A Journey to Transformation
The first customer keynote speaker was the CIO of a major electronic connectors manufacturer. Their story was one that many companies can relate to — how technology is necessary but by itself not sufficient to transform a company. It was a story of perseverance and having the will to make the difficult changes in behavior, culture, and processes. And how, in the end, tremendous benefits can be had by making those changes.
Starting with Core ERP
This company has dozens of manufacturing locations, over 100,000 SKUs, and tens of thousands of employees. They finished their core SAP implementation (ERP, CRM, PLM) about 15 years ago, replacing pretty much 100% of their old core legacy systems. At that time their vision was that ERP would encompass all transactions across the company. But just implementing the technology didn’t actually drive the desired standardized processes across the business. It became evident that the technology was just one piece. The bigger challenge was the organizational change required. For the next several years, they took modest incremental steps to stabilize the systems and gradually work on global processes. Then, around the time of the recession, they ran into serious competitive pressures, forcing a major reorganization and rethink of their supply chains.
A Five-Year Plan for Transformation
By 2011 they had defined and launched a five-year rollout of their transformation focused on three main areas: 1) supply chain, 2) engineering and technical systems and processes, and 3) manufacturing. The first year they made technology decisions; the second year they made process decisions; and now in year three they are rolling out the new systems for all three areas in parallel.
The Pace of Transformation
The company wanted to try and take big transformational steps, but they have learned that this requires a lot of organizational commitments and that “those big jumps don’t come naturally.” They concluded that realistically it is probably an 8-10 years journey. Of course, the leadership team wants a return on their investment sooner. This is a common tug-of-war between the desire for quick ROI and the realities of the pace of organizational change, especially for a larger company.
The company did an assessment to identify the pain points in their supply chain and ability to roll out new product. They were at about 92% on-time delivery but wanted to get to 98%-99% while also reducing costs. They looked at email exchanges with customers, order and distribution patterns, and their ability to rapidly ramp up their supply chain for the huge surges in demand when their customers were launching a new product (like a new iPhone). They found that the lack of a single-version-of-the-truth within their firm and with customers led to a lot of wasted back-and-forth email exchanges. They also would agree to customer requests without understanding the costs. It took about nine months to really understand the entire process and pain points.
They also realized they would need to convince the organization to be confident in what the new system is telling them to do. They needed to make really sure that those systems were always right and accurate. They trained people in demand and supply planning and are putting together ‘rules of the road’ and the right structure to reinforce the importance of sticking with the plan.
But, the speaker said, it has become clear they don’t have the right people in the organization. They are driving this fundamental change from a very manual, judgment-call-based approach, to a process that requires a data-based, analytic process anchored by a shared single version of the truth. He said that they need to bring in a different set of skills to do inventory management and optimization, product segmentation, and demand and supply planning, all driven by analytics rather than gut-feel estimates. This is another wider dynamic we are seeing — the changing skill set requirements for those people responsible for running the supply chains.
The company decided to re-implement APO from scratch. This makes me wonder about the initial implementation, but we know that too many implementations are done incorrectly. This firm does a lot of inter-plant and inter-hub shipments, as well as international shipments. They decided to implement SmartOps for inventory optimization and are about to implement supply planning as well. Those are the tools they will use for the S&OP process. They are piloting that in two divisions, and then will roll out globally.
The company already had implemented SAP PLM by 1999, but engineers were still storing drawings and documents outside of the system. They concluded that having a single-version-of-the truth, driving consistency, and standardizing components will be one of the biggest returns from this investment, not just to reduce cost, but more importantly, to enable rapid response to market demands. Sometimes they need to respond to a requested change in design within 3-5 days. The electronics industry is driving to ever shorter product lifecycles and demands a very rapid turnaround. – delete image
During the 2011 Japan Tsunami, three of their primary suppliers were totally wiped out. Within 3-5 days the supply chain group knew what inventory they had and which demand/customers would be impacted. But, then they discovered that a lot of the engineering and tooling prints were out of date, some being three to five years old. It took them months to reverse-engineer it. That debacle was one of the triggers for this new PLM effort.
