Archive for Supply Chain Design

Ethical Supply Chain Management

BANGLADESH-BUILDING-DISASTER-TEXTILEReshma was pulled out of the wreckage of the Bangladesh factory fire after 17 days. She survived in a dark 8 foot by 10 foot space with room enough to move and food and drink enough to survive. After finding over 900 dead in this factory, the miracle of Reshma brought joy to the rescuers. This factory garment worker did not give up her life making our clothing but somehow she puts a face on the ethical questions troubling me and many others who work in the field of supply chain management. Should we know when the factories making our products are unsafe? Do we have a responsibility for our far flung supply chains? I believe that the answer has to be yes. But fulfilling that responsibility is a difficult task.

There are attempts to organize companies around the principles of safe, humane, ethical working conditions. In the electronics industry many companies are members of EICC which is the Electronic Industry Citizenship Coalition. Their website states that “the EICC is a coalition of the world’s leading electronics companies working together to improve efficiency and social, ethical, and environmental responsibility in the global supply chain.”  HP is a member and also has its own social and environmental standards and policies. Since 2005 HP has audited over 700 suppliers in its 1000 plus company supply chain. During those audits non-compliances are found. The offending company is to fix the non-conformance and report back upon closure. Is that enough? Other companies do more or less work on this topic. How can you judge what is enough? Can we expect to get to zero non-compliances? Perhaps our goal should be an ever decreasing number of non-compliances approaching zero.

The garment industry is trying to get a coalition together for monitoring and compliance throughout the supply chain. It is called IndustriALL. There is some dragging of feet on joining. Gap is not ruling out joining this group but so far it is doing its own work to monitor factories for safety. After the Bangladesh fire there is more momentum around this topic.

And what about human trafficking? An organization called Not For Sale is focusing on this topic. Their website states that this is a $32B business and it is tied to almost every product we use. As consumers we don’t have the information to even vote with our dollars. This organization is stressing the need for transparency. If we know where the problems are and they are visible to consumers there would be a move away from those markets. The economic pressure shifted apartheid policies in South Africa and it can make a difference here as well.

What are the “to do’s” for supply chain leaders? Here are the few I can suggest:

  1. Join the coalitions available. They aren’t perfect but they at least get a collective body to call attention to a problem.
  2. Create transparency in your own supply chain. Know who your suppliers are and who their suppliers are and who their suppliers are…Spend the money to audit.
  3. Keep this high on the agenda. Talk about supply chain design with this in mind. Cost drives many decisions but take the total cost into account. Understand the cost of the monitoring required. Put the right system in place to do the right thing.
  4. Participate in the dialogue. Talk to other leaders about this topic. Engage with the government and with non-profit organizations. Take a position.
  5. Design your supply chain with ethics in mind. Enough said.

“You have just dined, and however scrupulously the slaughterhouse is concealed in the graceful distance of miles, there is complicity.” 
―    Ralph Waldo Emerson

Product Actualization: Bento Box or Potluck?

During the many trips to Japan I’ve made over the years a bento box for lunch is common sup. Everything is neatly presented and fits into its section. There are many flavors but they don’t run together. Stuff stays where it is put because the box is compartmentalized. Sometimes there are familiar looking little finger sandwiches made out of white bread and what could be tunafish or chicken salad. Sometimes there are creatures of unknown origin. Always there is a neat lid that can be used to tidy up at the end.

It would be lovely if launching and ramping a product was like a bento box. If only we could keep things from blending together. If only the bad things could be ignored in their little compartment and eventually sent away with the lid on top. In the world of new product development, supply chains, manufacturing and logistics, stuff runs together.

As an operations executive I see the organization’s bias to keep things organized, separated, clean. Let the development team work their problems. Don’t slow them down. Let the marketing team think about product roadmaps and forecasts. Don’t second guess. Customer service can deal with quality issues in the field. There is no time to get to root cause with an angry customer on the phone. Just ship them a new one. But alas, without the messy cross-functional conversation and real-time data exchange the results are non-optimal. Sometimes the results are disastrous.

