soour focus now is primarily on the customer and demandside of things, because that’s where I think we can makethe greatest improvements.

Finally, one area that I believe supply chain leadersmust never lose sight of is what we call CIPs—continuousimprovement programs. At ADTRAN, we’re well alongthe road toward building a culture of continuous improve-ment into the DNA of how we operate.

complexity, even duplication, which increases inventorylevels and costs. It will be important for retailers to ration-alize their channels and optimize legacy systems.

Visibility, associate education and retention and cross-channel management are some of the significant supplychain challenges for retailers over the next few years.Improving internal and external collaboration and focus-ing on supply chain visibility will position companies tobecome supply chain leaders in the future.

Thomas L. DadmunVice President for Supply Chain and Program Management,ADTRAN

For the past few years we’ve been doing a lot of workon our sales and operations planning processes to help usbetter understand demand and react appropriately. Thatwill continue to be a top priority. In particular, I want tobe able to get better information from our customers, andquickly interpret that information in ways that are relevantto our business—not only from an operations perspective,but also from a revenue and margin perspective. [ADTRANdevelops and manufactures networking and telecommuni-cations solutions to carry voice, data, video and Internetcommunications across copper, fiber and wireless networkinfrastructures.]

I believe the supply chain is really a demand chain.Customer demand drives it all, so if we can do better withforecasting and understanding the demand up front, thenthat’s three-quarters of the battle. Of course, dealing withdemand is difficult, forecasting accuracy is always toughand getting the information that we need, when we needit, to make the right business decisions can be a challenge.

What we need to do now is to get more point-of-saledata, and more point-of-usage data about our products,from our customers. Sales data sharing happens in theretail sector all the time, so if it works for them, then I saywhy can’t it work for us? Of course, it can be more chal-lenging for us to get the data, particularly for our enter-prise clients, which we serve through distributors. Butwe’re now establishing some pilot projects for that marketto see if we can improve our performance.

Today, many of our distributors have different stock-ing strategies, some with monthly reporting, others with quarterly reporting. As a result, on any given day it can bevery hard for us to know what’s really going on with ourdistributors’ inventories, what they have on hand, what

Opinion (Continued)

The supply chain is really a demandchain. Customer demand drives it all.


ability to deliver on the promise of co-design is critical.To meet consumer needs in profitable ways, companiesmust now do more than produce truly innovative products.They must also design for manufacturability, for compo-nent reuse, for distribution and for environmental sustain-ability. Co-design mandates more collaboration than everamong different companies in the supply chain.

Unfortunately, many companies are still very insular,focusing only on the next link up or down in their chain.They operate in a buy/sell relationship along the chain,versus a team approach to satisfy the end consumer. If thesupply chain were truly transparent to all companies, thenI believe we would see a very different approach to solvingoperational issues, and everyone involved would be betterserved. Companies would make better decisions that arebased on the potential impact on the end consumer.

Better availability and use of information drive thechange necessary for supply chains to move more rapidlyand to foster collaboration across companies. To accom-plish this, leading companies now strive for the purestdemand signal they can get and to improve their processesto better understand demand trends. Point-of-sale (POS)data provide the moment of truth, and the further you canpropagate that information along the supply chain, thebetter results you will see. (See article on the power ofPOS data on page 17.)

Furthermore, companies need to do a better job of surfacing other forms of information, beyond the demanddata that already exist within their operations, and makethat information visible in practical ways that improvesupply chain efficiency. Tremendous amounts of usefulsupply chain information exist at all points along theextended chain, but today it is very difficult to get to thatinformation and make it available for decision making.Supply chains face the same challenge that consumers didprior to the Internet: Large amounts of information existedin the world, but it was very difficult to find. Today, thatproblem has been largely solved by the Internet, but wehave a long way to go before uncovering all the useful datain the extended supply chain.

Companies today have a lot of work to do to get theirsupply chains and processes moving fast enough to satisfyever-changing consumer preferences. Finding ways to bettercapture and leverage information will benefit the companiesin the chain and contribute to the prosperity of all.

John CummingsSenior Vice President and Chief Marketing Officer,i2 Technologies

Looking ahead, it’s clear that getting closer to customersand satisfying the needs of those customers by makingbetter use of information are major priorities for supplychain leaders in many companies. Because supply chainmanagement has traditionally focused on supply, this willbe a major shift for some companies, necessitated by theshift in consumerism. No longer passive recipients, con-sumers are now in the driver’s seat.

Why? Consumers now have more information availableto them than ever before, and that tips the balance ofpower in their favor. Consumers can—and in growingnumbers do—use the Internet to find out everything theyneed to know about a particular product and the variouscompeting offerings before they decide what and where tobuy. They rapidly compare price and features across manybrands and channels. They are far less loyal to brand namesand much more interested in price and unique features.

This makes it all the more important, and challenging,for companies to develop innovative, differentiated prod-ucts, and to have them available in the right place at theright price when the consumer is ready to buy. The effortis further complicated by today’s shortening product lifecycles, and the proliferation of SKUs companies are nowdealing with as they look to create more specialized offer-ings aimed at smaller consumer segments.

To succeed in today’s fast-paced, consumer-drivenenvironment, companies need to break down the barriersbetween producers and end consumers, enabling them tobetter understand consumers’ needs and to design productsto meet those needs. Boeing did this recently with thedesign of the 787 Dreamliner. The aerospace companyinvolved more than 100,000 frequent fliers in the designprocess, asking them what they wanted to see in an air-plane and incorporating their input into the final design.

The promise of co-designIn other industries, some companies now try to get

more intimate with the consumer by moving to the con-cept of co-designing products—that is, bringing togetherworking groups from companies all along the supply chainto help drive innovation. In that process, the supply chain’s

The Last Word

Opinion interviews were conducted by freelance writer

Michael Cohen.

Using Scenarios to Plan for Risks


Protecting Revenue ThroughSupply Chain Risk Management

Focus by Ravi Vancheeswaran, ON Semiconductor

Loss of revenue is the biggest risk to any business.Today, supply chain managers are figuring in the calculusof risk management at this strategic level, quantifying supply chain impacts on revenue as well as on the moretraditional domain—costs.

