When you slice up the supply-chain into its different components, one of the highest areas of expense, and an area that many companies struggle to comprehend and manage, is transportation.  Why is it, that for many otherwise sophisticated companies, no one within the organization is held accountable to know what they spend on freight, where they spend it, why they spend it and how they can change it?

A recent transportation survey conducted by Profit Point shows 75% of our survey respondents continue to struggle with the trade-off between adding carriers to reduce costs, and limiting the total number of carriers so they can be effectively managed for safety and service.  Probably the most surprising finding for me was that one out of every four respondents was unable to confirm whether or not their most recent improvement projects in the transportation arena had any impact.  Wow! One quarter of transportation managers can’t measure whether their efforts made a difference.  In this uncertain economic environment where every penny counts, I think we should expect more from ourselves.

Another find – only 30% of respondents had been out in the market with a bid over the previous 12 months.   At a time where shipping volume is picking up and carriers are becoming more aggressive with pricing, it seems we should be very close to the market to make sure we’re paying the right amount for our freight.  With less than a third of shippers out in the market with a bid over the last year, how can we be sure that the price increases being proposed by carriers are reasonable?

Transportation continues to be a significant portion of the total supply chain cost, therefore for many companies, the single most significant area to focus cost reduction attention.  Have we lost our vision?  Is it time for a new pair of glasses?  Our survey seems to suggest it.  If you have been anointed as the Czar of transportation for your company, then you need to be in touch with the market and confident that the changes you implement are having a meaningful impact on the bottom line.

You can download the report by clicking the link below:

Download the
Transportation 2011 Survey Report

Just this week, IBM’s “Watson” computer showed off its impressive language processing capability by handily beating the best humans at the game Jeopardy!. This was of interest because Jeopardy is filled with tricky language such as puns, slang and wordplay; and Watson was able to process it all, figure out the context, and take it to the humans in winning handily. You can read about Ken Jenning’s firsthand account at http://www.slate.com/id/2284721/.

This story reminds me of the 1997 chess competition between Deep Blue and Gary Kasparov. I was fortunate to hear Kasparov speak at a supply chain conference just days after he had lost to Deep Blue. Despite the fact that he was deeply upset about having lost, Kasparov was able to share important insights that were relevant to the supply chain industry and business in general. What he pointed out was that the competition missed the real point. He described how machines were better at certain kinds of tasks (memorization of massive data, fast processing through the data, etc..), and humans were better at other tasks (certain kinds of inferences and relationships), and that in the future he would hope to see man-machine teams compete against one another to see who could create the best combination of person and machine to be the best at Chess.

Clearly this was an insightful comment to a room filled with supply chain experts. It is our job, every day, to make the best possible decisions in the face of an overwhelming amount of data in front of us. We know for sure, that we cannot rely completely on technology to make these decisions. We know equally well that experience and business savvy are not enough in today’s world to consistently make the best decisions for our business. So our challenge is the one of which we are once again reminded: how best to combine human ingenuity, experience and insight with the power of modern technology to make our business and supply chain be the best they can be. At Profit Point, this is our passion.

At Profit Point, we often repeat the mantra “People, Process, Technology.”  All three are important for the kinds of projects we work on.  You have to have good systems (the technology part) that support good work processes and people that follow the process and use the systems.  If your people are not committed to following the process and using the systems, you are going nowhere fast.

Recently we were discussing with a senior manager at one of our clients what makes for a good Sales and Operations Planning Process (S&OP Process).  Being someone who is more of a process and technology guy I was thinking that he might say something like “You have to have a well thought out work process that is clearly communicated to everyone involved” or “You have to have a system that is easy to work with that supports the work process well.”  WRONG!

The first thing he mentioned was that senior management needed to be openly committed to the process and systems.  He illustrated this for us by recounting what another senior manager at this same client said during an S&OP meeting with a large group.  The group was going back and forth discussing a “potential” order from a customer and this particular senior manager said “If it’s not in the system then it’s a rumor and we don’t plan and schedule for rumors.”

As you can imagine, this cut down on the chatter in the room quite quickly.  This client had spent a lot of time and money developing processes and systems that worked well and those two things are necessary but not sufficient.  You have to have leadership that says “We have a work process to follow and a system to use to support executing that process.  Follow the process and use the system.”

Next you have to have people who do exactly that!  If this is not happening then as I heard from another executive “Either the people will change or the people will change!”

You have to be able to trust the data in the system but really at its root this boils down to trusting the people who entered the data in the system.  As I was reminded, this starts at the top!

Okay. I am an anomaly. I live in Utah and drink coffee. The majority of the people that live in Utah do not drink coffee, and that is OK, but I do. So, is there a shortage of coffee Cafés in Utah? No. There are many cafés and several that serve outstanding coffee.

We have an exceptional espresso café downtown, located on a side street off of Main. They roast their own coffee and use triple certified organic grown beans. It is the type of place the local coffee lovers go to hang out and have good conversation over a morning or afternoon latté or espresso. Possibly the best coffee I have ever had. What is interesting to me is that a large percentage of the residents in my area do not even know that this café exists.

So what is my point? When it comes to outstanding services or products most people are unaware of what is available, primarily because it does not fit into their lifestyle or what they’re accustomed to. I believe you can transfer this similarity to the business world. Manufacturing logistics and transportation people become accustomed to doing things a certain way. Over time they may become blind to ideas for improving the supply chain. They are unaware of an exceptional Supply Chain Café, even when it is located just seconds from a combination of keystrokes and Google.