The international economy fluctuations have made the job of forecasting consumer goods next to impossible. I’ve worked hard in a previous position to shorten lead times to allow for faster reaction to changes in demand. But that wasn’t good enough. The breakthrough took place with a move to design the product so that we could postpone differentiation. The work was upfront with the design and marketing teams to design for postponement. The payoff is that a few “assets” could be built into many end products to meet localized needs. The result is less inventory, more availability, better customer satisfaction, lower lead time.

Potlucks are a messy, yummy, eclectic, out of control smorgasbord. When a manufacturing organization puts on a potluck it is the best darn eating you can find. There are typically dishes from all over the world. The tastes mix together on your paper plate…with any luck.

Product actualization done well is more like a potluck. The lines blur and true concurrent work happens naturally. Customer data is vigorously collected and then it flows freely to the cross-functional team. Manufacturing partners are brought in at ideation. The development team thinks about how to design for postponement. Marketing is working alongside the other functions to anticipate the localization needed and to make the product configurable as a last step. There are blurred borders and no compartmentalization and the result is a much more successful business.

Simplicity follows complexity. Business is messy.

Manufacturing for Dummies

Acmestartup has a breakthrough security product. The software bits have lovingly been stuffed in a white box server platform and volumes have been manufactured at a reputable contract manufacturer who just so happens to have designed the basic server. These initial beta boxes will be sent to early adopters of this new breakthrough product. First impressions are everything. It matters what they think. These first users will be the evangelists and the potential investors of this nascent company. Alas, when the product arrives it doesn’t work. What could possibly go wrong? How hard is it to customize an off-the-shelf server and load software and firmware. Apparently it is hard enough that the CEO of Acmestartup has made the resolution of this manufacturing problem his number one priority. When he should be worrying about the next great security algorithm, he is losing sleep over why the box shows up dead on arrival.

Startups and small companies are all about the product and customer and should be. In the same way that these small companies should get professional public relations, accounting and legal advice, these companies should be getting professional manufacturing advice. Some engineers have both development and manufacturing experience but not many of them have ramped products to volume nor have they had to choose partners, negotiate contracts or set up manufacturing processes.  And even if these engineers have had manufacturing experience is it good to divert attention away from the critical path of product development and maturity? When in doubt, hire a professional. Here are a few key pointers for those not in the field.

1. Pick the right manufacturing partner – The right partner has a focus on small companies and they have a good reputation. Ask for references. Talk with your start-up peers with similar products. Make sure that they have some local presence. Don’t rely on a company that is only in asia. You need help close to your development team. Ideally your partner should have some local manufacturing, not just reps close by.

2. Put together a cracker-jack virtual ops team – You probably can’t afford to hire all of the elements of a dynamite operations team but you can piece together experts through consultants and through your contract manufacturing partner. Make sure your collective team is thinking about purchasing, planning (and the systems that go along with the purchasing and planning), customer service, assembly and test, quality, metrics. Yes, you are small and volumes are small but all of these elements could stop you dead as you are ramping.

3. Put a manufacturing geek on the team – Do this early. Embed them with the engineers. Think about the component suppliers and final assembly process early. If possible, have your contract manufacturer supply someone to sit on your team. It is not too early to design for manufacturing if your intention is to supply a quality product to the customer as quickly as possible. Don’t design, build, ship crap, recover or try to recover.

4. Kick the hell out of the product before you ship to a customer –  HALT is Highly Accelerated Life Testing. This test will vary temperature, vibration, voltage levels until the unit fails. In other words, add variation to the process ahead of shipping. If you plan to ship your product any distance, make sure that you know what the product can withstand in terms of temperature and vibration. In addition to HALT testing, if you have multiple suppliers for a component, vary what you load on the board or use in the product and see if you can make the product fail. Ship the product across the country to your mother. See if it arrives ok and have her set it up. This works less well if the product is for the enterprise or for the construction industry but find the analogy (ship to your buddy in an IT department).

5. The devil is in the details – The small things are what get you. This is true for all companies but is particularly dangerous for smaller companies without the resources to recover. Don’t forget about customs, import taxes and regulations. Don’t ignore documentation, labeling, packaging. Watch out for long lead times for components…all it takes is one part that you can’t get fast enough. And finally, consider how you will repair and/or upgrade your product. What is your “reverse supply chain”?