Supply chain managers have become so involvedbecause responding to demand within the narrow windowof opportunity is critical. If a company cannot serve cus-tomer demand when it presents itself, then the companyhas lost the demand. Companies have more control overcost; therefore it is easier to manage than demand or revenue. “To build or not to build?” is the only decision to be made when demand and cost are the primary consid-erations. However, managing revenue is vital, since mostcompanies are looking to grow their bottom line.

While most supply chain managers talk about risk interms of natural and man-made disasters, such as typhoonsor terrorism, in truth such catastrophes are rare. Theopportunity to win—or lose—a customer, however, comesup every day. So, the risk to revenue is constant.

Organizational and process complexityThere are many ways to grow a business, but all of the

options are moot if the supply is not in place. Growth can

come from a push to keep up with demand for a uniqueproduct produced by a limited number of suppliers. Forexample, poly-silicon is currently in tight supply and inhigh demand—mainly because of the rise in solar-celltechnology, which results from the high price of gas andoil and increased world-wide interest (and policy) regard-ing “green” technology.

Consumers’ increasing demands for more options andthe corresponding reaction from businesses have led to aproliferation of products on the market. This is the situa-tion today in the electronics market space. As consumersclamor to have more fashionable and more feature-richdevices in their pockets and on their desktops and dash-boards, semiconductor customers are inevitably creatingmore complex risks for supply chains. How? They’rerequiring firmer commitments of supply to demand upsides.They’re speaking in “ranges of outcomes” rather than“point forecasts” to hedge their risks. Some electronicsmanufacturers, however, do not understand that there arecosts associated with such risk management. If they want

If a company cannot serve the demandwhen it presents itself, then the company has lost the demand.

Constrain/unconstrain resourcesCapacity edits: base, min, flex capacitySwap capacityDown time––holiday or plannedEditing cycle times / yieldsStructural changes to bill of materials

Consensus forecastCustomer high-confidence forecastCustomer scenario forecast

EnterpriseIntraprise

SupplyScenarios

DemandScenarios

BusinessScenarios

Phase 1

Phase 2

Phase 3

Phase 4


to share the risks with the suppliers, they need to sharethe costs—that is, develop collaborative models across thesupply chain.

In addition to more complicated supply/demand cyclesand needs, the inventory dynamics in the high-tech indus-try have also changed. In 2000, semiconductor companiesheld 13 percent of the total high-tech supply chain’s inven-tory. By 2006, that figure grew to more than 30 percent.

Additional players have also joined in the fray. In thepast, the semiconductor company might have allocatedsupply to original equipment manufacturers (OEMs), dis-tributors and EMSIs. The OEM would send informationback to the semiconductor company to direct the materialsupply. Today we have many more players inside the supplychain—such as design companies, third-party logisticscompanies and original design manufacturers—in additionto the OEMs, distributors and EMSIs. As such, it is criticaland necessary to triangulate the demand information tolimit the natural bullwhip effect.

Supply chain complexityHow do supply chain managers handle all of this

complexity? At ON Semiconductor we’ve found thattechnology is key, but has to follow process. Process leadsorganization—or reorganization. We’ve defined the com-plexity challenge as one that requires optimization of threecritical variables—revenue (on-time delivery and lead times),inventory (internal and channel) and factory utilization(with attendant supplier relations). We’ve learned thatinventory and capacity flexibility can reduce mistakes

in forecasting. We look at it this way: capacity is the riskshock absorber between tactical and strategic planning,and inventory is the shock absorber between executionand tactical planning.

At ON Semiconductor, we’ve learned to let the cus-tomer-order lead-time patterns drive the safety-stockrequirements across the different stages of the supplychain, allowing us to exercise the power of postponementbased on the demand visibility from the customer.

We also have found that instead of developing pointforecasts, we develop range forecasts based on the relativerisk of the opportunity. By doing so, we ensure that oursales and marketing teams can let us know their relativeconfidence in the different opportunities. Using this method,we can make better decisions on capacity investments bysizing the opportunities more realistically. The lower thelevel of confidence, the less likely the company will be toinvest in the risk.

Meeting this promise has never been more important.As ON Semiconductor’s senior vice president and chieftechnology officer, Peter Zdebel, has said, “Delivering theproduct on time to the customer’s requirements is absolutelycritical—even more important than fully meeting initialspecifications. There is flexibility for refinements at laterstages, but failing to make volume by the first deadlinejeopardizes the entire project.”

New-generation toolsNew-generation software tools built on the i2 Agile

Business Process Platform have given us the visibility andagility we need, enabling us to make faster decisions andcreate better workflows and protocols for speeding thedecision-making process and executing decisions based onthe risk of demand fluctuations. The platform allows forsharing of information across silos and even enterprises. Italso allows managers from all levels in the organization tosee the information they need, drawn from a “single sourceof the truth” at that moment.

The biggest impact of the software is the ability tovisualize and manage bottlenecks across the supply chainholistically, rather than by manufacturing silo or stage, oreven business unit. We realized early that our flexibilitylevers are inventory and capacity, and without automationand modeling algorithms in place we would not be able tostage either inventory or capacity in the right places at theright times. There’s nothing like driving the production

FOCUS CONTINUED on Next Page . . .

The opportunity to win a customercomes up every day, so the risk torevenue is constant.

2006 Revenue: $1.5 billion

Industry Segments:Computing, Consumer, Wireless, Automotive,Industrial, Networking

Products:Power analog and power discrete components(more than 2 billion products shipped monthly)

Market Segments:Asia-Pacific (33%); China (32%);North America (19%); Europe (16%)

ON Semiconductor Snapshot


Focus (Continued)

promise model was inaccurate. And our supply chaincomponents were disconnected. With advanced planningand scheduling, we manage by exception, conduct multi-echelon inventory planning, operate with defined businessrules and have more flexible allocations for demand fulfillment.

We’ve also realized a $20 million value within twoyears—in productivity, increased inventory turns, andreduced obsolescence. Our number of planners is down to 30, and 98 percent of our orders are scheduled auto-matically in real time.

Instead of local wins and global confusion, we haveachieved our global objectives—followed up with localactions—and a synchronized supply chain. For now!

[See also “New Technologies Help Identify and MitigateRisks,” on next page.]