It is not their fault they are missing the best latté available. We, as consultants, who prepare those delightful solutions from the Supply Chain Café menu, have probably not done the finest job of promoting our services and software to your neighborhood, but that is changing.

There are many empty cups in the supply chain, waiting to be filled with successful solutions. Supply Chain and Logistic managers tackle difficult supply chain problems every day, but they are so focused on getting their job done and making it through the day that they have little time to think of alternatives that may improve their processes and well being. I am not sure how we can help everyone, so let’s focus on the window shoppers. These are the ones that are aware of the café, but have never been inside. Maybe you are one?

If you are reading this blog, then you must be a window shopper. I am guessing you are looking for a better espresso. OK, you found “Profit Point”, although you may not know what we do. Guess what? Help is on its way. We can share our menu with you. We just published four videos that will introduce you to the Profit Point team and what we do. Embrace three minutes out of your day, select one of the videos, and watch it. Learn how we help companies improve their supply chain, by serving the best coffee with a smile.

Yes, you can improve your supply chain with our help. The supply chain solution that you are looking for, is about to be yours. And if you place an order, we can fill your cup to the top, with the “good triple certified” stuff. If you cannot seem to find that special item on our Supply Chain menu, then no fear, we love special orders.

So, is there a shortage of Supply Chain Cafés? No. You just need to find the one that serves the optimal latté. I know it’s out there somewhere.

To learn more about Profit Point’s Global Supply Chain Optimzation services, please contact us.

Frequently, you might hear somebody say that the capacity of a production facility is some known and fixed value.  When this happens be very wary of what they might be trying to sell you.  Because as with so many other things, when measuring capacity ”the devil is in the details”.

The “capacity” of a factory sounds like a pretty simple notion and something that should be easy to calculate.  But this is only true for production systems that are fairly straightforward, consisting of totally independent machines and processes.  If the organization however consists of operations that are interconnected and interdependent on each other, then capacity can be a fairly difficult thing to measure.

In the vast majority of production systems, there is a very real link between capacity and three critical factors:

1. the mix of products, and how much time is required for setup/cleanup between consecutive production runs,
2. the ability to create sophisticated and optimal schedules for the production resources,
3. how much physical space exists in the factory where products that are only partially complete can be kept or stored; what’s known as Work in Process (or WIP)  Inventory.

To see these 3 relationships at work, consider the simple case where a certain department produces two products, A and B, which both use the same piece of equipment, and there is only one of these machines available.  The production rates of the machine are in the table below and there is a 4 hour setup time required when the machine switches over from producing one product to another.  Now consider the 2 scenarios below.  In Scenario A, the capacity is 170 units per day while in scenario B the capacity is 145.

This example clearly demonstrates the frist item above, that the “capacity” of the department depends to a large extent on the mix of the 2 products that are being produced.

Now suppose that management wants to produce 110 of A and 80 of B per day.  These new requirements seem to clearly exceed the capacity of the department given EITHER Scenario A or B.  But maybe the necessary capacity can still be found.

If the new requirement is to produce at this increased rate for only a single day, or to produce at this rate each and every day, then there is definitely not enough capacity on the machine.  However, if the increased production is required over a sustained length of time, then we can gain extra production by modifying the production schedule so as to eliminate or minimize the occurrence of the 4 hour setup.  If the department schedules production in long blocks spanning several days, where first one product and then the other is produced, then the department DOES have the capacity.  In the table below for example, 440 units of A is first produced followed by 320 of B, with a 4 hour setup between them.  This represents 4 days worth of the increased management requirement (100 of A and 80 of B each multiplied by 4).

With this schedule, the total required hours of 94 is less than the 96 hours available in 4 days, and so now there IS enough capacity!  By scheduling wisely (i.e. “working smarter”), the department’s average daily capacity has actually risen to (760 / 4) = 190 units per day, a good deal higher than either 170 or 145 in the two previous scenarios.

Thus, the department capacity clearly depends on the ability to implement “smart” production schedules that make the best use of the available resources, i.e. the second issue mentioned earlier.

Finally, this higer capacity schedule is an example of a “good news / bad news” situation.  Although the plant is able to produce more (and presumably company revenues will go up) the downside of this higher capacity schedule is that  the department will be maintaining a larger amount of inventory in the supply chain on average.  And if there is more “stuff” in the pipeline, then there has to be the physical space to put it.  This is an important consideration if inventory has to be stored in or on particular types of storage facilities such as refrigerators or special racks.  Therefore, although it might be possible to ”buy” extra production capacity with a better equipment schedule,  it is important to realize that different schedules put more or less demand on the spatial capacity of the actual storage facilities.

Therefore, this example illustrates the third item, that increasing ouput can put stress on the plant’s storage facilities

This last scenario also shows that maximum capacity is not necessarily the same as minimum cost.  Because notice that in this scenario there is only one 4-hour setup, and thus any costs from the setup activity are averaged over a larger number of produced items.  But offsetting this savings in setup cost is the fact that with the increased WIP, the inventory costs will have gone up.

The fact that capacity can be such a difficult thing to measure, does not mean that it is not a valuable parameter to describe a given system.  What it does mean is that when any capacity value is given for a particular supply chain, it is absolutely critical to understand the assumptions that underlie it.  The fact that capacity is such a highly maleable concept, simply reinforces the fact that managing a company’s supply chain is always a delicate balancing act between competing costs and non-monetary factors.