While all of these considerations could seem obnoxious when you are working on a product that solves man’s or woman’s most pressing problems, they can stop you in your tracks or at the least will slow you down enough for the competition to catch up. So, consider manufacturing as a competitive weapon when launching your business. Seamless ramp coupled with highest quality at no cost to time to market should be the goal. It can be done. You aren’t a dummy!

Bring (Some) Manufacturing Back

Yesterday a riot in a Foxconn plant in Taiyuan, China got out of control and police were called in to stop the violence. The reason for the unrest is unclear. The news articles coming out of China are stating that there was a disagreement in a dormitory between guards and employees. The articles are saying that 1000 workers were involved (out of the 79,000 in this facility)…and yet 5000 police were called in. This conjures up a disquieting image.

Warning: the following numbers are my guesstimates and are just a way of framing the problem. I have read that if Apple were to build the iPhone in the USA the cost would increase by $50 which is about 2 hours of fully loaded labor. Since that is just too much time to assemble, test and package the phone I am going to assume that the $50 includes space, logistics and even a tax differential so it is an “all in” number. The consumer price of the phone is about $650. If the gross margin is 50% (surely Apple doesn’t get all of this but it is spread amongst distributors/carriers) then the total cost of goods sold (COGS) is about $325 for material, logistics, overhead, depreciation, labor, etc. Adding $50 to this is an increase of over 15% to COGS which isn’t small change. What if that increase in cost could be offset with benefits that either manifest now or in the future? Could we find a way to bring some manufacturing back to the USA? What is the tipping point?

1. Grow your own workers – There is value in having access to trained and local electronic assembly and test technicians, engineers, manufacturing leaders. We have lost the training grounds for good manufacturing prowess in the USA. The last of us “hands on manufacturing nerds” are going to leave the workforce eventually and the next generation will not have experience on an actual manufacturing line.

2. “Next bench” experience for development engineers – The engineers who are developing the next big thing can walk down the line, ask questions, observe and learn from the people doing the assembly work.

3. Faster quality resolution – If a problem is found it is easier to be all over it if manufacturing is close at hand. Thus, faster resolution.

4. Faster ramp – Once the manufacturing expertise is solidified near the development and marketing arm it is easier to take ideas and ramp them to market. Less travel is needed. Less translation and more cooperation is possible.

5. Disruption insurance – Spreading out risk is a good idea. If all of a company’s manufacturing is in China and there is a labor strike, natural disaster, logistics event, fuel crisis you have a longer and more expensive recovery. Put your eggs in multiple baskets if you have the volume.

6. Good will and free advertising – Surely it is worth something to a company to get the good will associated with “made in America”. I know people who won’t buy an iPhone because of the “slave labor” association and noise. That is an unreasonable response since all phones and frankly almost all electronics are made in China. But there has to be some consumer value to “made in the USA”.  Maybe it would just be a willingness to buy the brand but not a willingness to pay more. But even that has value. Volume helps a company get to lower costs and more margin dollars associated with that volume helps cover more operating expense even if the margin per unit is lower.

7. Wild card government help – Maybe it is coming at the federal level. Surely there is help to be found at the state level. Look for it. Find a deal. Make a splash in the news. Start some momentum.

It is certainly time to take some manufacturing out of China and to spread it across the world. The risks are just too high in China to put all of your manufacturing in that one country. I believe it is time to bring some manufacturing back to the US. If the differential to bring work back is about a 15% hike in COGS with no mitigation let’s chunk the problem. Find a way for government to mitigate 5% with tax breaks or deals on land or capital. Be willing to eat 5% in the company if margins are good and if the future benefits can justify the investment. Pass on 5% to the consumer. Since this is 5% of COGS it is a smaller percent of the price to the consumer. Perhaps the impact shows up as a 2-3% increase. I think it would fly.

But what do you think?

Top Ten Global Supply Chain Mistakes

A global supply chain is the norm for almost any company in business today. In order to take advantage of the capabilities throughout the world and in order to reach markets around the world it is important to create a system that reaches across borders. Creating that system is a difficult process especially for smaller companies focused on technology and marketing as first priority. How do you build a robust supply chain that is a competitive weapon rather than a necessary evil? Below is a summary of mistakes commonly made.

