SUPPLY CHAIN TRANSFORMATION CASE STUDY
HUB-AND-SPOKE CREATION
Illustrating Five Flows of Supply Chain Management
- Flow of Goods
- Flow of Cash
- Flow of Information
- Flow of Value
- Flow of Risk
SUPPLY CHAIN NETWORK RECONFIGURATION
Continent wide supply chain restructuring in the north American continent
This supply chain transformation case study illustrates how an entire supply chain was reconfigured into a winning model.
- Einstein famously wrote about the magic of compound interest. He could well have written about the magic of hub-and-spoke.
- In the right conditions a hub-and-spoke model is critical to shed the fulfilment costs, dramatically increase the service levels, and reduce the SCM risk – all at the same time.
- If you are not used to thinking in terms of business models, you will think that the current model is the only possible model. When an alternate model is presented to you, it will appear like an impossible curiosity.
- It is hard to believe how much cost difference an alternate model can make. People verify again, and again, and again – before they can believe their eyes.
- After the new model is embedded into the system – people quickly forget the old model, and even the fact that it ever existed.
Fascinating Facets of This Project Enhance The Learnings from creating a new supply chain model.
At the start of the project
- Before people see the new model, they believe in the impossibility of reducing costs further.
- Once they see the new model, they find the cost savings hard to believe. They verify the new cost structure, again and again, just to be sure.
- Once the new model is in place – they start believing it was all so obvious from the beginning.
During the project
- The new model and its 18 variations and scenarios were each modelled by hand on the map of continental North America from scratch.
- Each time the hubs were chosen from the demand density and the spokes were chosen according to customer density.
- Thousands of the demand locations for each of the product families (for dozens of product families) were plotted by hand on the map of continental North America.
- The best way to determine the best hub for each spoke is by manually drawing the right
circles around the hubs. - The routes from the hub to the spoke were manually built, while the routes to the hubs from the sources were plotted by computer.
After the project
It is hard to create a new business or supply chain model. It is even harder to get it accepted.
Yet, once it is embedded, after a while, it is impossible even to remember the old model.
Further savings are always available by fine-tuning the new model when it is in place.
In reality, a combination of the hub-and-spokes model and the direct delivery model was deployed because the hybrid presented the best cost structure.
You can carry any model too far – even hub and spoke model can be carried too far by the purists. Always be on the lookout for practical savings by fine-tuning the model.
A careful perusal of this case study will show How Supply Chain Flow Modelling Encourages New Thinking in The board rooms rife with financial modelling and analytics-based milieu.
- Traditional costs and works accounting is extremely good at incremental cost savings – chipping away one dollar at a time. Yet, at the same time, it stifles creative thinking and massive cost reduction by thinking of new industrial models and ways of doing business.
- Supply chain thinking, flow-based and properly applied, more often yields record breaking results because It creates and compares alternate Supply Chain models.
tHIS CASE IS SET IN A HIGHLY COMPETITIVE INDUSTRY GOING THROUGH MASSIVE CHANGE
HIGH MARGIN, NO ROOM FOR ERROR
BUFFETTED BY STRONG FORCES ON ALL SIDES
- Very powerful and large customers; no pricing power
- Equally powerful and large suppliers; no bargaining power
- Rapidly consolidating industry; winner takes all
- No product substitutes
- High risk and high reward situation
SUPPLY CHAIN was the last competitive frontier
Big first mover advantage from supply chain Reconfiguration
The Client was a large global multinational Company with operations in almost every country on the earth.
- The North American unit had been underperforming for several years.
- The other geographical units in the rest of the continents were performing relatively well.
- The company had tried a minimum of six different stellar consulting companies to ‘fix’ the north American business
- These attempts did not succeed, partially because this was a ‘small’ client for the consulting companies, especially in North America
- The HQ was at a loss and tried this as a last ditch effort before selling the division to one of its competitors
- It was a mid size operation with an annual revenue of close to $1 Billion.
- Large-scale B2B company with a continent-wide footprint covering densely populated and remote areas of Canada, USA and Mexico.
- The company suffered from a very high cost-base.
- The company had made several acquisitions over the past 20 years, and the supply chain was an amalgamation of several separate supply chain features from those acquisitions.
- Unfortunarely, it also suffered from a perpetual low profits due to lack of focus on supply chain.
- Some people knew that the supply chain was
not all that great but did not have concrete ways to move forward. - The senior executives expressed a concern that they had a good solid business and profitability should have been higher every year inthe last 5 years. As per the senior
management, somehow the staff managed to lose a lot of money in execution phase, and as
a result profit was always less than anticipated.
The Head of Client Team was an immensely Astute Executive.