Ravi Vancheeswaran is director for strategy and continuousimprovement for the global supply chain organization at ONSemiconductor. He is also the chairman of the i2 User Group.

mix for 24,000 devices to motivate a company.As a result, our supply chain managers collaborate

regularly with sales, marketing and finance managers, aswell as with information technology managers, to get theupfront intelligence on trends and market data in time tomake the decisions that will advance our top line. We’vebeen working hard to have intra- and extra-enterpriseintegration with our IT systems, and to make them agileenough to help the company respond quickly to all sorts oftrends—from industry trends and customer demands to end-market functionality and product packaging and regulations.

The business challengeSeeing the trends early is new for supply chain managers,

especially in our industry. But it’s essential, because it takesa long time for the total semiconductor supply chain toreact to a trend. The cycle time to make the product is7–13 weeks. And the EMS cycle time is another 3 weeks.So, it’s really a question of optimizing between cost andcycle time. The tricky thing with cycle time is understand-ing how the demand is moving through the network rightnow and how it is going to change over the next 2–3 years.Yes, manufacturing is moving to Asia. And yes, we’re serving demand in Asia, so we have to look at havingmore visibility in Asia. But, how do you have an Asia-focused network and still serve the customer needs in the Americas and Europe? These questions are part of aforward-thinking strategy.

Another thorny issue is staging the network so that ifan uptick in demand occurs, you can move it throughquickly. And, if it doesn’t happen, you can postpone deci-sions so your inventory liability is not high. Can you getout of a decision you made today tomorrow? And if yourdecisions cost more today—but you gain flexibility—wasit worth it?

We are in our seventh year of focusing on improvingthe agility and speed of our supply chain processes andorganization. With the help of i2, we’ve moved from tac-tical planning optimization through scenario managementto our present focus, collaborative risk management.Throughout, we’ve focused on supporting processes thatevaluate risks to revenue and cost containment.

Before implementing the advanced planning systemsfrom i2, we had to manage more than 3,000 orders a daymanually. We had 150 planners in high-cost regions of theworld. We also had large inventories. Our available-to-

The biggest impact of the software isthe ability to visualize and managebottlenecks across the supply chainholistically.

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Customer Fulfillment Preferences

Production Capacity-Demand Mismatches

Global Sourcing Reliance

Competitor Disruption

Mode Capacity Shortages

Organizational Restructuring

Fuel Cost Volatility

Market Growth Strategy

Inventory Ownership Liability

3PL Service Capacity

Source: Supply Chain Executive Board, February 2005

Top 10 Supply ChainRisk Factors

expectations. In response, the marketing and researchteams quickly rolled out a similar model based on gut-level projections. But on this second product, they missedthe mark and ended up with a warehouse-yard full ofunsold inventory that had to be liquidated at a loss.

Demand risk also results from competitive pressures,weather-related events and macro-economic factors.With shortening product life cycles and rapid innovationin technology, companies sometimes find a product is notcompetitive in price and features, even at the time of initiallaunch. This can result in write-offs or negative profitmargins and no appreciable increase in market share.

Natural phenomena can also affect demand for certainproducts by region either positively or negatively. In thefashion-apparel industry, early spring or late winterinclement weather—even if only in certain regions—canwreak havoc on demand forecasts. This leads to excessinventory and mark-downs in areas where demand isunexpectedly low, while other product lines or regionswith high demand may experience product shortages,resulting in lost sales.

Geopolitical influences in the global marketplace alsohave unexpected consequences on product demand. Forexample, recently, the political policies of Hugo Chavezin Venezuela had an indirect impact on the demand fordomestic beer in the United States. While this mightseem preposterous, a recent survey by Morgan Stanleyindicated that rising gas prices have contributed to adecline in the growth of beer consumption in the United

RISK CONTINUED on Next Page . . .

New Technologies HelpIdentify and Mitigate Risks

Risk Management by Darren Ward and Anand Iyer

In 1995 an earthquake in Kobe, Japan led to the closuresof Japan’s two largest ports—resulting in more than $100billion in damages to supply chains worldwide. Morerecently, a blue laser diode shortage caused Sony to slashprojections for the PlayStation®3 launch in late 2006 by2 million units. And just this summer, Mattel, the world’slargest toy maker, announced three major recalls ofChinese-made toys in little more than a month becauseof excessive amounts of lead paint.

Supply chain challenges and disruptions such as thesemay negatively impact average operating income and returnon sales by more than 100 percent for two years or moreafter an incident occurs. (Georgia Tech Research News,February 2, 2004, article by Vinod Singhal and KevinHendricks.) Perhaps that’s why AMR Research finds that“Nearly 50 percent of companies intend to evaluate ordeploy new technology for supply chain risk managementin the next year or two.” (AMR Research: “ManagingRisk in the Supply Chain—A Quantitative Study,” byMark Hillman and Heather Keltz, January 3, 2007.)

To proactively evaluate and manage the risk in theirsupply chains, companies can employ something we callRACE: risk analysis and continuous evolution. Thismethodology can help companies evaluate and manageboth customer demand and supply-risk factors, alongwith the potential impacts on company profitability andmarket share.

Sources of riskDemand risk can come in the form of changing or

misunderstood customer preferences, technology or com-petitive changes, natural phenomena or geopolitical influ-ences. Risk related to customer preference involves unex-pected changes in types of product attributes customersdesire. It can also come from incorrectly anticipating thedemand for a certain product. For example, a consumerelectronics company recently introduced a new producttargeting the surge in the MP3 player market. Its firstproduct was very successful, with demand exceeding

Ward Iyer

All risks are not equal. They must becategorized on the basis of the severityof the impact of the risk, and the likelihood of occurrence.


Two-Year Impact of Disruptions

Ave

rage

Perc

enta

geC

hang

e 20

15

10

0

-5

-10

Sales

-7

11

CostGrowth

14

InventoryGrowth

Source: Georgia Tech Research News: “The Weakest Link: New Study Quantifies FinancialFallout from Supply Chain Malfunctions,” February 2, 2004, by Vinod Singhal.

most likely to occur should be the first priority.These are complicated scenarios requiring substantial

computing power and sophisticated analysis capabilities.All risk-analysis approaches have two phases, even thoughthe specific techniques used in each of the phases varywidely. The first phase of risk analysis is risk identificationand consists of determining the sources of risk, the depend-encies among them and the likelihood of occurrence. Forexample, the loss of a supply source in one location maycause a shortage of transportation capacity in a differentarea, where an alternate supply source is available.

