Tuesday, August 17, 2010

Ethics, Integrity and the Supply Chain

Apple is probably one of the most admired technology companies on the planet. They continue to deliver eye-popping financial results with the introduction of the highly innovative products that define new market segments. When a company such as this occasionally falters, it is always interesting (and fun) to study and learn from their mistakes.

Recently, one of Apple's former Supply Chain Managers, Paul Shin Devine, was arrested for accepting bribes and kickbacks totaling $1M USD from Apple suppliers. He allegedly provided confidential information that enabled them to win business from Apple. Many in the media have already ostracized Mr. Devine. Given that the system of law presumes innocence until guilt is proven, I will not speculate on the guilt of his alleged crime.

However, this incident should serve to remind us of the importance of ethics in the Supply Chain. When a company, such as Apple, with a near fanatic obsession to protect its trade secrets is susceptible to this type of breach, we should all wonder how our company is doing in managing the ethical integrity of its Supply Chain.

Separation of duties has always been one way to deal with this tricky issue. However, during the current recession, many firms have had to slim employee ranks to reduce cost and stay completive. The expense of monitoring and preventing employee dishonesty has been prioritized over the potential risk. This case reminds us that the cost of having a bad apple (pun intended) in the organization can be very expensive. Not only does it lead to higher costs, but the damage to the company's reputation will have a negative impact to those suppliers that compete honestly and act as good corporate partners.

Apple should be applauded for bringing the issue to the forefront. Many companies sweep the problem under the rug and those employees go on to commit the same crimes in other organizations. Apple did not do that. It is unlikely Mr. Devine will find professional employment any time soon.

Supply Chain organizations should learn from Apple's experience. At the very least, increasing the organizations awareness of unusual activity may help prevent similar activities in your company. Stay vigilant!

Sunday, October 07, 2007

Creating Resilent Supply Chains Without Depending on Forecasting

Many years ago, I remember having a discussion with one of my company's Sales Managers. He was responsible for an important, but difficult, customer. "Jim," I said, "I'm having a real problem with with your forecast accuracy. You've been forecasting the same order for four months; and I have been carrying component inventory for nearly two. When are you going to close this deal?" Jim replied, "Hey, Sunny, we got a new order last month." "Yes," I said, "for a product that was not even on your forecast. I'm paying expedite fees to meet your promised ship date. I have calculated your forecast accuracy at 50%. Jim, that's no better than a coin toss. I need better forecasting from you." Jim mused, "Sunny, there are only two kinds of forecasts, 'Bad' and 'Lucky'. I can't always be lucky."

Does this sound familiar? Chances are it does. Almost everyone I talk to, and in every department (Sales, Planning, Purchasing and Manufacturing), complains about the forecast. Yet, many producers heavily rely on forecasting even when they admit it is not accurate. Worse yet, most companies have intermediate processes to review and revise the forecast because they do not trust what comes from the field. This step adds latency to the process, further causing the information to be less accurate.

Reducing Supply Chain lead-time can reduce forecast dependency. There are many ways to accomplish this, but ultimately, lead-time reduction offers multiple benefits including reduced inventory, improved responsiveness and better on-time delivery. It also offers the same benefits to your suppliers and their suppliers. Before you run off and start negotiate lower lead-times with your suppliers, make sure that the reductions are real. It's critical to understand the "physics" of your supply chain. Producers must work closely with their suppliers; building trust is essential. Arm-twisting a supplier to sign-up to a lead-time they can't possibly meet is a receipe for disaster.

Yes, buffering inventory may be a necessary evil, but inventory risk can be dramatically reduced if effectively managed. I am not talking about buffering finished goods or in-process inventory. Instead, I propose going deep into the supply chain to the lowest possible cost point. Your company will dramatically reduce lead-time, even if it is necessary to share some risk with your suppliers (or their suppliers). Analyze the liabilities carefully, because if executed properly, the risks will likely be offset by big benefits. You may even find that you've gained new business opportunities through your organization's increased responsiveness.

Lead-time reduction is also an effective process during New Product Introductions (NPI) when a forecast may not even exist. I will discuss some of my ideas on implementing lead-time reduction in my next post. Stay tuned.

In the meantime, feel free to comment on your experiences.