Operational excellence is a systematic project

After years of continuous growth, company Z's turnover has continued to rise. At the same time, the company's operations have deteriorated day by day, and various problems have erupted like a blowout. At the front end, the upstream demand plan is uncontrollable, and urgent purchases and order cancellations occur frequently; all products are mass-produced, and the design is still being revised, even revealing design flaws; product demand is unstable, resulting in unstable material demand and supplier inventory. Backlog. At the back end, the introduction of suppliers is uncontrolled, the purchase amount is scattered, the bargaining power is reduced, there are many suppliers, and there is an urgent need for integration; the procurement system is not perfect, the quality and engineering participation are not enough, and the quality cannot be guaranteed; long-term overdue payment, the supply risk greatly increases. For the entire company, the product price competition is fierce, but the cost is difficult to reduce; sluggish inventory, pending orders, and historical arrears are like a sword hanging over the head; the inventory that remains high, it is profitable on the book, but all the money is made. stock. The result is that costs and inventories are out of control, and while sales are growing, cost pressures are increasing day by day.

Do these questions seem familiar? Although "unfortunate families have their own misfortunes", the problems faced by enterprises in operational distress are surprisingly similar: in all aspects of supply chain operations, from demand to production to procurement, it is difficult to find a link that is in place. In this way, from the customer's point of view, the customer cannot get the perfect order, that is, the right quantity, the right delivery time, and the right quality; from the company's point of view, the cost is out of control. Urgent, wasteful and sluggish inventory, in the end, is still "Yang Bailao". Although the problems are two, the root cause is one, that is, the level of operational excellence is too low, and a systematic solution is needed.

Horizontal: All links in the supply chain are linked and need to be taken into consideration.

I have visited the company several times, and I have been in contact with people at all levels, from the chief operating officer to the production manager, design, planning, purchasing department Supervisor, covering major departments in the company's internal supply chain. Everyone recognizes the seriousness of the problem and wants to start from the areas they can control and try to come up with solutions, but the result is that the overall operation is more chaotic and inefficient. In front of you is a vivid picture of "Swan, Barracuda and Shrimp": everyone wants to pull the car out of the quagmire of inefficient operation, but they cancel each other out and the effect is limited.

For example, marketing and R&D want to save the company through new products. There are dozens of R&D teams, and more than 100 products/technologies are under development at the same time. I hope that some of them will become popular, but the development resources are too thin. The development quality is not high, and the design is still changing after mass production. And in the case of a limited market, the more product types, the smaller the batch size, and the loss of the scale effect, which brings greater challenges to planning, production, and procurement.

As for production, due to the difficulty of scheduling and the low utilization rate of production capacity, we can only expand production capacity, buy more equipment, and recruit more people to support the development of new products. As a result, the company's fixed costs are higher. Purchasing is more absolute: in order to reduce the purchasing price, two sets of purchasing teams are set up for the same product to compete with each other. The result is that the price has dropped, but the quality and delivery problems are "pressing the gourd and the scoop" has become a nightmare for the quality assurance and production departments. Another consequence is that the number of suppliers has expanded, the purchase amount has been scattered, and the company's overall bargaining power has declined, creating obstacles for future annual price reductions.

As for the senior management, in order to control the cost, the exception management has been changed into the "in case" management. Everything needs to be signed at the first level, and even the small orders generated by the MRP must be signed by the senior management before it can be issued. It is said that it is a multi-layered approval, but it is actually going through the motions: the upper level sees that the lower level has signed it, and it signs it; Therefore, the quality of decision-making has not improved, but the decision-making and approval process has been longer and less efficient, and the operation level is full of complaints.

Figure 1: Without overall consideration, local optimization is like "Swan, Barracuda and Shrimp"

There are so many on the entire chain Operational problems are complex and, as GE's President Immelt said, requires systematic thinking to solve them systematically. One of Huawei's "seven objections" is that it firmly opposes changes by cadres who lack an overall view. This is also true.

In the supply chain, enterprises and enterprises, departments and departments interact with each other. When solving a problem, we must weigh the side effects to other departments or partners, and try to find the solution with the lowest total cost. A locally optimized solution is likely to damage the overall interests, and in the end everyone suffers.

