Operational excellence is a journey that a company undergoes where leaders and their team work together to solve problems that exist within the business; properly navigating the path can set your organization apart from its competition. The road to operational excellence involves turning the supply chain from enterprise-focused to customer-centered. A successful journey requires gaining visibility from end-to-end across the supply chain — an effort getting even tougher as supply chains extend globally and become more complex. End-to-end supply chain visibility can provide significant benefits such as better order fulfillment rates, improved customer service levels, enhanced profitability, increased operational efficiency and higher revenue growth. Digitalization underpins such visibility.
However, just as with operational excellence as a whole, digitalizing a company’s supply chain is a journey, not an instantaneous fix.
A digital supply network (DSN) plays a crucial role. Using a DSN that offers collaboration and visibility capabilities, a company can achieve better on-time performance, reduce variability in lead times and free up working capital.
Key Lessons Learned
Successfully crossing the digital divide poses challenges to any business. Some lessons other organizations have learned as they made the transition can help you think about and prepare for any issues you might face.
Know your strength. Critically assess what differentiates you. Is it being a low cost, reliable supplier of commodity chemicals? Or your capability to rapidly create highly engineered products? Or the many different products you stock at the right locations to meet demands?
Understanding your core competence and place in the market will help you focus on what’s important in a digital transformation and how best to accomplish it.
For example, one company saw its strength as selling customized products — but had a high cost and long lead time to set up new materials in its enterprise resource planning (ERP) system. Sales and the internal data teams often were at loggerheads. Aligning internal processes with what was going on outside the organization yielded improved results.
Another company concluded that customer relationship management was a differentiator. Outsourcing data mapping functions for order automation freed up time that allowed better customer service. Cross-selling and supply of contracted volumes increased.
Embrace customer variability. Most companies will take demand signals in any form that a customer will provide. Having systems and processes that can transform these diverse inputs to what your ERP system needs is critical to operational excellence.
Govern your data. The importance of this isn’t well understood and, so, the subject is easy to ignore — the business case for keeping data accurate over time simply isn’t as interesting to executives as marketing, new products or quarterly financial reports. However, a lack of data governance will lead to incorrect reporting, inability to get system to scale, hidden work-around processes and manual data manipulations. Making corrections later is nearly impossible.
Don’t outsource your core. Contracting out core competencies — which for a chemical company include, e.g., product manufacturing and managing customer relationships — to a low-cost provider can boost the bottom line in the short run but risks losing intellectual capital. For most chemical makers, accounts payable automation and data mapping between business software systems aren’t core.
Make progress in phases. Striving for a fully automated process from day one may result in a very expensive but flawed implementation. In contrast, automating most cases and pushing exceptions to qualified staff can yield high returns at a much more reasonable cost.
A phased approach affords a manageable learning curve. For example, let’s say your ultimate goal is to touch a good order for the first time only when it’s ready to be loaded on a truck. However, your first phase may be to receive the order electronically, post it to the ERP system and then have customer service review it. Later, you automate the credit check. Further in the future, you automate “available to promise” responses. Still later, you automate the goods issues. Phasing can let you receive value early on while building best practices into the system.
Getting Essential Support
Driving operational excellence through the business is an organizational change initiative. Assign a knowledgeable leader to develop expected outcomes, costs, opportunities and challenges. Company size and complexity will dictate the duration, scope and staffing of the initial assessment. The process will be like unpeeling an onion — new information will come to light as you peel back the layers.
Key skills needed to plan such a journey include project management, understanding of the business and its systems, process design and organizational change. Implementation of digitalization often uncovers needed process change; diagnostic evaluations early in the process can provide insight that fosters support for the effort from executive sponsors as well as case studies to help employees understand objectives. Peeling back the onion in most organizations will yield a vast number of opportunities to increase value. Don’t be too ambitious, though; try to start in just one or two areas.
A real-world example of this is an ERP work process I recently reviewed where the system managed batch numbers and lab results both for raw materials and finished goods. The opportunity was to predict finished goods’ performance characteristics based on raw materials’ lab results. Imagine entering raw materials’ test results into a system and making minor adjustments to manufacturing to drive higher quality (hence, price) products for the same cost or to increase operating flexibility.
However, because of manual work process and system issues, the correct batch information only existed on paper. So, automating a predictive batch manufacturing/recipe generation system based on correlating raw material and finished good test results wasn’t possible.
The next question was: “Why are the system records incorrect?” It turned out to be a data quality issue. Over the years because the batch information wasn’t used for trackability or quality, the system records fell out of sync with reality — similar to an inventory accuracy issue when physical counts differ from system inventory records. The solution provided a template suitable for similar problems:
• Shine a light on the problem with management.
• Obtain support to solve it over time.
• Make a one-time adjustment to get the system to match the physical counts by batch/lot.
• Error-proof the process (via automation, training and management oversight).
• Measure and monitor over time.
Planning the journey to operational excellence requires process and organizational maturity to pick feasible targets; project management skills to assess cost and timing; systems and process skills to design the transition approach; and change management to drive it forward.
Technology As A Driver
Process automation — either within an organization or with external partners — can be an excellent mechanism to improve processes and transform knowledge into organizational assets. This is especially important with impending retirements and a need to bring on a new workforce.
Automation projects can uncover hidden processes. For example, a user of a system may have learned by trial and error how to get orders to post — without taking advantage of features of the software to do this systematically. The person may manually convert customer part numbers to supplier part numbers instead of using the automated features because those features require data records that don’t exist. A better solution is to set the records up, use the cross-reference feature, and then manage the processes to keep the data accurate. This provides a fix that works even if that person gets sick or retires.