1. All eggs in one basket: It is risky to partner with only one contract manufacturer, logistics partner or key component supplier. Comparing price, quality, locations and practices can give you the information you need to drive your supply chain toward best in class. Having some tension in the relationship will also give your partners a good reason to offer you the best prices, quality, technology and lead times. But if you don’t have the volume to support more than one supplier without compromising cost or attention, put your eggs in one basket…and watch that basket very closely. Even with one partner you can quote annually to keep the tension in the relationship and to give you additional information. Ask for a transparent cost model so that you know what you are paying for and can more easily disaggregate the work to look for the best combination of suppliers. Even if your volume won’t support multiple production suppliers of key components, qualify more than one supplier ahead of time to give you options if there is a problem later.

2. Out of sight, out of mind: Once a global supply chain is set up and running it is a mistake to assume that the job is done. Weekly conversations should be held with your partners either in person or on the phone or via video-conference. Virtual meetings can be set up to review metrics, current action items and future work. Monthly visits should be made to meet with the key players eye to eye. Walk the production floor. Talk with the people on the production line even if they don’t speak your language. Use a translator and convey your thanks and interest in their work. That will help you later when fast action is needed and you are not there to oversee. Observe and ask questions. Make sure that you are getting what you expect. Remember, people respect what you inspect.

3. Too little, too late: It is unwise to assume that a verbal contract or purchase order with legal sounding words on the back is good enough. Draw up a contract and negotiate the details. While you are unlikely to ever sue your supplier, the value of a solid contract is that you have talked over the problems before they occur. Don’t wait until you have a field quality issue to decide who will take lead and drive to root cause. Don’t wait until there is a sub-tier issue to decide who is liable for the resolution and cost. There are templates available for supplier contracts and it is okay to start there but don’t stop there. Think about what is important in the relationship and write it down. Even if it doesn’t end up in the final draft at least the conversation has been held and documented and there is some understanding of expectations.

4. It’s not my job: Don’t sit back and assume that your supplier will watch your back. Supply chain design and development remains the responsibility of the product company. The inputs to strategy are targeted markets, technology needs and growth plans. Yes, the inputs also include changes to the supplier landscape and cost shifts, but it is unwise to rely on the supplier to tell you when to modify your supply chain. I recommend an annual review of labor and logistics costs, shifts in the market, tax changes and other macro-economic factors. What are the implications to your supply chain? Is it time to manufacture in a region for tax purposes? Are labor rates changing enough to consider a shift to another region of the world? Do you have a change in your product roadmap that will require new process technologies?

5. Only sure thing is death and taxes: Death is hard to control but don’t overlook the impact of taxes. The tax implications of your supply chain decisions can outweigh the labor cost benefits. Have a tax expert examine your plans ahead of time. Understand your target markets and if there are import taxes based on manufacturing content. Are you selling into government agencies? Some have restrictions about where the product is made.

6. Count the costs: Don’t make the mistake of just looking at the price tag from your supplier. Remember the cost to move the product to the market. Remember inventory carrying costs for a longer pipeline. Remember the cost of travel to manage a remote supplier. Quality costs are higher if your pipeline is longer and if the time to resolve is longer. And finally, what is often overlooked is the cost of time. If your new product slips a month due to the challenges of remotely ramping with the wrong partner, the costs are large. Do the math on the full costs of your alternatives.

7. Time Flies: Time should be mentioned a second time because it is just that important and is often not considered when designing a supply chain. It does take longer to get work done across time zones, cultural and company boundaries. However, if managed well there can be an advantage to having multiple time zones to work a product launch or a quality problem. The key is to set up the processes ahead of time with the right responsibilities and accountabilities. It is a little like a battle strategy in that you want to consider where you position your forces and how you arm them based on where the enemy lies. With new product launches the enemy is lack of documentation, lack of information flow and lack of iteration. Launching remotely needs more of all three. Don’t neglect to make that investment to save valuable time.

8. Risky Business: When natural disasters strike, the companies best able to recover are the ones that don’t ignore the inevitability of failure. Having a documented business continuity and enterprise risk management plan in place will give the troops a jumpstart on what to do. Work with suppliers ahead of time on “what if” scenarios. Know who within your organization will run the war room. Decide how you will respond to a disaster in any part of the world. Of course you can’t anticipate every problem but you can do enough to be in better shape than others. When being chased by a grizzly bear you don’t have to be the fastest, just faster than the other guy!