Cluster Analysis in Supply Chain Optimization

Cluster Analysis (CA) is a versatile tool for grouping objects based on their similarity to each other.  It is applied in a wide variety of situations.  Some example applications are similarity of faces, countries, and species of dogs.  One starts by defining attributes of the individuals (countries, faces, species…) that can be assigned a numerical value, e.g. length of nose, separation of eyes.  One of several available metrics is used to define the ‘distance’ between the individuals.   Individuals are then assigned to a cluster based on the shortest distance.  CA produces some appealing results and gives useful insights that spark further investigation even in the exotic applications.

In the relatively straightforward context of grouping locations, cluster analysis performs equally well.  This makes CA a useful tool in supply chain optimization.  Designing a distribution network often involves planning of routes over regions or deciding on locations for warehouses.  One could look at a map covered with dots representing locations and draw circles around groups.  But this would be an arbitrary approach.  CA offers a way to group locations in a systematic way and speeds up the process of exploring several different versions of the clusters.  I am going to present a few examples and describe the mechanics of the CA process.

In the examples that follow we have a set of 400+ locations from an area surrounding Denver Colorado.  The latitude and longitude of the locations are the attributes that will define the similarity of locations.  In this case the distance between objects and clusters really is a distance.  In CA you can generally use Euclidean distance or XY distance – as though you were on a sidewalk in a city.  Which to use depends on the situation.  If looking at a downtown area, the XY distance might be best.  But over a broader area the Euclidean or Great Circle distance makes more sense.

There are really two broad categories of clustering – hierarchical and non-hierarchical.  The hierarchical methods begin by considering all the individuals (locations) as separate groups.  The nearest two are joined and now we have one less group.  The location of that group can be defined in a few different ways.  For now picture it as the centroid of the group members – which could be weighted by something like demand for a product.  The next join depends on the remaining distances between members or between a member and the existing clusters.  In either case we end up with one less group.  CA keeps joining until there is one large group.  This is agglomerative or hierarchical clustering.

Along the way there is a point at which we have 434, 433… 5, 4, 3, 2, 1 groups.  For any given number of groups we can look at the distance between the groups and the distance of group members from the centroid of their own group.  One could look for a small number of clusters where the distances within a cluster are small compared to the distances between clusters. 

Most of the options within hierarchical clustering are based on the way we define the distance between an individual location and a cluster and the distance from one cluster to another.  One example is nearest neighbor.  In this case the distance of an individual to a cluster is the distance to the closest existing location in the cluster.  Farthest neighbor is also a possibility.  Neither of these is well-suited to most supply chain applications.  The typical method is to use the centroid as the cluster location for defining distances.  Let’s take a look at three methods, average distance, farthest neighbor, and Ward’s method (which will be described soon).

Figure 1 – Clustering based on farthest neighbor (Complete Clustering)

In the complete method an individual or cluster is joined to another cluster based on the smallest maximum distance between any two individual locations.  Figure 1 above is what it produces.  If the groups were to be used to define clusters for delivery routes one problem might be the unequal sizes of the five groups that were created.

The average distance method joins individuals or clusters to another cluster based on the smallest average distance to the members of a cluster.  This gives another result with unequal cluster membership.  A method based on the median distance gives a result very similar to the complete method using the sample data, though it is less sensitive to outlying locations that are far from all others.

If reasonably equal group sizes are important, then another method called Ward’s method is one of the best choices.  The results using Ward’s method are shown below.  Ward’s method makes assignments that minimize the within clusters deviations from the centroid of the cluster.  What you get depends on how many clusters you ask for.  You can compare the results of five and six clusters.

Figure 2 – Clustering based on average distance to the existing cluster members.

Figure 3 – Ward’s Method with five clusters requested.

Figure 4 – Ward’s Method with six clusters requested.

Another way to look at the results is with a type of graph called a dendogram.  The dendogram gives a visual look at the way similarity of clusters changes as individuals are merged into the clusters.  The dendogram is shown in Figure 5 below.  The vertical scale is just a measure of similarity.  It is linear and is often just a normalized scale from zero to one hundred. 

What you take away from the dendogram is this:  as fewer clusters are formed, the similarity of members within a cluster decreases.  Picture a horizontal line that cuts across the figure where it will intersect just six of the vertical dendogram lines.  Notice that with just a small change in the vertical scale we could cross four or five vertical lines of the dendogram.  That implies there is not much change going from four to six clusters in terms of the nearness of individuals within the clusters.  They are still very similar (close).  Things change much more rapidly going below four clusters.  Of course, at the bottom when there are two hundred clusters, members of each cluster are very similar (read close) to each other.

The last method to look at is different than hierarchical clustering.  It is called K Means clustering.  It is not a hierarchical method so a dendogram is not really possible – joining does not occur sequentially.  Without too many details, K Means clustering works like this.  We start with an initial division into a certain number of clusters – let’s say six.  The initial division should be done in some sensible way, e.g. Ward’s method.

Figure 5 – Dendogram based on Ward’s method.

K-Means clustering keeps examining all the observations to see if they are closer to the centroid of some group than to the group they are currently in.  If so, they are moved and the centroids of both affected groups are recalculated.  The method continues until no more improving moves can be made.  It is important to start with a decent initial grouping.  The result of K-Means clustering using Ward’s method as a starting point is shown in Figure 6.