The second phase is response analysis and involves deter-mining potential options to hedge against the risk whileassessing the impact in terms of both cost and benefit.

Risk identification. The first phase of risk identifi-cation often involves variants of the Delphi method ofpredictive analysis. Developed by the Rand Corporationduring the Cold War to predict the impact of technologyon warfare, the Delphi method is a facilitated brainstormingor information-gathering process. It involves experts whoparticipate anonymously in iterative sessions by providingpredictions with supporting logic. The results from eachsession are reconsidered by the experts until the processconverges on a relative consensus.

Next, probabilities are associated with risk factors througha wide variety of techniques. For example, historical datamay provide estimates of variability in forecasts or leadtimes. Analysts may also use sophisticated regression modelsto determine errors in long-range growth forecasts.Similarly, such analysis enables planners to estimate theprobability of rare events. The process results in a goodunderstanding of potential risk factors and their probabilityof occurrence.

Response analysis. Once risks are identified, theresponse-analysis phase focuses on estimating the impactof risk factors across the supply chain. This exercise ischallenging because the relationships between risk factorsare not static. In other words, one decision or risk factormay impact other risk factors. In practice, techniques foranalyzing risk-decision clusters fall into two families—prescriptive decision models and descriptive simulationmodels.

Prescriptive decision models, which include manysupply chain optimization tools, are designed to prescribean answer for a given set of inputs. The models used insoftware solutions are further divided into two categories:deterministic and probabilistic. Both deterministic andprobabilistic models provide insight into the interaction

States as consumers use their beer money to keep gas intheir cars! (Morgan Stanley Research North Americareport, May 13, 2007.)

In addition to managing and mitigating for demandrisk, companies must carefully consider factors that couldpotentially disrupt or constrain production, logistics or theprocurement of raw materials. Supply disruptions may bethe result of natural disasters, strikes, terrorism, mechanicalfailures, research and development delays or unexpectedlogistics challenges, such as customs-clearance delays.

As more supply chains stretch across the globe, thecomplexities increase and require additional buffers ofinventory and time to offset the potential impact of unex-pected disruptions. Consider the difference in complexitybetween a one-day domestic truckload delivery from aplant in the United States to a domestic customer and aninternational delivery to the United States from Chinathat may take three weeks—crossing two internationalborders and traveling on three or more modes of transport.All of these factors can add considerable expense andrequire a careful cost-versus-benefit analysis for each risk-mitigation strategy. (See article on “Total LandedCost” in the Spring 2007 issue of this magazine.)

Phases of risk management Even the best-managed companies can be over-

whelmed by the prospect of rationally and proactivelybalancing the potential negative effects of risk factorsagainst the cost and benefits of implementing risk-miti-gation strategies. In fact, it quickly becomes clear thatmanaging risk could contradict other strategic initiatives,such as reducing inventories and cutting costs. Therefore,effective risk management requires a careful considerationof the appropriate balance among customer service levels,cost and working capital within an acceptable risk tolerance.

In addition, all risks are not equal. They must beidentified and categorized along a scale on the basis ofthe severity of the impact of the risk, and the likelihoodof occurrence. Obviously, risks with high severity that are


Risk Management (Continued)

Disruptions Lead to Drop in Shareholder ReturnParts Shortage (-7.53)

Customer Changes (-11.52)

Ramp/Roll-Out Problems (-10.98)

Production Problems (-10.29)

Development Problems (-10.58)

Quality Problems (-9.29)

0 -2 -4 -6 -8 -10 -12Source: Georgia Tech Research News: “Putting a Price on Supply Chain Problems:Study Links Supply Chain Glitches with Falling Stock Prices,” December 12, 2000,by Vinod Singhal.

For many companies, the most signifi-cant constraint to agility and flexibilityhas been information technology.

between risk factors and supply chain control variables bysystematically analyzing different scenarios.

However, while deterministic models use a singlenumber for each variable under consideration, the moresophisticated probabilistic models use statistical probabilitycurves for variables such as demand patterns or the likeli-hood of a supply disruption. Because of the increasedcomplexity in these probabilistic models, they tend to belimited in scope.

Descriptive models can simulate the operation of thesupply chain and generate statistics as a series of simulatedinputs that are provided to the model. These statistics arethen analyzed to facilitate decision-making. It takes acombination of sophisticated tools and techniques toeffectively determine the appropriate response to supplychain risk factors.

Steps to mitigate risks. Once risk factors are prop-erly identified, analyzed and prioritized based on severityand likelihood, companies can take steps to proactivelymanage the risks in one or more of the following ways:

• Redesign the network strategy to take into consideration geopolitical factors in addition to costand service factors

• Redesign supply chain or sales and operations planning (S&OP) processes

• Improve strategic sourcing and contract management• Establish analytically supported demand forecasting

and new product introduction processes• Implement multi-echelon inventory optimization

(while considering random risk factors)• Utilize supply chain scenario planning and management• Monitor and manage global logistics• Transfer risk by using insurance

A case in pointOne example of real-world proactive risk management

is at ON Semiconductor, a global supplier to multipleelectronics markets, including the fast-paced fashionindustry for cell phones (see article by Ravi Vancheeswaran,ON Semiconductor’s supply chain director of strategyand continuous improvement, page 36). ON Semicon-ductor has continuously improved its supply chain toincrease market competitiveness. The company proactivelymanages risk through a combination of sales and operationsplanning (S&OP) disciplines and inventory optimization,leveraging best-of-breed supply chain planning solutionsfrom i2 to include supply chain scenario planning.

As ON Semiconductor has discovered, a one-timerisk management analysis is not enough; continuous evolution is required. An effective long-term strategy tomanage supply chain risk requires an organization to beagile and responsive. Therefore, competitive companies

today must implement world-class processes and supplychain solutions that provide the ability to continuouslyadapt and improve across the dimensions of organizationalstructure, process, technology and strategy.