9. Stunted Growth: Don’t just think about what you need now. It is a big mistake to pick partners based on what you need today and not think about their global footprint, scalability, systems strengths and capacity. There is nothing worse than having to pick up and move your processes while growing just because you didn’t partner with growth in mind. If you need one assembly line now, make sure that your partner has room to give you three without moving you to another building or location. Can you claim dedicated resources now ahead of expected growth? Have you picked a supplier who has bought into your plans and will invest with you appropriately?

10. Flee, fly or flow: Last but not least, don’t staff up with a wimpy team.  Understand the importance of picking supply chain leaders who have lived through global supply chain challenges and can bring experience to the table. Resiliency is a characteristic that comes to mind. There are a myriad of challenges that come up with a global network of suppliers. The challenges can be viewed as a necessary evil or can be managed and mitigated to bring your company a competitive advantage.

The Secret Order of Supply Chain Chaos

In all chaos there is a cosmos, in all disorder a secret order. Carl Jung

On March 11, 2011 the Great East Japan earthquake, magnitude 9.0 kicked up a wall of water 133 feet tall that hit Miyak0 in the Iwate prefecture. This tsunami traveled 6 miles inland leaving destruction and death in its path. The Fukushima Daiichi Nuclear Power Plant experienced a level 7 meltdown. The ports and airports and roads and factories shut down in northern Japan. This was the worst earthquake in Japan’s recorded history and damages are estimated at over $30B. Chemicals, semiconductor and automotive manufacturing happened to be concentrated there thus crippling several industries with one big natural act.

In the fall of the same year the record rains in Thailand coupled with the mismanagement of the water flow out of key industrial regions caused flooding north of Bangkok. Damages were estimated at over $3B. Key global disk drive manufacturers happened to be concentrated there thus impacting the electronics industry for almost a year.

In 2011 and 2012 the labor rates in Southeast China increased an average of 17% per year.  With the RMB strengthening against the dollar at a steady rate (7.3 RMB per dollar in 2007 and 6.3 RMB per dollar in 2012) we spend more dollars to buy that RMB worth of labor.

A barrel of oil has increased from $55ish per barrel in 2007 to $95ish now. Logistics costs have therefore increased at a similar rate.

Yes, there has always been change but the rate of change in the world is increasing. It is not simply right to follow the old norms. It is not simply right to outsource to China. It is not simply right to outsource. The defaults that used to rule the day (and plenty of momentum still exists) are no longer good enough. Now it is important to know the inputs and outputs and to understand the trade-offs prior to making a decision. While I’ve not seen a perfect model out there, there are helpers available through most contract manufacturers. It is in their best interest to steer you to the right geographies ahead of you looking into it on your own. If you decide that Vietnam is the place to put your next product and your CM doesn’t have a plant there that is an open door for re-quotes and loss of business. Can you trust the models your partners offer? I say no, not fully.

Here are a few of the questions to ask when deciding how to design (or re-design) your global supply chain:

  1. What is the value of a shorter lead time?
  2. What is the cost of your product and therefore what are the inventory implications of your SC design decisions?
  3. What are the tolerances of your product? Can you pull it off from a distance?
  4. Are you selling to any government agencies with restrictions on origin of manufacturing?
  5. What are the tax implications?
  6. How smooth are your new product ramps? Can you do that from a distance? What is the cost in travel and time?
  7. Are their advertising advantages to building in one area or another? (e.g. made in Japan makes a big difference in the Japanese market)
  8. Can you reduce your packaging costs with a shorter logistics path?
  9. What is the expertise of the local supply base? What is their productivity? Are your current partners manufacturing their already?
  10. Is it important to keep some manufacturing expertise in-house or close by for that “next bench” learning and design improvement?

Some of these questions are answered using models but final decisions should be made using structured decision-making methodologies. I recommend a must/want sort coupled with a weighting process. While it won’t be precise it should yield the right discussion based on analytical input.

As the quote at the top infers, chaos leads us to opportunity. The last few years have been non-stop chaos but this can lead us to reconsider default answers. There is a secret order to the chaos given the right approach.