Figure 6 – K Means Clustering with an initial group.

If we had started without an initial group the result would be a bit different.  It would look like Figure 7.

Figure 7 – K Means Clustering without an initial group.

This is somewhat different than the result with an initial group. 

Bottom line recommendations are these.  Use K-Means clustering with Ward’s method as an initial seed.  If K-Means clustering is not available, use Ward’s method.  If you use a hierarchical method take a look at the dendogram as a way to decide on a number of clusters.  You can reduce the number of clusters until the reduction of similarity is large.  Looking at the scattergram of the points for various numbers of clusters should confirm the dendogram information.  Methods like the farthest or nearest neighbor will very likely give poor results.  All methods are affected by outliers to some degree.  Consider managing a few far out points by hand.  Minitab is a very good software product for doing cluster analysis.

CA is far from a mathematical curiosity.  It can be a very useful tool for network or facility location analysis.  It certainly lets the analyst explore more solutions than could be done manually.  Rather than some arbitrary decisions on grouping, CA can contribute the analysis that leads to bottom line savings.

As Profit Point celebrates 15 years in business this week, we are reflecting on the many dimensions that has made our journey successful. One aspect of our company that too often flies below the radar, is our commitment to participating in, and giving back to, the communities where we work and live.

In order that you may better understand this aspect of our company, we’ve recently posted a summary of both our philosophy on this subject, and our accomplishments. Like all aspects of our business we set a clear strategy early, identified the appropriate tactics to support that strategy, and then implemented quickly and effectively.

We hope you will enjoy reading about our history of philanthropy.

This month’s issue of Supply Chain Solutions magazine features an article by Dr. Alan Kosansky and Dr. Joe Litko entitled Leverage Value.

“Executive-level business decisions include a broad range of interconnected variables leading to an extensive array of options. In the supply chain arena, this often plays out as a tradoff between operating costs, working capital, asset utilization and customer service levels.”

This article looks at the challenges faced by executives in making these decisions and the value of modeling future scenarios to make better decisions. You can read the complete article here.

If you would like to learn more about our Supply Chain Optimization and decision support services, please call (866) 347-1130 or contact us here.

With the timing and velocity of an economic recovery uncertain, many companies are looking for new ways to improve profits without risking growth capacity. One key opportunity for gaining competitive cost advantage is transportation spend.

So this year, we conducted a survey transportation decision makers to learn more about their concerns and expectation for 2011. Supply chain professionals from a variety of companies and industries were polled. Here’s what we learned:

• In today’s environment, cost and service still dominate all other considerations
• Despite current economic conditions, 87% of respondents are concerned about rising transportation costs
• 75% of all respondents find it challenging to balance the tradeoff between cutting costs and adding too many carriers
• One in four respondents were not able to measure the impact of their “improvement initiatives”

To read the complete report, including our conclusions, click the link below:

Download the 2011 Transportation Survey

To learn more about Profit Point’s transportation optimization and transportation procurement services, call (866) 347-1130 or contact us here.

A good friend of mine, who works for a large employer in her city, recently told me that her department’s budget, along with every other department budget that was classified as “Administration” in the ubiquitous SAP system, had to be cut by a large and specific percentage.

It didn’t matter that the “Administration” label was not uniformly applied across her organization and that some departments that were so labeled performed functions very similar to other departments that were not stuck with that label.  It didn’t matter what services each department provided, or how efficiently they provided them, they just had to cut the budget and they had to hit the number.  Incredibly, it didn’t matter that her group was one of the few “Administration” groups that actually generated revenue; in her case three times their total annual budget spend.

Unfortunately, hers is not the first story like this that I have heard.

There is no doubt that many corporations, organizations, governments and households have been hit hard by the recent economic downturn.  Each of these groups has been forced to make some difficult decisions.  So what do I have against across-the-board (ATB) budget cuts?  Basically, I think it has to be the worst way to reduce costs in an organization, and here’s why.

Let’s take a look at something that is important and familiar to all of us; the family budget.  Sadly, many families have been forced to drastically reduce spending as a result of a lay-off or furlough over the past two years.  In those cases, an ATB cost-cutting strategy just doesn’t work.  Try telling the bank that you’ve had to cut your monthly mortgage payments by 15%.  I doubt that they will be impressed when you tell them that you’ve had to do the same with your property taxes, insurance premiums, electricity and water payments, as well.  You might get lucky and be able to renegotiate your mortgage and you might get lucky if your state provides utilities assistance for people who have recently lost their jobs, but most tax assessors and insurance companies will not be particularly sympathetic.

But my guess is that you’d probably take a very different type of approach to cost-cutting in your household.  You’d probably take a hard look at all of the money that you’re spending over a month or a quarter.  You might first examine your spending to see if you could conserve on the amount you consume or if there were ways to get the same goods and services in a cheaper manner.  If that didn’t reduce your spending enough, you’d probably divide the remaining spending into different categories.   There are many different ways to categorize your expenses, but they’ll probably come down to something like, 1) Essential; 2) Non-essential, but painful to cut; 3) Non-essential and easier to cut.  If you’re lucky, you will be able to cut enough of your spending by eliminating or reducing your expenses in the non-essential categories.  If not, you might be forced to re-examine what really is “Essential.”  For example, your mortgage payment is essential, as long as you plan to stay in your house, but if the situation calls for it, you can reduce your costs by moving into a smaller home or apartment.  Not a fun choice, but it could be the right thing to do in certain situations.