For example, in the fashion industry, the production cycle is very long, it takes about half a year from concept to finished product, and demand is difficult to predict. In order to reduce risks, many brand owners require distributors to place orders in advance. There are two order fairs every year, and in summer, the goods are ordered for winter and spring. Many channel dealers are small companies who are busy dealing with customers all day long. How can they predict how much the same style will be sold in half a year? Only by feeling, the order is placed, but it is not much different from throwing dice. At that time, the channel merchants will not be able to sell, and the backlog will be accumulated. Although the brand merchants produce according to the order and receive payment on delivery, there is no financial risk, but the channel merchants have a serious backlog of inventory and no funds for subsequent orders. This brand merchant's business in the second half of the year will become a problem. ; In one place, the sales are not good, there is a backlog, and another place sells, and there is a shortage, but there is no way to adjust the inventory (because many channel dealers are independent), and finally the shortage loses business. It also follows the payment: if a brand that has been established with great difficulty is often in short supply and prices are cut, what will happen to the brand in the minds of consumers?

And the systematic solution to this problem is to follow a basic principle of supply chain management: for one thing, which partner in the supply chain does the best, it should be done by that one, because doing so has the lowest overall cost, best effect. For example, brand owners generally have strong marketing and design teams, are familiar with fashion trends, and at the company level, their forecasting accuracy is higher, so their forecasts are more accurate than those based on aggregated sales channels. Some brand owners realized this and began to change their operating models, extending to channels, leading the overall forecast, distribution, and marketing of products to optimize the entire chain. In this way, overall forecasting is more accurate, inventory allocation is more efficient, and overall supply chain costs are lower.

For example, in Adidas' global plan, an important point is to increase self-control sales to 45% by 2015, such as through own retail stores, e-commerce, joint ventures, shop-in-shop, etc., because they believe that this is a The most economical way to effectively control the entire sales channel and avoid partial optimization of supply chain partners. In their opinion, the previous practice of selling products to channels even if the matter is over is partial optimization, and it is not sold until it reaches the hands of consumers.

Vertical: from the result to the root cause, to provide a systematic solution

The above is the horizontal system, that is, the horizontal connection in the supply chain, whether it is within the company's various departments, or between companies. Vertically, operational performance has to be broken down vertically, from results to symptoms to root causes. Operational excellence is like a pyramid (see Figure 2). The whole system is driven by the customer (demand management). The upper end is the goal, that is, the perfect order in the eyes of the customer and the reasonable supply chain cost in the eyes of the enterprise. These two big goals are decomposed into many small indicators. For example, perfect orders include on-time delivery rate, quality, order accuracy, etc., and supply chain costs include production costs, logistics costs, and procurement costs. Low levels of operational excellence result in poor results, with symptoms such as high total inventory and long accounts receivable and payable periods. The root causes are in various functions such as procurement, production, planning, and inventory.

Figure 2: Operational Excellence Pyramid

In many companies, the CEO's focus is on outcomes and symptoms. When the cash flow is tight and the inventory is high, the CEO will mobilize the whole people to carry out the inventory reduction campaign. Therefore, sales are desperately pressing the goods to the channel, purchasing orders the suppliers to deliver less shipments recently, and the production lines are also tightening their belts to reduce the inventory of those processes. In fact, inventory depends on the overall operation level of the enterprise, which is the result, not the root cause. You cannot fundamentally reduce inventory without improving the capabilities of supply chain processes and systems, such as reducing procurement lead times, increasing supplier on-time delivery rates, shortening production cycles, and effectively controlling design and planning changes. No, once the inventory movement is over, the inventory will come up day by day: the sales channel has a backlog of inventory, and no new products will be purchased, and the company's finished product inventory will rise; the production line must operate normally, and the entire process of the line must be filled. The supplier has pressed so many goods for you, and after waiting for so long, it is difficult to endure the exercise until the end of the exercise. Of course, they will try their best to deliver it and get the payment early.