The third area is manufacturing plants and operations. They have piloted MII,1 focusing on managing molding, assembly, and plating machines in three plants (Ireland, Nebraska, and Chengdu China). This initiative gives them data they never had before on utilization, costs, manpower, and resources going into those processes. Now they have the ability to tear apart a process, look at trends and disruptions, and analyze, identify, and implement cost/cycle-time improvements. They can go after not just improved asset utilization, but how to do spare parts better, how to do preventative maintenance better, and more. This also required a different type of person than the standard direct labor force whose skill set is setting up tools and machines.
For supply chain, MII is providing real-time data off the shop floor enabling more accurate calculations of the ship date.If a disruption occurs, like a tool breakage, it automatically notifies the customer service organization (and ultimately the customer) about the change to the ship date.
The company’s ‘manufacturing council’ recently looked at all the data from those three pilot plants and decided to roll out across the whole company. They asked if it could be finished by the end of 2014 — the team thinks they can do it by mid-2016.
Alignment and Commitment are Critical
In a transformation of this magnitude, it is certain there will be bumps in the road, disruptions and changes. The speaker said that you need a strong enough commitment from the whole team to get you through those times of challenge. That alignment and commitment must extend down to the troops on the ground — everyone needs to understand why this is being done. Organizational change is needed, driving the right best practices.
Ultimately, execution capabilities are extremely critical, too. The ability to successfully execute and consistently deliver on projects is critical to maintaining credibility and momentum.
The company’s goal for benefits from the supply chain project was about $50M/year. Now they believe they can get $80M-$100M. For PLM investment, they believe they can reduce the number of parts by 20%, resulting in savings in sourcing and inventory. For the MES system, the three pilot plants believe they can get at least another 10% of utilization out of their assets. Since they have thousands of molding and stamping machines, that 10% represents a significant reduction in additional capital expense. One VP of operations believes they can get 12% productivity improvements from direct labor.
SAP’s Manufacturing Supply Chain Management
Another important talk was by Martin Barkman, VP of SAP Supply Chain Management. Martin talked about “a new way of running supply chains,” driven by volatile and emerging new markets with growing logistics complexity and speed requirements. There is a need for end-to-end visibility, and shorter planning cycles integrated into execution and collaboration with business partners. But there are many challenges to achieving this. Very few companies are run in real-time. Forecast accuracies still have a lot of room for improvement, as do inventory accuracies. Only 10% of suppliers are directly connected to their customers’ supply chains, because of the cost, time, and effort required to connect. In response, SAP announced and is bringing solutions in four areas:
- Supply Chain Monitoring — monitoring end-to-end in near real-time information. Leveraging HANA to predict issues in the network.
- Integrated Business Planning – At the core this is SAP S&OP, with a new UI. Running on HANA greatly simplifies the IT footprint.
- Demand Driven Supply Networks
- Logistics & Order Fulfillment
By running integrated planning and execution on HANA, the amount of time to run a plan is greatly compressed, from hours to seconds. Also since HANA runs optimization and execution off the same in-memory database, it enables a planning model that is always consistent with the execution model. With this added horsepower, they are able to do optimization that considers the complexity of the supply chain.
Other interesting developments that Martin discussed include:
- Embedded collaboration — SAP is working to embed collaboration right into the application, across global planning functions. SAP’s S&OP already has embedded collaboration.
- Pattern recognition algorithms for predictive demand — Forecasts are in weekly buckets, but replenishment may happen several times per week or daily. It may not make sense to just send 20% of the weekly demand each day. Instead, SAP tools enable more precision in replenishment by looking at historical order patterns, how shipments vary by day and season, and how the forecast has performed, all augmented by current POS data.
- Stochastic optimization — Multi-echelon inventory optimization is a SmartOps2 specialty — calculating item/location/time-period inventory targets in optimal ways at various echelons, taking into account the variables in demand, supply, and production.
- Agile supply chain solutions — When something unexpected happens outside of the plan, we need mechanisms that allow supply chains to respond. For example, if the manufacturer receives a big unexpected order, the system rapidly checks whether they have capacity and materials, and how that changes how things are allocated. And if they can’t meet that request, it suggests what can be done and proposed in response to the customer.
SAP is very strong in the manufacturing sector, especially with larger firms. This conference showed that they continue to push forward to meet the challenges of modern manufacturing.
1 MII (Manufacturing Integration and Intelligence) is SAP’s system for collecting and making available the real-time data from the shop floor. — Return to article text above
2 Martin Barkman was the CEO of SmartOps when it was acquired by SAP. — Return to article text above
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