Looking back on the family budget example, what did we do?  First, we looked for opportunities to conserve and less expensive ways to purchase the same goods and services.  Next, we prioritized our spending so we could make good decisions.  To find less expensive ways to purchase the same goods and services and to prioritize the spending means that we needed to 1) understand what we were getting for the money we were spending and 2) understand what would happen when we stopped spending that money.  After prioritizing our spending we made trade-offs by deciding what we could live without.  Some of the trade-offs may have been no-brainers, but some may have been very difficult.

I would argue that this is the same process that should occur in any organization that needs to reduce its spending.  It amazes me how a manager can walk into a large organization and mandate a large cut in the budget for each and every department (as they are defined in the accounting system, but that’s a different blog) without understanding where, how and why the money is spent.  It would be laughable if the results weren’t so sad.

ATB budget cuts penalize your best managers.  These are the managers that run a lean operation, who have taken the initiative to drive out all of the waste and improve productivity.  They are already doing the job you’ve asked them to do with the fewest resources possible, but they are being treated in the same manner as the manager who is either not as effective, or who has become jaded by past ATB cuts, so that he/she keeps some “rainy day” resources in the budget for just such “emergencies.”  (… and people wonder why their best managers seem to leave after these types of budget cuts, even when their positions are not eliminated.)

Let’s not forget the knock-on effect of penalizing your best managers.  The best managers often assemble the best teams to do the work.  If one or more members of a lean, highly productive, well-functioning team is forced out in an ATB cut, the rest of the team is forced to pick up the additional work of the departing team members.  This extra work, on top of an already full workload, either forces the quality of the work to suffer, or reduces the total output of the team; that is, if the rest of the team elects to stay in an organization that doesn’t value efficiency.

ATB budget cuts often fail to achieve their savings targets or result in so much “slash and burn” damage to the organization that “add-backs” must occur after the blood-letting so the organization can survive.  It continues to amaze me that these managers have the time to perform an initial ATB cut, followed by another one or by an “add back” program; but don’t have the time to do it right the first time.

ATB cuts suggest that the value of the work performed under each of the budgets is equal to the value of the work performed in all other budgets.  I have seen a lot of different organizations over my career and I don’t think I’ve ever observed this to be the case.  Take my friend’s case: her group makes money, while others spend it.  Is a cost cut that forces a reduction in revenue equal to a cost cut that has no impact on revenue?  Probably not.

So, what’s the answer?  Clearly, many organizations are forced to radically reduce costs just to survive.  I think it goes back to our home budget example: 1) know what you’re spending; 2) understand what you get for it, 3) find ways to get the same or similar things for less money, and 4) make the hard choices about what you can do without.

In the end, my experience has been that managers who drive ATB cost reductions are incapable/unwilling to understand their business processes and organizations sufficiently; lack the imagination or skills to reengineer their business processes; or lack the courage to make the hard choices about what their organization will do and what it won’t do in the future.

To all those top level managers who have instituted ATB cuts, or for those who are planning to do so: Don’t do it! Think before you act, and save your company the added burden of bad management.

At Profit Point we are in the ‘Science of Better’, and we are always looking for new ways to do business, both for our clients, and for ourselves.  When we started, we had the challenge of being a virtual company, that is, we have never had a corporate office space. Since 1995, each of us has always worked from home.  While there are numerous benefits of this style of company architecture, including having a family that actually knows who you are, and keeping the company’s overhead to a minimum, it also has its drawbacks. Like forcing each person to make the deliberate decision about when to start work, and harder still, when to stop work each day. We knew when we started this company that we wanted to keep our overhead costs low, so a virtual office seemed like the natural choice.

More recently, we have been faced with another challenge, how to reduce the cost of the projects we do. Projects in the supply chain business require a certain amount of industry and company specific knowledge.  Until recently, we had been building into our projects ample on-site time where the project team could gel and collaborate and build the trust that is needed for the free flow of ideas.  But the world has changed, and we have changed with it.   No longer are big travel budgets a normal part of the projects we see. So the challenge was: how to reduce the travel expense line item, without sacrificing the project speed or quality?

In the consulting business, there is sometimes no substitute for ‘face-time’.  So travel to the customer site perforce happens.  Over the course of the last 15 years, I have seen a marked drop in the amount of time that we need to travel, going from 60-70% a decade ago to less than 20% currently, and this has been brought about primarily by two factors: 1) Companies simply do not want to pay the travel expenses. Since 9/11, most major companies have been slashing their travel budgets, and expect their consultants to follow suit.  One particular project comes to mind where I had seen travel expenses that were as much as the consulting bill each month. But in general, we see pressure to reduce the travel expenses that are generated by projects across the board.  2) ‘Remote Touch’ Technology has provided the means to travel less.  There are some great remote desktop control tools that allow two or more people to have a telephone or VOIP conversation, and look at the same computer screen, to discuss and collaborate on ideas and tools.  These web based telephony and remote control tools have eliminated the need for travel to a greater extent than you might think.   Many of our projects today have only two face to face meetings, one to kick it off, and one to present the results or close it out.  Some of our clients are handled successfully without any face time. I must say though, that in our experience, low face-time projects only work well within the culture and language: that is, when language and culture barriers exist in the project team, face-time is the best way to bridge these gaps, and mitigate the risk of project overruns and delays.

