Bruce E. Jacobs11.17.08
End-to-End Thinking
Bruce E. Jacobs
Unless a manufacturer’s product can demonstrate substantive value differentiation from a competitor’s similar or substitute product, the lines of distinction between competing products and competing manufacturers become blurred and indistinguishable for customers. Difference without distinction is not a competitive advantage. As less distinction can be made between competing products and competitors, the value proposition offered by competing products and manufacturers migrates from a value based on functions, features, quality, assortment, reliability and customer service, to a value based on price.
Moreover, today’s customers are changing. Customers are not accepting price increases. They are demanding lower prices and holding providers to higher performance standards in order to remain a provider. This higher expectation is independent of the performance of the provider’s product. Whether you are a contract manufacturer, supplier of materials and parts, manufacturer of branded products or a distributor, every customer is becoming less tolerant of mediocre performance and inferior customer service from their medical device and equipment providers. Customers are:
• Demanding and achieving higher service levels from providers, in terms of order fill rates
• Inventorying less of the provider’s products, placing smaller and more frequent orders
• Shortening the lead times from order placement with the provider to delivery
• Measuring the provider’s performance and issuing financial penalties for failure to meet order specifications and compliance to performance targets
• Requesting and achieving special services from providers without added costs from providers
• Requiring deeper integration of the provider to manage their inventory of products and the replenishment process
These are not new demands being placed on providers, whether they be a distributor, manufacturer or supplier to the manufacturer. These demands originated almost 20 years ago with the automotive
assembly plants and the retailers of consumer packaged goods.
The winners in these industries have achieved competitive distinction not only with their products, but with the performance of their end-to-end supply chains. Competitors will win in the market, gain market share and customers, outperform their competitors with responsiveness and service to customers with a supply chain that is synchronized across all its supply chain players, with its customer’s demand for products and service. Customers want what they want when they want it and for the least total cost. The customers of medical device and equipment manufacturers are no exception.
Synchronizing the provider’s supply chain with the customer’s rate of demand for product requires end-to-end thinking. Incremental improvements and optimization of set-point operating improvements already have been implemented in most companies to achieve benefits and performance gains. But they have been implemented within the boundaries of the provider’s internal business model and supply chain. For example, lean manufacturing practices are implemented and new materials and work-in-process inventory levels are reduced, but finished goods inventory doesn’t decline. The customer’s inventory doesn’t decline because the lead times and fill rates across the supply chain have not improved enough to make a difference; new technologies are implemented to manage customer’s inventory and achieve visibility of consumption, but the information is not used to replenish product to the customer based on demand. The provider’s internally generated sales forecast for product, which is either lucky or lousy, is not netted to reflect the actual sales against the forecast. There are numerous examples of incremental improvements being made by manufacturers throughout their business operations, which optimize specific components of the business model.
End-to-end thinking is about leveraging all the players and components across the supply chain to synchronize the supply chain end to end with the customers’ actual rate of demand for product. This requires a different level of thinking and the integration of all the players in the supply chain to leverage their capabilities and be able to provide product at the least total landed cost. It requires synchronization of the supply chain as close as possible with actual customer demand, while providing the highest level of customer service.
Defining the end-to-end supply chain for most manufacturers or providers, from their customers back through the supply chain to raw material sourcing, shouldn’t be a major undertaking, and neither should managing the supply chain end-to-end. What is required is a different level of thinking—one that is focused on the process as a whole, to provide and replenish product to customers based on their demand rate for products. Aligning every player in the supply chain for the manufacturers to work in harmony to provide product to the customer is needed.
This may appear to be an altruistic and simple vision of the manufacturer’s supply chain fully integrated across all the players in the supply chain and with their customer. The supply chain provides product to customers at the least total landed cost with the highest level of customer service and lowest total inventory. The objective is to achieve flexibility and responsiveness of the supply chain to meet changing customer demand. While incremental improvements within any single player of the supply chain are beneficial, order-of-magnitude benefits and economic gains are achieved when the supply chain of the manufacturer and all the players work in marching formation to meet the customer’s changing demand rate for products.
Simple Isn’t Easy
If it were simple to synchronize the supply chain with customer demand, most manufacturers would already have done it. Making it simple is not easy because the manufacturer’s internal business processes and functional organizations that create customer demand, respond to the customer and fulfill demand do not necessarily work in harmony with each other. There is a major lack of integration between the manufacturer’s organization and business processes that create demand for product, and fulfill demand for product. The Demand Creation function of the manufacturer, consisting of the sales force, marketing and product development organizations are not integrated with the manufacturer’s Demand Fulfillment function and business processes that distribute, manufacture and purchase from suppliers. More importantly, neither the Demand Creation nor the Demand Fulfillment functions are aligned and integrated with the customers and their demand for product.
Integrating the manufacturer’s supply chain and synchronizing it with the customer’s rate of demand requires the manufacturer’s Demand Creation and Demand Fulfillment functions to be integrated with the customer. Three business processes embedded in the manufacturer’s business can provide this integration. They are the processes of Customer and Account Management, Demand Management and Communications, and Continuous Replenishment.
The business process of Customer and Account Management requires the Demand Creation business function to plan and manage the revenue volume of key customers, integrate with their demand cycles for product and measure the performance of the customer. Customer and Account Management integrates with the Demand Management and Communications function and processes that develop and monitor sales forecasts, set and adjust inventory targets, monitor order fill rates and proactively take corrective action to meet changing customer demand for products. The Demand Fulfillment business function requires the manufacturer’s Continuous Replenishment process to monitor the customer’s inventory, replenish product to the customer as it is consumed and adjust inventory targets with the customer as seasonal demand and promotional activities take place. The business process of Demand Management and Communications is the integrator between the provider’s Demand Creation and Demand Fulfillment functions.
In addition, performance measurements are put in place to measure and communicate performance of the supply chain to all the players, and take corrective actions when necessary. This is an additional role of the Demand Management and Communications business processes.
Achieving a synchronized supply chain is a journey that begins with a vision of the supply chain’s operating performance. Operating a synchronized supply chain end-to-end is similar to the operating performance of a philharmonic orchestra, where every player has the rhythm, score and performance requirements defined, and works in harmony—in contrast to a musical jam session of would-be musicians trying to play something musical together.
Starting the journey requires the vision of a highly synchronized supply chain to be developed. The vision will dictate the business process designs, process improvements, and business policies and practices, enabling tools and technology support systems that will be required to be implemented. Finally, the performance measurements are identified and implemented. These measurements work in harmony with each other, drive the appropriate behavior and do not create any disproportionate costs or performance for other business functions or players across the supply chain.
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Breakthrough performance gains can be achieved with end-to-end thinking about supply chain performance. Manufacturers who align the players in their supply chain to serve customers and leverage their supply chain’s capabilities and players create benefits for all the players in the supply chain.