The rebound of inventory is like losing weight, starving, and finally losing a few pounds. If your living habits remain unchanged, once you return to a normal life, you will add all the lost. So the bosses started the next round of inventory reduction. The result you know: the power of systems and processes is like the windmill in "Don Quixote", no matter how high a person's status and power are, they are all invincible in the end. The inventory problem has become a monster that can't be killed. Some bosses are superstitious about their leadership ability and are invincible in market development, but they have repeatedly failed in solving the inventory problem because they have not found a systematic solution, that is, starting from the results, analyzing the symptoms, going deep into the root causes, and focusing on the implementation of improvement projects , make one, become one, over time, the inventory will naturally decrease.

Tell me an example. In Silicon Valley, a large equipment maker has long faced the challenge of having too long lead times and too high inventory. The delivery time is long, and many customer orders must be processed as urgent orders as soon as they land; the inventory is high, and any changes in demand and design will have a great impact, because it takes a long time to digest the existing inventory. These are the stubborn problems of large equipment manufacturers. After several analyses, the company identified three main causes and focused on improvement.

One of them is the six-week plan, which fully reduces the supplier's delivery time to less than six weeks. If the production process is complex and the supplier's lead time is really long, the company does not hesitate to build process inventory at the supplier. For example, there is a series of parts that are roughed in Silicon Valley for about six weeks, and then airlifted to Japan, after finishing, and then airlifted to the United States, for a total of about three months. The company decided to establish an intermediate inventory point in the rough embryo link to maintain a certain amount of inventory. The company is responsible for the inventory. If it eventually becomes sluggish inventory, the company pays the bill. The rough embryo accounts for roughly 20% of the total cost of the final product, but it can reduce the delivery cycle by 50%, and the input and output are good. Although it used to be order-driven from rough embryo to finishing, in order to cope with unstable supply and changes in production demand, the company maintains a fairly high safety stock at the finished product level of parts; now the rough embryo stage is push, and the finishing stage is pull , Although the inventory of rough embryos has increased, due to the shortened delivery cycle, the safety stock level of the finished parts level has dropped, and the total inventory of the entire supply chain has declined, and the responsiveness of the supply chain has been significantly enhanced.

The key here is that, as a chain owner, equipment manufacturers must be willing to take the risk of process inventory. In the past, out of departmental interests, procurement was reluctant to establish process inventory at the supplier. Around the six-week plan, the company counts the on-time delivery rate of suppliers. In the past few years, the on-time delivery rate has increased from 95% to 96% or even 97%. A series of problems such as high and high inventory water level also significantly solved the problem of too long equipment delivery.

Indicators: Operational excellence is inseparable from the indicator system

In addition to the overall horizontal consideration and vertical root cause analysis, operational excellence should also establish a complete indicator system for comprehensive monitoring and key improvement.

In a business, it's easy to see problems on the sales side: whether sales are growing or falling, it's easy to see at a glance. But operational issues are not. Especially for fast-growing local companies, the revenue growth can cover a hundred ugliness. However, with the rapid growth of turnover, various inefficiencies have also sneaked into the corners of enterprise operations, such as more and more complex organizations, more and more processes, and more and more diversified products. These problems are like the fat on a person's body. They don't accumulate in one day, so they won't cause immediate alertness. When you find out that you are fat, many problems have become systemic problems, and it is very difficult to lose weight.

Meanwhile, in order to boost morale, businesses always emphasize how good they are. After a long time, the employees really feel that the company is good, at least it is insufficient and more than the next. This kind of peace of mind is terrifying. While content with the status quo and being content with stability, employees and companies unconsciously become big fat cats that sleep soundly. If you don’t advance, you will retreat. The operation of the enterprise begins to decline, and it gets into trouble unknowingly. Just like a person who has been in a sub-health state for a long time, because he is used to it, he thinks he is healthy, but he does not realize that he is in danger step by step. , until one day it crashed to the ground. For people, regular check-ups, blood pressure measurement, heart rate measurement, weight measurement, comparison with the standard value, and comparison with yourself before and after can help you know your physical state. In an enterprise, this is the construction of an operational indicator system, which is used to judge the operational level of the company through indicators.

An enterprise has an operational indicator system, which does not necessarily mean that the operational excellence level is high; but without an operational indicator system, the operational level of the enterprise is destined to be low.