- Officially the key client executive had a title of Head of Procurement, but for several years now he had been working as the Head of Business Transformation, with the blessing of his boss (the CFO), as well as the CEO, and the board.
- As he kept finding more and more opportunities for cost savings, his sphere of influence expanded to every part of the entire supply chain and business.
- In fact, eventually, after the success of the cost savings program which our project was part of, he was promoted to CPO, reporting directly to the CEO, and acting more like the Chief Cost Officer (CCO).
- After so many years I still cannot forget his favourite maxim - 'keep digging, more you dig - more you will find" as he spoke about the cost savings opportunities.
- Always the one to take calculated risks on cost savings ideas and new teams, he would keep backing up the winning teams till they kept delivering the savings. We had a very long and profitable association till he retired after about 8 years of service.
SUPPLY CHAIN pROBLEM DETECTION
attack the ROOT CAUSE, or, assauge the SYMPTOMS?
Key Diagnostics Questions:
- Which of the five flows of supply chain is the most important in this case?
- How is this flow impacting rest of the flows to make supply chain inefficient?
- Where, exactly, are the flow disruptions in this supply chain, and what are root causes?
- What is the business impact of these supply chain flow problems?
- Which of these problems are worth fixing, and how to do so?
which supply chain flow controls the profits here?
What supply chain projects will adequately fix the root causes Forever?
The HOBT (Head of Business Transformation) called Us in to assist in a brainstorming workshop on Logistics and supply chain.
- The internal team had been running several smaller cost savings projects, and we were called up by the HoBT (Head of Business Transformation) to run a workshop with his team.
- At the end of the workshop, I expressed dissatisfaction that only very small savings ideas had surfaced – everyone seemed focused on the low-hanging fruit. It was clear that most of the low-hanging fruit had been picked in the last 2-3 years.
- HoBT asked me how I can be sure there are larger-scale improvement ideas in the business.
- I replied it would take us about two weeks and some primary data to know if bigger scale cost savings were available and what could be the potential range of sizes (min-max) of such opportunities.
- That is how the project started.
There was already a Lots of internal activity to improve the supply chain. Everyone was keen to get the savings.
- Yet the profitability continued to be low. People were perpetually busy, running from one meeting to the next.
- Most of the meetings were discussing basic failures of co-ordination between sales, delivery, invoicing and receivables.
- There were several indications that supply chain planning was inadequately embedded in the business despite availability of personnel and software specifically designated for that purpose.
- Despite being in a protected industry with a long standing market position and secure market share, the business was barely profitable.
- Everyone was working hard, long hours and significant amount of travel. Yet, the agenda in most meetings was to discuss basic delivery failures and customer complaints.
- The company had recently built a state of the art manufacturing facility in Mexico and closed down a series of plants in USA and Canada.
- This move had made the supply chain a lot more complex than it had ever been in the past.
- Combined with the industry trend of consolidation, and a series of recent acquisitions of smaller rivals had left the company with an overly complex supply chain.
Unfortunately, most of the Current efforts towards cost saving were ineffective and ineffectual.
Our client was not the only one experiencing a profit crunch. the Entire industry was going through a big upheavel.
INDUSTRY TRENDS
SHAPING THE FUTURE
Consolidation – 18 players were gradually reduced to 3 big ones and one smaller specialist player over a period of one decade.
- The three key players had all made a number of significant acquisitions and were gradually adjusting to the new market reality of an oligopolistic market structure.
- Outsourced manufacturing and offshoring – an emerging trend in the industry which was currently underway.
CUSTOMER TRENDS
Digitisation of the end customer base was creating vocal and demanding customers
Who were keen to retain traditional old fashioned services,
Yet, they demanded modern facilities and price reduction at the same time
A permanent lowering of cost base was necessary and expected.
SUPPLIERS TRENDS
Logistics suppliers were sharper than the usual logistics service providers
- All instances of logistics mix-ups were always billed to the customers, no matter whose fault it was
- The suppliers were on notice because the logistics manager had already expressed her displeasure with the state-of-affairs
- However, she did not yet have any justifiable cause to end the contract.
eMERGING PROBLEMS
- For the board – the key stated problem was a strong long term dissatisfaction with the low profits.
- For the executives – key stated problem was poor execution and fulfilment despite being in a privileged position in a privileged industry
- Everyone wanted to reduce the scramble to meet profit targets at the end of every quarter.
CHOOSING WHICH business PROBLEM TO SOLVE, AND HOW?
pROBLEM DEFINITION
Key assessment Criteria:
- Potential Savings and Timeframe
- Probability of Savings
- End Customer Satisfaction and "Revenue Impact"
- Project Investment Requirements
- Risks and Mitigation Strategies
How to reconfigure supply chain flows?