The technology challengeFor many companies, the most significant constraint

to agility and flexibility has been information technology.Traditionally, systems to support business operations—including supply chain management—have imposed opera-tional workflows and processes that required the businessto adapt to the technology. However, when companiesevolve through acquisitions, divestitures and even organicgrowth, they are forced to deal with multiple systemssupporting different processes and technology paradigms.Proactively managing supply chain risk factors furtherexacerbates this challenge. As a result, a company’s abilityto evolve is often restricted by its technology infrastructure.

While not a panacea, new-generation supply chainsolutions based on a service-oriented architecture (SOA),such as the i2 Agile Business Process Platform, canaddress this problem. SOA-based solutions enable a company to rapidly develop and evolve business-orientedsolutions and workflows that leverage and complementexisting technology investments, rather than requiringthem to be replaced.

A related and complementary capability is MasterData Management, which enables the business to effectively and efficiently manage all of the data that drive a supply chain. In short, SOA and MDM capabilitiesare critical for supply chain solutions that can adapt toevolving business requirements in preparation for and inresponse to critical supply chain risk factors.

Darren Ward is i2’s senior director of sales consulting

for the Retail and Consumer Industries sector.

Anand Iyer is an i2 fellow.



Risk Analysis Matrix

Likelihood of

Occurence

Severity of Occurence

Make moderateinvestments to minimize impact

High priority forproactive investmentin risk management

Minimal if anyinvestmentrequired

Align investmentswith cost-benefitanalysis

HIGH

LOWLOW HIGH

A May 2007 USA Today article entitled “Toyota’sSuccess Pleases Proponents of ‘Lean’” may have left somereaders confused. On one hand, it attributes Toyota’s success to lean manufacturing. On the other hand, itquotes survey results from management consulting firmBain & Company stating that just 19 percent of companiesthat have tried lean are happy with the results. While the key concepts surrounding lean have existed for morethan 40 years, the bottom-line savings and operationalperformance—in terms of inventory turns or order-fulfill-ment performance—have been below target, especially inenvironments beyond simple make-to-replenish.

Still, the concepts of lean manufacturing are funda-mentally sound and pragmatic, and there is significantinterest among industry professionals to use lean manu-facturing to realize demand-driven order fulfillment.What is standing in the way of better results? Recenttrends have contributed to a sense of skepticism about the adaptability of lean techniques, eroding adoption ofthe principles across all industry sectors.

One of these trends is mixed-mode manufacturing,where elements of build to order, engineer to order, andassemble to order can be applied to support an ever-increasing product portfolio and fluctuating demand profile. This operational model is more complex than thesimple make-to-replenish model, and lean practitionersare having a hard time adapting the principles to it.

Another complicating factor is the extended enterpriseor value chain, where value-added activities are extendingbeyond a company’s four walls. In this case, the material-control techniques using the traditional manual/visualmethods are no longer sufficient to synchronize materialflow. More and more companies are calling for an electronicpull mechanism to adapt to the visibility, speed and flexi-bility required.

The other key factor for slow adoption of lean is thelack of knowledge and process discipline to enable aclosed-loop continuous improvement, or kaizen, culture.[Kaizen is a Japanese term for creating continuous improve-ment; it focuses on quality, communication, teamworkand a willingness to adapt to change.] This kind of cultureis critical to realizing a quick plan-do-check-act cycle forfactory personnel.

The “Lean”Challenge

in Demand-Driven

Value Chains

The “Lean”Challenge

in Demand-Driven

Value Chains

Material pull must be driven bycapacity signals from down-stream in addition to inventory-replenishment signals.

by Aamer Rehman and Kelly Thomasby Aamer Rehman and Kelly Thomas

systems. Pull-based production paces a factory to actualcustomer demand and keeps the factory floor synchro-nized through a set of real-time, pull (kanban) signals.The goal of pull-based production is to create a smoothmaterial flow throughout the supply chain. This is achievedby flowing product in small batches (to reduce lot size),pacing the processes to Takt Time (the “drumbeat” thatsets the production pace in the plant), to avoid overpro-duction, and replenishing according to signals originatingfrom downstream operations.

This control discipline limits the amount of inventoryto a fixed maximum for each manufacturing cell, where themaximum is equal to the number of kanbans circulatingwithin the cell. That’s where things get sticky. Unfortunately,a simple kanban control system does not perform well in environments dealing with high demand or processvariability. For example, one would like to have a largenumber of kanbans at times of high demand to enablequick response. But one would like to have a small numberof kanbans at times of low demand to reduce inventorycosts, since the number of kanbans is equal to the targetinventory of finished parts.

In reality, manufacturers need the flexibility to choosedynamically between large and small numbers of kanbans.But it is commonly accepted that kanban control doesnot work well when demand and flow of parts are highlyvariable, thereby making it impractical for production envi-ronments in the high tech and industrial sectors, in particular.

In environments with custom products, product-mixvariations, seasonality or highly variable demand, simplekanban control is not sufficient. Fortunately, there arematerial-pull techniques other than kanban control thatsupport the changing production landscape, but stilladhere to the core principles of lean manufacturing. Whileproven, these techniques are more complex than traditionalkanban control and therefore require sophisticated tech-nology and process support.

In high-mix, low-volume, demand-driven environments,pacemaker-level planning and scheduling must take anumber of factors into account. First, there is the need to

LEAN CONTINUED on Next Page . . .

But several obstacles to routinely achieving this itera-tive process present themselves in today’s fast-moving,short-cycle manufacturing environment. There may be highemployee turnover, eroding the knowledge base establishedover many years that fosters a systematic, “best-practice”approach to operations. Also, as manufacturing becomesless centralized and more distributed, it gets more difficultto sustain consistency across plants and practices. Thesolution is in standardization of both processes and systems.(Also see Interviews with GM’s Adriana Karaboutis onpage 12 and with reengineering guru James Champy onpage 45.) A structured approach can eliminate maverickshop-floor behavior and channel shop-floor innovationsso they can become cross-plant best practices.

While, in the past, lean practitioners preached tech-nology solutions as an obstacle to lean adoption, todaythey are calling for a combined process and technologydeployment model that can address complex fulfillmentchallenges. Partly, this is because planning, schedulingand execution are converging, and the hierarchical levelsamong them are diminishing, due to the need for quickdecision support in a lean environment. But there is also

a dawning realization that it is hard to achieve return oninvestment and total cost of operations savings for leanplants using the solutions of the past.