When I go to some large local companies to judge the level of their supply chain operations, I often start with the simplest operational indicator: Do you have on-time delivery rates? Of course the answer is yes. How about statistics? The answer is that we do a questionnaire survey: give customers a questionnaire to give us a score on the on-time delivery rate; give an internal user questionnaire to give a score to the supplier's on-time delivery rate. If you ask if you have ERP and whether your business has orders, the answer is mostly yes. Then why not count the on-time delivery rate around the order? At this point you will hear all kinds of reasons, but the result is the same: we can't measure the on-time delivery rate at the order level. The on-time delivery rate is so straightforward. You are either on time or not on time. If even such indicators cannot be objectively counted, this company does not actually have an indicator system for operation management; , a typical extensive operation.

On-time delivery may not be important, but cost control is important enough, should it be better? Wait a minute, to control costs, you must first know where the money is going. You go to some large local enterprises, especially state-owned and central enterprises, and ask which company is your largest supplier? Regardless of whether they manage suppliers or not, most people can answer it in one bite. Continue to ask: So how much did you spend on this supplier last year? Even the purchase is guaranteed to be a big stumbling block. Some people may say that it doesn't matter, as long as I spend every penny reasonably and get all the cost reductions that I deserve.

That's right. But this later reflects the problem of management finesse. Such a large company always has a financial system, and every penny spent by the company is well documented, but the isolated information system makes it difficult to summarize. For example, the procurement of direct materials is driven by material planning and enters the company's ERP and becomes a direct cost; indirect procurement is driven by requisitions and enters the company's financial system, and some are allocated as management costs. The two systems often do not interface. Even if it is the same type of cost, different branches and business departments often use different software systems for statistics, which makes it more difficult to integrate. If you can't even count how much money you spend, how much can you count on your savings? Therefore, the purchasing manager often said that 50 million was saved, and the financial manager said that he could only see 30 million in the account. Who the CEO listens to, you know. The results of the operation department cannot be accurately reflected. Can the status of the operation department be high? Can operational excellence be valued by companies?

Since you can't even count objective and intuitive indicators such as on-time delivery rate, procurement expenditure, etc., in a company with thousands of people, functions, regions, and incentives are different, you can accurately quantify, How likely is it to count subjective impressions? How credible are your operational performance metrics, and how valuable is it to guide your business’ operational decisions? Everyone knows that these indicators are subjective impressions, so energy is spent on managing subjective impressions, rather than working on organizations, systems, and processes to truly improve performance. It is manifested on the supplier side, such as pulling relationships, entertaining guests and giving gifts, corruption; within the company, from top to bottom between employees, in a sentence in English, it is you scratch my back, I scratch yours (you give my back Tickle, I'll tickle your back), open one eye, one eye closed, everything is fine, the company is not mine anyway.

Without performance indicators, accountability cannot be fulfilled. The problem is there, everyone can see it, but everyone can't do anything about it, because in a big company, there is no way to improve it without statistics. But market share, company profits don't lie. Businesses with low levels of operational excellence, with few exceptions, have unusually low profit margins. For example, a large state-owned enterprise had sales of more than 40 billion yuan in 2012 and a profit of 1.6 billion yuan. But think about it, if more than 80 billion fixed assets are sold and deposited in the bank, the 5-year fixed deposit can also get 4.75% interest (value in July 2012), which is equivalent to nearly 4 billion yuan. This is not counting the team of more than 80,000 people. It was disbanded and outsourced to the talent center to do labor services. Each person still can't make a profit of several thousand yuan a year. Isn't this another hundreds of millions? You don't have to be an MBA to see how inefficient a business is. This kind of enterprise is not rare in China, and it consumes so much investment in the society. The rate of return is actually negative. It has become a bottomless pit that consumes resources, and it is naturally a typical example of non-excellent operation.

Liu Baohong, US Certified Purchasing Manager (CPM), founder of "Supply Chain Management Column" (www.scm-blog.com), Executive Director of CSCS International. He graduated with an MBA from Arizona State University, specializing in Supply Chain Management, and obtained a Six Sigma Black Belt qualification. Mr. Liu currently lives in Silicon Valley and often travels between China and the United States, training local procurement, planning and supply chain management talents, and providing consulting services to help local companies improve their procurement and supply chain management levels. His monograph "Procurement and Supply Chain Management: A Practitioner's Perspective" was published in 2012 and topped the bestseller list for seven consecutive months.