How to Structure supply chain projects to maximize benefits while minimizing the costs and risks?
Everyone Else in the company thought that the logistics team was the problem
It was easy to point fingers at the least popular man in the board room.
- There was a belief that the logistics staff was not competent:
- They were reputed to be paying too much for a shoddy logistics service
- In the monthly management meeting, logistics staff was frequently upbraided for perceived infractions of delivery requirements, and
- Overall cost overruns on
- The average per package, as well as,
- Per kilo basis.
- Overall cost overruns on
- In the monthly management meeting, logistics staff was frequently upbraided for perceived infractions of delivery requirements, and
However, what hurt the profits the most were the Three unrealised problems.
- The supply chain model was outdated, a relic from the time when 10-15 players were in the market, as compared to the current three. The volumes as well as supply chain networks in the industry had to change dramatically.
- The supply chain was a mish-mash of 8-10 supply chains of companies acquired by the company over the past decade. The head of supply chain was a weak individual who acted more like a logistics co-ordinator rather than a supply chain manager.
- The sales staff, who were also head of the four regions were not cost savvy and did not know how costs varied with service level, and with complexity. Their understanding of the complexity curves was sparse; they underestimated what it takes to build a capable supply chain network.
The Actual core problem Was the outdated supply chain model of this company.
Initially, none of the executives could get their mind around the biggest problem their supply chain was facing.
- For us, it was critical to solve the correct problem because the HQ was asking us for real results, not window dressing.
- Everyone inside the company was so focused on day-to-day problem solving, such as missed deliveries, truck coordination problems and unpaid invoices, and shouting customers and service reps that they did not realise that the entire model of the supply chain was up for renewal.
With many supply chain problems in the company, our team needed to stay focussed on the core supply chain issue that would resolve several other flow-on issues.
Redundant milk runs were the norm in this supply chain. The supply chain network consisted of large-scale milk runs. Nobody in the business had heard of the merits of the hub-and-spoke model and how it worked.
A new supply chain model was urgently needed. Any other change, without the new supply chain model, would have been akin to applying a bandaid on a cancer.
PROJECT COMPLICATIONS
the right SUPPLY CHAIN solution was hard to find,
and even harder to implement
why?
- Lack of real suply chain know-how in the business
- Weak position of supply chain personnel on the totem pole
- Confusion between logistics and supply chain management
- Expecting miracles and magic pills from supply chain
- Mismanagement in the remote locations and lack of control over the regions
How to acknoweldge and side step the complications?
keeping eyes on the main game
Several supply chain software companies were trying hard to sell their products as tHE solution
- They tried to sell multiple alternate concepts – each with little grounding in the realities of this business.
- Each of the models had some merits and its proponent inside the business.
- None of the models was well understood, particularly regarding its limitations and shortcomings.
Supply chain head and his team Tried but could not FIX THE SUPPLY CHAIN themselves
- Their core expertise was in running a well-structured supply chain. By trial and error, they could tune an out-of-tune supply chain, but it was too much to expect them to build and test alternate supply chain models.
- Moreover, in this company, the supply chain staff lacked credibility with the rest of the business to effect any positive change.
- The understanding of the concepts of supply chain management within the business was low, and they were initially very reluctant to learn anything new.
- The supply chain team were regarded as incompetent in controlling the vendors by the salesmen / regional heads.
In the best-case alternate scenario, the supply chain team would have chosen one of the supply chain software solutions and gotten part results.
And, then gone from one such solution to another for years before stumbling onto a hub and spoke model.
Logistics and supply chain team was a convenient scapegoat
- It was a cultural norm to constantly pressurise the logistics and fulfilment staff without helping them to up-skill, or to revamp the business / supply chain model.
- The sales staff and the regional heads enjoyed their immense power over the logistics and finance functions.
There were pockets of covert and overt resistance to change
- The current logistics service suppliers benefited from the highly inefficient supply chain and lax oversight.
- The sales team benefited from the massive power imbalance and constant finger-pointing,
even for their own shortfalls.
There were some barriers to solving the core problem
- The management was reluctant to invest money in upgrading the supply chain model even as the company lurched towards bankruptcy/ sale.
- They did not know much about supply chain and alternate models of supply chain management.
- They were also not sophisticated to compare and contrast these when presented with alternate models, and were highly conservative in general.
This project would not have even started if there was no intervention from the HQ to finally put a stop to the waste of resources.