There are three levers companies can use to adapt leanprinciples across the enterprise. One is the use of variousmaterial-control techniques adapted for multi-modemanufacturing. A second is the deployment of advancedtechnology solutions that provide standardized workflowsand “what-if ” exceptions management. A third is theapplication of lean process-transformation approachesoffered by service providers. Such offerings address thetraining, design, deployment and roll out of new process-es and systems, depending on where a company is in itsjourney to an evolved lean manufacturing model.

Before we explore these levers further, let’s revisitsome of the basic principles of kanban.

The kanban systemThe kanban control system is probably the most well-

known pull-type mechanism for multi-stage production


It is commonly accepted that kanbancontrol does not work well when demandand flow of parts are highly variable.

It is commonly accepted that kanbancontrol does not work well when demandand flow of parts are highly variable.

schedule build-to-order, make-to-stock and assemble-to-order items on the same production resources. Then,there are the start-of-life and end-of-life issues associatedwith parts planning and ordering. Finally, a set ofsequencing rules based on order configurations andchangeover matrices for products must be establishedwhile still achieving mix and capacity leveling. In suchcomplex situations, planners must be able to create“what-if ” scenarios quickly to assess the impact ofchanges on inventory targets, product mix and capacityutilization before publishing a feasible level plan.

The new paradigmIn the old paradigm, the kanban signals keep all in-

house and external operations synchronized with the pace-maker. These signals are consumption-based and initiateproduction of specific parts and quantities upstream toconsuming operations. Such kanbans are well-suited forlow mix and repetitive production.

In the new paradigm, production authorization is notonly driven by inventory-replenishment signals, but alsoby capacity signals from downstream operations. Theprocesses and systems must have the capability to adoptnew techniques as the production model transitions to amixed-mode manufacturing model. It must be able toapply a manual kanban approach when appropriate butramp up to electronic material-control techniques whenrequired.

These techniques have been developed over the past10–15 years and include CONWIP (constant work-in-progress, to control the total inventory in the system),POLCA (paired-cell overlapping loops of cards withauthorization, effective when there are capacity constraints)and hybrid CONWIP and kanban. An appropriate combination of these techniques can be used to synchro-nize upstream and downstream operations with the pacemaker schedule.

Technology requirementsThe solutions required to deploy lean principles and

at the same time react quickly to demand volatility intoday’s complex, demand-driven manufacturing environ-ment must be able to:

• Handle hybrid make-to-stock, make-to-order,assemble-to-order and engineer-to-order fulfillmentmodels using a single technology framework

• Support additional material-control techniquesbeyond traditional kanban control to manage high-variety and custom-engineered products for whichdedicated flow lines and simple visual control methods are not practical

• Use a single application platform capable of address-ing lean requirements during design, operate, sustainand improve phases of a lean program

• Standardize on a technology platform that can handleplant to plant variations in terms of business rules,user experience, reporting and integration with legacy systems

• Provide a closed-loop environment to drive structuredkaizen improvements using real-time metrics on theshop floor

• Maintain the same level of simplicity, user control and visibility for which lean is known, while makingthe enterprise roll-out of a lean program possibleThe i2 Lean Transformation Life-Cycle solution has

been designed to meet these challenges. It offers a com-

prehensive set of capabilities that support design, deploy-ment, operation and improvement phases of a lean-manufacturing program. The solution combines principlesof the Toyota Production System, various material-controltechniques, a flexible application platform, rich schedulingand execution capabilities, quick what-if scenario assess-ment capabilities and real-time metrics for driving kaizenimprovements.

The solution is compatible with lean manufacturingprinciples of level production, as well as with mix man-agement, synchronized pull and Six Sigma’s DMAIC(define, measure, analyze, improve and control) approachfor continuous improvement and process control. In theseways, it can help companies operate in a hybrid mode toachieve the successful adoption of lean manufacturingacross the extended enterprise.

In summary, i2 strongly believes that it is possible toemploy lean principles across the extended enterprise ifcompanies are willing and able to invest in a comprehen-sive methodology based on more sophisticated pull tech-niques and more advanced software solutions. If so, theycan create a long-lasting lean transformation across theirextended enterprises.

Aamer Rehman is a vice president of manufacturing

solutions and services at i2, and Kelly Thomas is senior

vice president of i2’s Manufacturing sector.



Manufacturers need the flexibility tochoose dynamically between large andsmall numbers of kanbans.


people think it will take. I’m a strong believer now thatchange happens in companies over a period of years—aminimum of five years for a complete change that includesbehaviors—not a period of months.

That doesn’t mean that you can’t get incremental business-performance improvement during the first yearor two. In fact, it’s important to see benefits from processor system change in that time to be sure that you aredoing the right stuff.

How has your thinking evolved about the mix ofpeople, process and technology as organizational levers?

I think those are still the three most significant organi-zational levers. But I think more strongly than ever thatprocess is where you have to begin. You begin by reallyunderstanding the processes in the company and theircurrent state. What are they? What’s the quality of theoperation? Where do the processes break down? Where’sthe money—where’s the concentration of cost? And thenyou have to develop a future state—the way the world hasto work with your company. What do the processes haveto look like at this point? Unless you understand these twostates, you’re just wallowing around; you won’t produceanything very good, in my view.

As you’re doing that, you do have to pay attention tothe people, because it’s the people who will implement thechange and make it happen. There are always people issues.You always have to deal with resistance. In fact, one of thefirst questions that is asked when you begin a campaign ora process change is whether your people have the skills andthe appetite to implement the change, particularly the senior management team. I’ll tell you, this isn’t just aboutthe people in the warehouse or on the line. It’s aboutwhether senior management has the appetite for change.

The most serious source of resistance comes from thesenior management team when it’s not aligned with whathas to happen, what has to change and how it’s going tohappen. Although senior management is always ready tostep up and say, “Of course we have to improve our pro-ductivity in this area by X amount and we need to put innew processes and technologies,” what is often hidden isthe debate about how—how to execute on it.

GUEST CONTINUED on Next Page . . .