In business, technology comes into being as a means to enable better business processes.  The processes that we use that are enabled by this remote touch technology includes an agile approach to solving business problems or developing software solutions.  We use several readily available web based tools every day in our business, and boy have they allowed us to reduce the travel expenses.  These include:

GotoMeeting.com

This is the best remote touch tool out there in our opinion.  Until a robust free app comes along, this will remain the best value for the money.  The best part of the app is the recent addition of the integrated VOIP, where you can use a head set (I would recommend the Logitech ClearChat PC Wireless Headset: http://www.logitech.com/en-us/webcam-communications/internet-headsets-phones/devices/4226) to join the integrated telecon line.  This has the advantage of freeing up your phone, and being instantly connected to the telecon as soon as you start it.  No more long telecon numbers with their passcodes! We use this many times every day, and it is the primary reason why we can travel less.

Box.net

This is a simple to use and secure web based file storage and sharing application that fosters and supports collaboration with people both in your company and externally.  We love this app, and my clients seem to as well.  Just drop a file into this app, and share it securely with anyone with an email address. Use it when email attachments just will not do, due to size limitations, or just when the email hassle is too much.

PivotalTracker.com

This is a terrific project management tool that is designed for agile projects, and makes it simple to create and manage user stories for tool development.  While inviting new members can be a hassle (since their email seems to get caught in many spam filters), once they are in, these folks have made a stellar user interface to manage the tasks in a project of nearly any size. Use it to track bugs too. We have done several projects using this tool. and we will be using it for many more.  Great tool.

TableauSoftware.com

If you like to look at data, like we like to look at data, then you will want to look at Tableau.  You can think of it like a pivot table / chart on steroids.  You open it, connect to you data, (whereever or what ever data you’ve got, it can connect to it), and then you start to explore your data like you’ve never been able to before. Like a pivot table, you can drag and drop fields, aggregate data along dimensions,  and make sums, etc, but the really cool part of Tableau is the part where it suggests new ways of the looking at the data.   Go ahead, make maps, heat charts, time phased graphs, whatever.  Then you can assemble the graphs into a dashboard. Dashboards are the best.  Want to see a ton of data distilled down into a very compact visually stunning view suitable for management? Get a copy of Tableau, and you can make that view in minutes.

Used appropriately, these tools, and others like them, have enabled us to travel less, and work faster and better. (and more!)

If you have other great apps like these that enable better business processes, I would love to hear about them.

Did you miss Jim Piermarini talk at CSCMP about Logitech’s supply chain distribution methodology? For those that are interested, we are posting the slide deck here for your review. To download the complete presentation click the image below:

To learn more about how Profit Point can help you improve your inventory fulfillment, contact us here.

CSCMP’s Annual Global Conference is in full swing and a couple of our team members are on-site in San Diego.

Jim Piermarini will be speaking at the event tomorrow along with Michele Hermann, the VP of Global Operation Solutions for Logitech.  Please stop by and hear Jim and Michele talk about our efforts to help Logitech improve its supply chain and inventory. You can find the full details below.

And, if you’d like to meet up with Jim at any other time during the conference, you can send us a note here.

Logitech: A Better Way to Assign Inventory to Backlog Orders

Tuesday, 9/28, 3:30 pm to 5:00 pm

• Learn techniques to control assignment of inventory to backlog orders.
• Gain an understanding of the challenges of replacing enterprise resource planning (ERP) functions with offline decision systems.

Michele Hermann, Vice President Global Operation Solutions, Logitech
Jim Piermanni, Chief Executive Officer, Profit Point, Inc.

When making infrastructure planning decisions regarding adding new facilities, or adding capacity to existing facilities, you will want to take into account a variety of facility costs to ensure you make the right decisions.  These costs include…

• variable cost, dependent on the volume through the facility
• operating fixed cost, to cover costs such as taxes, security, leases, etc.
• depreciation,  based on the life of the equipment, and
• cost of the capital used to construct / purchase the facility

In an optimization model you can capture all of these costs separately, or perhaps you will want to consider the fixed costs as a “lump sum”.

Here are two ways that you could build the cost of capital into the decision-making process:

• Add a Capital Recovery Cost to the objective function, to reflect the cost of the capital required to build or expand a facility.  One way to do this is the approach used in the Microsoft Excel PMT function, which asks for four inputs to the calculation of recovery cost for a time period:
  • capital cost of the asset to be added, e.g. a plant, production line, distribution facility, waste water treatment facility, etc.
  • useful life of the asset  - the entry here for the number of time periods should be consistent with the frequency of time in your model
  • salvage value at the end of the asset’s used useful life, if any
  • capital cost charge (interest) rate to be charged in each time period – again, the entry here should be consistent with the frequency of time in your model.  (This number could be annual, monthly, or based on another frequency, depending on how you have defined your model.)

The Capital Recovery Charge can be thought of as a loan repayment for the amount of capital required in purchase and install the facility.  Excel has help files describing the details of the PMT function, so we will go into more detail here.

• Use Economic Profit as the objective of the model, or as a measure that you use to compare alternative solutions.  Economic Profit is your standard accounting profit, less the opportunity cost of capital invested in the business.  The opportunity cost is the return that the company would have been able earn if it had invested in the next best alternative project.  For instance, if you consider a future alternative where
  • the accounting profit for the time period (say, year) is 100, with the additional asset, but
  • the asset has a capital cost of 1000, and
  • the opportunity cost for capital is 15% per year (the company could have received a 15% return by investing the capital elsewhere) , then
  • the Economic Profit for the year is 100 – .15*1000 = -50.