An automation project led by the right team can improve the process and automate it at the same time. A good role for management is to identify candidate processes (without being too heavy-handed in what to do). Then, let experts work with users to improve the processes. Often what management thinks is going on and what must be done may require adjusting.
Starting The Journey
At the onset, management must design an operational excellence process on paper taking into account the lessons learned. Create an end-to-end value stream diagram that spans the time from when an order is received until it’s delivered to the customer. Each step of the process contains material, information and people flow that move with the product through the connections created from the starting point. Every employee can see the flow and is empowered to fix problems — and knows how to — when they arise. What this means is that each employee understands the product moves from process A to process B in a specific quantity, at a specific time, to a specific location — otherwise, something is wrong. After identifying and fixing any issues, process steps continue until the order is delivered successfully.
For example, a manufacturer will incur huge losses and suffer a competitive disadvantage versus better-prepared competitors if it holds excess raw material at a time of falling raw material prices. Conversely, too low a raw material stock at a time of increasing demand can preclude manufacturing sufficient product and lead to customers turning to suppliers that had better insight into changes in the supply/demand balance. The journey to operational excellence should enable a chemical maker to properly sense demand and thus set optimal inventory levels that meet customer requirements.
With end-to-end supply chain visibility, your business will be able to respond more quickly to demand changes and will be better positioned to beat the competition. Some experts suggest that demand-driven companies can sense market changes five times faster, which enables better customer service, lower inventory and improved bottom-line profits.
Basically, customers want to know: “Where’s my stuff?” Emerging next-generation end-to-end visibility applications in concert with a network of interconnected buyers, suppliers and logistics providers are enabling companies to lower working capital and operating expenses, mitigate risk and improve customer satisfaction.
Today’s technology allows all stakeholders to share a single network, connecting and collaborating on supply chain activities from one end of the enterprise to the other. Each trading partner has access to information generated through the network, gaining visibility to all aspects of production, procurement, transportation and distribution. With the proper information, executives can make qualified decisions that drive improvements in the business.
With end-to-end visibility as the key driver for an effective supply-chain improvement strategy, a business must build more collaborative relationships across its network of trading partners. For example, a University of Limerick study found that end-to-end visibility improved service level agreements to a consistent 98%, decreased inventory on hand from ten days to fewer than seven days, and reduced freight charges from 5% to 3.5% of volume.
Sense and respond are critical processes for supply chain visibility; you only can achieve them through a collaborative network coupled with advanced analytics. Using a DSN that offers collaboration and visibility capabilities helps an enterprise achieve better on-time performance, reduce variability in lead times and free up working capital.
A recent McKinsey research report highlighted that, on average, companies that aggressively digitize their supply chains can expect to boost annual growth of earnings before interest and taxes by 3.2% — the largest increase from digitizing any business area — and annual revenue growth by 2.3%. What does it take for a digital transformation of the chemical processing supply chain?
For a chemical company buying and selling around the globe, it’s important to use robust technology that automates processes across procurement, order fulfillment and logistics, capturing data along the way and analyzing trends and information across product, demand and supply networks. A network that strengthens interactions across companies will deliver prosperity and economic growth for all participants.
A DSN provides a technology foundation for improving inter-business processes, expanding supply chain relationships, increasing revenues and reducing operating costs. It creates greater opportunities by integrating your suppliers, customers and logistics service providers in various ways depending on the level of inter-business processes you’re performing.
One method is to connect via ERP-to-ERP integrations with high-volume suppliers and customers to streamline and automate sell-side and buy-side transactions. A second technique is through some type of portal for order capture and invoicing for inter-business automation. Finally, some leading DSNs provide email as a simple onboarding method to digitize an inter-business process without requiring supply chain partners to have any integration software.
Connection to a DSN enables your business to communicate with customers, suppliers and logistics service providers simply by sending and receiving emails to confirm direct material purchases, invoices and outbound shipments or by leveraging the more-sophisticated methods mentioned above. Once connected, you can begin automating your inter-business processes — with suppliers to procure materials more efficiently; with logistics service providers to drive continuous improvement in costs and service levels; and with customers to give them visibility as to the status of orders and shipments, even across multiple modes.
The DSN can handle supply chain documents such as:
• sales orders and their confirmations;
• logistics booking requests and their confirmations;
• shipment notices and associated updates;
• estimated time of deliveries with actuals;
• goods receipts confirmations; and
• invoice payments and freight collections.
By collecting, correlating and synchronizing data across multiple trading partners, the DSN enables you to differentiate what’s important from all the noise.
Coping With Corporate Change
Divestitures, mergers and acquisitions continue to reshape the chemical industry, and show no signs of letting up. A simplified, low-risk, predictable and accelerated path to managing organizational change can help a company cope while maintaining and even enhancing its trading partner relationships. Using a DSN can reduce costs by eliminating redundancy, create a faster time to value, and speed the operational excellence journey. It allows a company to:
• execute value-creation strategies by defining and driving a mergers-and-acquisitions plan;
• assist business and information technology leadership on how to control operational/organizational risks around process, people and technology;
• manage the integration roadmap and ensure transition alignment and operational integrity; and
• create a communication strategy for external customers, suppliers and logistics service providers.
Plan Your Journey
Technology can drive transformative projects that increase operational excellence. The technology implementation itself provides a wonderful opportunity to improve and standardize work processes. A team structure (perhaps via a business process automation center of operation excellence) that shares lessons learned from one project to the next can drive performance improvements across supply chains. DSN technology itself becomes an ERP force multiplier that spurs better performance and flexible connections with customers and suppliers, and lets you get a higher return from your ERP investment.
GARY NEIGHTS is senior director, product management, for Elemica, Wayne, Pa. Email him at [email protected].