Changing the Way You Work andThink About Your Business

James Champy is chairman of PerotSystems Corporation’s consulting practice. He is coauthor (with MichaelHammer) of Reengineering theCorporation and (with Nitin Nohria) ofThe Arc of Ambition, and the author ofReengineering Management. His latest

book is X-Engineering the Corporation: Reinventing YourBusiness in the Digital Age.

Your work throughout your career seems to be anexpansion of Index Systems’ (now CSC Index’s)early work in process reengineering. What is yourlatest thinking in your book on X-Engineering?

My latest thinking will be in a new book about changingnot just your business processes, but your business models.But X-Engineering is about cross-boundary processredesign—not just doing process redesign within the wallsof your company, but doing it in collaboration with yourcustomers, your partners and other business alliances.Some people will call the book “Cross Engineering,” but I call it “X-Engineering.”

In X-Engineering you list quite a few tenets thatwill change the way business is conducted. You writeabout how to prepare for, manage, and adapt tochange. How do you suggest that companies handleresistance to change?

You know, most resistance to change comes from howpeople feel about the change. How they feel is the reality,but some managers ignore that reality and focus on theabstract theory behind the change initiative. They make ittoo academic and fail to understand why people feel theway they do about the change. If they understood andacknowledged those feelings, they could then determinehow to respond to them. That’s behavioral work, but it’simportant work; it’s not “soft” work.

Many managers don’t realize that change doesn’t happenwith a single event, even though sometimes a catastrophicevent can encourage a company to change or help to estab-lish the need for change. Because change is not a singleevent, it needs to be managed as a campaign, and thatcampaign may take longer than the one or two years most

Viewpoint an Interview with James Champy

on the end-customer and the competition. Therefore, itsagenda is to buy for less. Does the manufacturer care if itssuppliers are making less? Well, I believe inspired manu-facturers do care. Michael Dell knew that unless he hadstrong, healthy suppliers, his business model wouldn’twork. He developed a build-to-order model entirelydependent on suppliers.

What are your top three pieces of advice for seniormanagement today, then?

My latest work is about new business models, beyondreengineering. Effective change of the business modelmeans changing both the promises delivered to the customer and the delivery means—the what and the how.

If I were to give a senior executive three pieces ofadvice today, the first would be to make sure your seniormanagement team is with you. The second concerns thenature of the team’s ambition. I am a very strong believerthat the quality of the ambition very much affects whatyou get. If the management team says let’s improve ourthroughput here by 10 percent, you can do that by tinker-ing with the operations. But if they say we want to improveby 100 percent and not build any more warehouses orfacilities, it causes the team and the middle managementto start to think much more dramatically. And if you don’thave an ambition for more radical change, all you’re goingto get is incremental business improvement.

The third thing may sound very tactical, but I thinkit’s critically important. You have to keep the CXO on thejob. For a long time, management consultants argued thatwhat you needed was simply support from a senior execu-tive. But that’s not the case. He or she has to stay in adecision-making role. Why? All of the operational andsales people in the field will argue that whatever they do isspecial or unique: They’ll say things like, “The market isdifferent in Omaha than in Philadelphia. We have to customize for our market.” And then the implementationteams go into months of debate and discussion about howto do things. But what you get back, at best, is compromisesin process and systems design.

Those teams will never make the hard decisions thatneed to be made. The chief executive has to be on the jobobserving—if not participating—in the discussion, makingthe decisions when there’s debate and disagreement.When you see these large IT projects run over budget bytens of millions of dollars, most of the time it’s becausethere was not a senior officer present to make the harddecisions, so things got delayed; they got overly complexand customized.

Isn’t that commonly left to people in middle management to execute?

Yes, but when senior management doesn’t like howsomething is happening, everything stops. I call it a cam-paign of silence. The senior managers don’t get involvedand hope that “this too will pass.” For these reasons, Ithink the most troublesome resistance to deal with is atthe top. After all, most of the time, middle managementwill do what it is asked, but senior management operatesat a much more subtle level. Senior managers are oftenconfronted with some of the most difficult choices theywill make in their careers during a change initiative, andthe leading question is whether they can accomplish thechange with the current management team.

My first question to an executive, therefore, is often,“Is your team with you—not just on the abstract idea ofwhat you have to change but on how the change is goingto happen?” You often don’t know the answer to this question until you get into the details about how thechange will be implemented.

Can you give an example of these sorts of details?

I’ll give you an example of what happens in warehousesand other operations associated with manufacturing.There’s a classic argument that occurs about how muchcustomization needs to happen. Is your management teamgoing to support a policy that argues for standardization?If you don’t standardize your systems and processes, everytime there’s a new release of technology, or anytime youwant to change something, it’s a huge and expensive customization problem.

There are four important principles in the X-Engineeringthinking. One is standardization. The second is trans-parency—openness among you and your suppliers andpartners. The third is about harmonization—of jointlydesigning the processes. And the fourth is trust. None ofthis happens unless the parties trust each other and unlessthey believe that there’s something in it for everybody.

Let me give an example in the supply chain realm.As a supplier, my mandate might be to work with my customer—the manufacturer—to improve processes so myproduct costs less while my margins improve. But, often-times, the view of the manufacturer is to beat down theprice of the supplier, because the manufacturer’s focus is

Most resistance to change comes fromhow people feel about the change.Responding to those feelings is important work.


Viewpoint (continued)

How does the CIO figure into this equation?

The CIO is the most senior technology implementer.But sometimes he or she does not have the authority orclout in the organization to tell a district manager he can’thave it the way he wants it. It takes a very powerful voicein these arguments. Sometimes the CIO just isn’t seniorenough in the enterprise to make decisions against whatthe line managers want. Even when there are close bondsbetween CEO and CIO, the bond is often not sufficient.It takes the authority of an operating officer.

X-Engineering implies a lot of collaboration.What’s driving collaboration today?

The Internet is a big enabler. I believe it will bringabout radical business change. After all, it provides almostfree infrastructure to allow companies to operate in funda-mentally different ways. And also to change not just howa company does its work but what it does—the nature ofthe service or product being delivered.

Let’s get back to your question of the people-process-technology mix. While I believe companies need to startwith process, IT is more strategic than ever when com-bined with process. This combination can dramaticallychange the strategy of a company.