If you are minimizing cost rather than maximizing profit in your model, then you can calculate Impact on Economic Profit for a given alternative, adjusting the operating costs from the model for the effective tax rate, and subtracting the capital charge.

Including the cost of capital appropriately will allow you to present a more complete analysis.

I’m a picture guy.  In our kind of work, we have to be able to take a lot of data and make sense out of the process or processes that generated it.  I used to work with a fellow named, Bill, who has a PhD in Operations Research, and is probably one of the smartest people I’ve ever met in my life.  Bill is a guy who can look at six or seven big tables of numbers and then say something like, “… and the answer is 7.563.”  He was usually right.  I don’t have that talent to create the linkages among lots of different types of information in my head to come up with a conclusion like that.  That’s why I like pictures.

Recently, one of my colleagues and I were visiting a manufacturing plant to assess their production scheduling process.  The client invited us to visit the plant because they knew they had a problem.  As we followed the scheduler through his day, we began to understand the root causes of the problem.  So how did I choose to communicate what we’d found to the client?  You guessed it; I drew a picture.

When the plant manager first opened the file containing the flowchart of their existing process, she told me she only needed to see that it took me three letter-sized pages to document to the process to know that the process was much too complex and cumbersome to be fixed with a couple of “quick hits.”  Why is it that she knew without studying the details that we needed a full redesign to fix this process?

I think many of us are just built that way.  I know there is a lot of clinical and academic research that shows how we human beings use our sense of sight as a first preference for observing the world, and that there are specific parts of our brains that are able to detect visual patterns or the lack thereof.  However, I don’t think we need to see the results of that research to know why the phrase, “a picture is worth a thousand words,” is such an enduring statement.  It rings true with all of us.

That’s why I like a software product called Tableau.  It is marketed as a visual analysis tool and I think it does its job quite well.  Although I don’t claim to be an expert user, I have found it quite useful when I need to understand what’s going on in a large dataset.  Let me illustrate using an example from a recent transportation analysis that we did for one of our clients.

Our client had grown by acquisition and managed its transportation in a very de-centralized manner.  Each of the sites contracted individually with their own set of carriers, using their own set of criteria for selecting and then awarding business to the carriers.  Profit Point was called in to help the client understand the cost-savings opportunities that would result from a more centralized approach to carrier contracting and management.

Our first priority was to find out what was going on at all of the different sites so we developed a database from the client’s freight payment records to do it.  Now, picture this (pun intended).  We now have over 63,000 individual shipment records to analyze and we needed to do it in a way that told a story that we could understand and that we could then communicate to the client.  The first thing we did was look at the spend by plant and by carrier.  The spend by plant was more of a prioritization issue, to understand which of the plants had the highest freight spend, but the spend by carrier became the first part of our story as you can see in the two pictures below.

This second chart was a very powerful image to help the client quickly see that the number of carriers being employed was out of control.  You don’t even need to be able to read the name of the carrier on the Y-axis to know that there are too many carriers in this picture.  Many of these carriers had only a single load all year long, but were still carried in the system.

We also wanted to show the client the significant different in pricing policies across their carrier base.  The following slides show how we used some more of Tableau’s functionality to make our point.

By plotting cost vs. distance for all of the shipments, we were able to see the general correlation of cost with distance that we expected, but we also saw a number of outliers that we wanted to better understand.

We then highlighted a group of very high-cost shipments and kept only those points to see what we might find out.

Using a simple stacked bar chart, it was very apparent that carrier “C-g,” the red bar in the chart at left, was the main player in this group.  Once “C-g” was identified, we were able to demonstrate that their cost was always greater than the average cost for shipments with distances greater than 200 miles and by as much as 50-66% for shipments with distances greater than 1000 miles.

Again, these pictures allowed us to find one of the smoking guns inside this mass of data.  Suffice it to say that we found many other opportunities through similar visual analysis.

Because of these pictures, and others like them, it was an easy sell.  Using a tool that makes it easy to use the built-in “intelligence of our eyeballs,” we were able to develop a convincing call to action for our client, who went out to the market with a targeted freight bid and reduced their transportation spend dramatically.

As technology continues to penetrate more and more aspects of business and our everyday lives, it makes more and more data available for us to turn into useful information.  But it’s only useful information when we can put it into a form that we understand and can communicate it to others.  That’s why I’m a picture guy.

To learn more about Profit Point’s transportation services, call (866) 347-1130 or contact us here.

“Going Green” is becoming a higher priority for companies large and small, as regulatory bodies and consumers around the world push for more readily-available information on corporate carbon footprints and companies’ plans to control / reduce their carbon emissions.  But how do you do this most cost-effectively?  Optimization is a tool that can lead to better “green” decision-making.

First, let’s review of the types of decisions that companies are making today.  Here are some real world examples from recent press reports…

Dole Food Company,  the world’s largest producer of fruits and vegetables, has committed to make its banana and pineapple business in Costa Rica carbon neutral over the next decade.  Dole social responsibility officials Sylvain Cuperlier and Rudy Amador recently highlighted their priorities in achieving this in an interview :

• measurement of current carbon footprint and activities, such as the use of fertilizers,
• research into and collaboration on mitigation and sequestration projects, and
• improved  operations, including increased use of rail transportation on land and more energy-efficient refrigerated containers for maritime shipments.

Tyco Waterworks, a worldwide supplier of water system equipment based in the UK, has documented its consolidation of multiple manufacturing plants into a single Manufacturing Centre of Excellence for meter boxes, plastic injection molding and gunmetal products in Bridgend, South Wales.  Having all its manufacturing under one roof results in a reduction in the company’s overall energy consumption and transport, with a resulting positive impact on its carbon footprint (as well as giving operational efficiency benefits.)

Xerox Corporation, which provides document services and equipment around the world, maintains a fleet of 5,000 vehicles used by its technicians in the United States as they respond to customer requests for service.   Tony Rossi, Xerox’s manager of programs and operational support, said in an interview that his programs, which have reduced fuel consumption over the last several years by 10%, and have a goal of a 25% reduction, can be grouped into four categories:

• pairing each driver with the best-sized vehicle for his / her needs,
• improving the fleet’s fuel efficiency as vehicles are replaced,
• tracking driver routes and distances traveled on a daily basis, and
• using GPS systems to match available technicians against pending requests as they are dispatched during the day.

The common thread?  These companies have made progress towards their cost and carbon goals by

• understanding their current situation, and what their options include,
• implementing more efficient operations over their existing supply chain (thus generally using less energy and lowering their footprint), and
• making the most effective capital additions to their supply chain systems when justified.

Optimization techniques can allow you to identify the best solutions that are possible in improving efficiency and implementing capital projects.  Thus you can make the best choices for meeting your goals from the options that you have at hand.

In making decisions for a manufacturing-oriented supply chain like the one described for Tyco Waterworks above, a network design tool like Profit Network can help you evaluate the benefits of:

• keeping or consolidating existing facilities, as well as,
• opening potential manufacturing sites, taking into account
• capital costs,
• shutdown charges,
• manufacturing rates and costs,
• freight costs, and
• and a host of other costs and constraints on operations.

Profit Network uses a combination of linear and mixed integer programming and related optimization techniques to guarantee that you evaluate a range of solutions and identify those that are best for your particular needs.  Potential decisions that can be evaluated include both operational changes and choices among proposed capital projects that will lead to greater efficiency.

Xerox and Dole have scheduling problems that can be solved by both optimization and heuristic means.  The Xerox technician dispatching problem is a variation on the mathematically well-studied Assignment Problem, which can be solved using “greedy” algorithms (which pick off the “low hanging fruit” but are not guaranteed to give the absolute best solution) or more comprehensive methods that can give the best solution, at perhaps a longer solve time.  Transportation scheduling problems again can be solved through these methods. Using the technology of the 21st century will be critical for businesses to meet their “green” objectives.  Optimization technology is one of these new technologies that will help you reach these goals.

This article was written by Dr. Gene Ramsay, Profit Point’s Infrastructure Planning Practice Leader. To learn more about Profit Point’s Supply Chain Sustainability services, please call (866) 347-1130 or contact us here.

Image courtesy of Gavin Schaefer.

Why do our customers come back to us over and over again? More than anything, I believe it is because they value the collaboration with our innovative team of creative supply chain thinkers.

There are two key concepts here: Collaboration” and “Innovation”. Let me say a few words about each.

Some companies are looking for external consultants to provide a roadmap, out of the box solution or tell-me-what-to-do best practices. Those companies typically are not our customers. Our customers are the ones who recognize the best partnerships are those that are collaborative: they actively bring unique knowledge and insights of their business and we provide best practices from across many industries, deep supply chain optimization expertise, and state of the art solutions that are practical, implementable and useable in all kinds of supply chain organizations. Together, we define, design and implement solutions that significantly improve supply chain operations in a sustainable and long-lasting way.

“Swapping commodities with other manufacturers instead of shipping internationally can greatly reduce transportation costs and boost profits. Finding the right swap partner will help you avoid the risks that are inherent in these arrangements.”

This quarter’s issue of Supply Chain Quarterly features an insightful article from Alan Kosansky and Ted Schaefer on commodity swaps.

“If you’re under a mandate to make substantial cuts in supply chain costs, you probably have already “picked the low-hanging fruit”—that is, you’ve made the obvious, easyto- achieve improvements. You probably have optimized delivery to your customers by routing orders through the most efficient network of warehouses. It’s likely that you also are sourcing from highly efficient manufacturing plants around the world. And perhaps you have partnered with ocean carriers and leveraged your shipping volumes to negotiate the best rates in the industry….”

You can download the article in PDF form here. CSCMP members and subscribers to the magazine can read the complete article here.

If you would like to learn more about our Supply Chain Optimization services, please call (866) 347-1130 or contact us here.

This month, Manufacturing Today magazine published an article entitled Supply Chain: Time to Experiment, which was co-authored by Dr. Alan Kosansky and Dr. Joe Litko of Profit Point. The article discusses how executive-level business decisions can include a broad range of interconnected variables leading to an extensive array of options and discusses how business leaders can gain exceptional insights in to future scenarios.

Read the complete article here.

If you would like to learn more about our Supply Chain Optimization services, please call (866) 347-1130 or contact us here.

Supply chain optimization consulting firm selected as a top solution provider for supply chain decision makers.

Profit Point, the leading supply chain optimization solution company, was awarded the Supply & Demand Chain Executive 100 award for its role in improving supply chain decision making.