The benefit from technology isn’t just in the trans-parency it provides between companies and their suppliersand customers. IT allows them to achieve whole new levelsof performance standards. It allows them to think muchmore dramatically about where work gets performed andwho can perform it—enabling the redistribution of work,particularly of intellectual work.

All of this offshoring could not occur without a tech-nology infrastructure.

Do you think this level of offshoring as a result ofglobalization is a good thing, is inevitable?

Absolutely. In any free economy it’s inevitable. Andagain, the technology and logistics enable it. The alterna-tive is to build a protectionist environment, blocking themovement of work. The result of that has always producednon-competitive companies.

I’m actually a believer that offshoring and globalizationare for the greater good. I’ll tell you why, from a U.S.perspective. The unemployment numbers in the UnitedStates are very low. Of course, there is displacement ofwork and workers—some people lose their jobs—yet thereare plenty of jobs. Perhaps they’re not the high-payingmanufacturing jobs some people have counted on. But

This interview was conducted by Supply Chain Leader editor

Victoria Cooper in June 2007. Cooper is the principal of

Cooper Communications in Sausalito, CA.


there still are manufacturing jobs, maybe in different locations and different industries that require higher skills.

But this country is not suffering from offshoring. A lotof companies are making all kinds of profit and buildingup big cash reserves. So globalization is not the issue here.

What do you think the more significant issue is?

The productivity improvement of the last 10 years hasprincipally benefited shareholders and senior managers.Workers have not benefited from it. They’re making lessand they’re working harder. But that’s not the fault of offshoring. It’s because companies have failed to rewardworkers more aggressively than they do. And the reasonthey don’t is because they’re under tremendous pressure by very short-sighted shareholders to maximize earnings.Yet this strategy is not sustainable in a capitalist society.

Why not?

What’s not sustainable is paying the executives andshareholders and saying to the workers, “No, sorry, wait 10 years and maybe something good will happen to you.”The workers become demoralized and wonder, “What amI doing this for? Is there a future for my children?” Thisdemoralization is very harmful to building a good enter-prise. If you want to build a good enterprise, you wantyour workers excited, committed, believing in the missionof the place and believing that they’re being treated andpaid fairly. A company that is not doing this will not havea committed or quality workforce, and that will eventuallyhurt it.

What is going to stop this trend?

Good question. My hope, frankly—and I do see somesigns of this—is that there will be companies that take amuch more inspired view about how to treat their people.I think Pepsi is a company like that. I’ve always admired itas a company that treats its people very well.

I know this sounds like a socialist point of view, but itis actually a capitalist point of view: In order to do some-thing effective, there has to be something in it for every-one, including your workers. The work should get better.The ability to profit should get better. There should becollaboration within and beyond the walls of the enter-prise to create value.


Inside i2 by Tom Smithyman

Winners of the 2007 Global Ken Sharma Award for Excellence

A leading semiconductor manufacturer, an internationalfootwear retailer and a Mexican beer brewer are the latestwinners of the Global Ken Sharma Award for Excellence.ON Semiconductor, Payless ShoeSource and GrupoModelo were recognized for their leadership in supplychain management during ceremonies at i2 Planet 2007Orlando in May.

The annual award, which honors i2’s late co-founderKen Sharma, was open to hundreds of i2 users withimplementations planned, in progress or completed. i2and the i2 User Group co-sponsored the award, and anindependent panel of analysts from AMR Researchjudged each nominee on the basis of innovation, supplychain depth and breadth, results and time to value.

Return on investmentLongtime i2 customer ON

Semiconductor received theaward for Supply Chain Returnon Investment. In the face ofshorter than ever product lifecycles and increasingly complexsupply networks, ON Semi-conductor sought to transformits supply chain into a competitive differentiator.

Leveraging a variety of i2solutions, ON Semiconductor has optimized its inventoryposition, improved scenario planning, implemented aninnovative sales and operations planning process, andincreased its end-to-end supply chain visibility.

As a result, the company has improved its on-timedelivery to customers from about 70 percent to more than90 percent. The company has also doubled its inventoryturns while increasing productivity by 300 percent. Itreports that the use of i2 solutions has saved the companynearly $20 million.

Supply chain innovation The Global Ken Sharma Award for Supply Chain

Innovation went to leading footwear retailer Payless Shoe-Source. With thousands of stores and SKUs, plus shortproduct life cycles and long lead times, Payless needed tooptimize its merchandise planning and allocation as wellas its store-by-store price markdowns.

Using i2 solutions, Payless has decreased inventory

levels, optimized markdowns and created a better managedproduct flow. The company has also optimized its casepack shipping, leading to more accurate quantities andsize assortments within all stores. As a result, Payless hasexperienced a string of positive same-store sales andimproved inventory positioning.

Supply chain breadth and depthThe Global Ken Sharma Award for Supply Chain

Breadth and Depth was awarded to Mexican brewerGrupo Modelo.

Each of the company’sbreweries operated its production schedule dif-ferently, and forecastingand planning operationswere often manual. Tosolve these problems,Grupo Modelo imple-mented i2 solutions toimprove visibility, planning,collaboration and control across its extended supply chain.

Through these implementations, the company hasreduced planning cycle times, increased forecast accuracyand improved its response to market changes. GrupoModelo has lowered costs by reducing inventories, improv-ing plant execution, optimizing transportation planningand enhancing customer service at distribution centers.

The company reports its network modeling activitiesalone have enabled it to realize multimillion dollar savings,while improving the quality of its production plans.

Finalists for the next round of Ken Sharma Awards will be namedat Directions, the i2 User Group conference, on November 5–7 in Newport Beach, Calif. The global winners will be named at i2 Planet 2008, April 30–May 2 in Phoenix.

John Mallon, ON Semiconductor

Ravi Vancheeswaran,i2 User Group

Gabriela Gonzalez,Grupo Modelo

Hiten Varia, i2 Darrel Pavelka, Payless ShoeSource

Ravi Vancheeswaran,i2 User Group

11701 Luna Road • Dallas, Texas 75234www.i2.com • 1-877-926-9286 • 1-469-357-1000

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supply chain leader: reaping the rewards of innovation (issue 4)

Documents

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