PROJECT sOLUTION
SUPPLY CHAIN DIAGNOSIS, TUNEUP, REBALANCING, REALIGNMENT, OR TRANSFORMATION
iT WAS CLEAR FROM THE INITIAL DIAGNOSTIC THAT
THIS CASE REQUIRED A DEEP LEVEL OF SUPPLY CHAIN INTERVENTION
- Product flow of the supply chain was the main failure
- Information flow within the supply chain needs tweaking
- Flow of risk, money and value would follow in lock-step with the other two flows.
TOTAL REVAMP OF THE PRODUCT FLOW IN SUPPLY CHAIN WAS CRITICAL FOR ACHIEVING SUCCESS
Information technology tweaks could fix the information flow. A new system was neither required nor advisable; that could have easily taken the eye of the main game.
The solution had to be simple, yet effective
- An alternate model of the supply chain was conceptualised, modelled and tested. This model had a hub-and-spoke distribution network at its core.
- More than 18 scenarios of the hub-and-spoke model were tested – with the number of hubs ranging between 3 and 15.
- Hubs were spread all over the North American continent, and the spokes were within the hubs’ circle of influence.
- Each hub acted as the Stock Keeping Location (SKL) for all its spokes.
- Stock holdings of each hub were modelled under each scenario, as were the fulfilment runs from to and from hubs.
- Costs were modelled for each of the 18 scenarios for each customer order for the period of one year.
- Costs, service levels and risks for each of the 18 scenarios were modelled and compared with each other to create a recommendation.
- The recommended scenario was tested by a pilot project, and proven as a concept.
- Detailed plans were created for the recommended scenarios and implemented in full to get the projected savings.
supply chain data for three years was analysed
- Each customer order, and each stock movement,
- For the period of 36 months prior to the year of modelling was collected via the ERP system.
- It was not a straight data dump because of multiple entries
- A significant amount of data cleansing was required.
- After that, data incompleteness issues such as dummy codes surfaced.
Baseline supply chain model was created and tested
- Data was diligently cleansed and interpolated in case of incompleteness.
- A complete picture of the supply chain rebuilt and modelled for each of the years.
- All five supply chain flows were recreated and tested as per the baseline.
Alternate supply chain models were conceptualised by the team
- It took ten weeks to conduct the preliminary analysis of the new supply chain models.
- Over ten new hub-and-spoke models of new supply chain structure were conceptualised and modelled as part of this exercise.
- Three addiitonal scenarios of supply chain were modeled at the board’s request – this took three additional weeks of time.
- Without a thorough analysis, the least-cost scenarios were not evident. Till it was comprehesively proven to them, the board and the management team were not ready to accept that many of the new models were clearly better than the current supply chain model.
- All the analysis proved the new hub-and-spoke supply chain model’s efficacy and helped choose the best alternative model with the least cost, least amount of risk and highest service levels.
A pilot project tested out the concepts in reality before the new model was rolled out.
- After the board’s approval, a desktop pilot was conducted for proof of concept.
- A detailed implementation plan was prepared, along with team structure and changes necessary at each location.
- A vendor briefing was prepared.
- Change management plans were created.
- Implementation plans were put into practice to create the new model for the test hub, which was then rolled out to the rest of the hubs.
The results showed nearly 16% cost reduction as per the preferred new supply chain model
- From the overall 18 scenarios, the board chose scenario number 8, which presented the most attractive combination of costs, service levels and risk management.
- Results of the analysis clearly showed savings of $2.3 million per annum in costs and
- An improvement of 26% in service levels from the hub-and-spoke model implementation.
Key executives associated with the project gained a lot of experience
- The internal project sponsor (a regional head) was promoted to the head of global supply chain for the overall business within 2 years of completion of the project,
- Later, he was appointed to the role of CEO of the company.
- There were several other promotions among the team – all of whom went on to do very well within the business.
Project sponsors benefited from bringing fresh thinking to supply chain within the business.
Several additional supply chain restructuring projects were initiated for other parts of the business, with a combined total of more than $30 million in annual savings.
PROJECT RESULTS
supply chain transformation
massive efforts lead to massive results
Almost everyone got what they expected from this project
- Results for the company
- Results for the project sponsor
- Results for the project team
- Learning for our team
the project had its detractors in the beginning
Detractors were won over by the project success
Finally, our client went from being the Dog of the industry to the star of the industry over a period of thirty months.
- The company won the cost structure battle against the remaining competitors. Finally, it acquired its largest competitor because it could not cope with the lower cost structure of the new supply chain model.
- Complete restructuring of the industry to the company’s advantage. The company went from being the dog, to the star of the industty with best performance, lowest prices and the highest profitability.
There were many key lessons from this project - which serve us well during our subsequent supply chain projects
Here is what we learned from our mistakes in this project
- We learned how CFOs almost always overestimate the quality and ready availability of the ERP data because it was sold to them as such.
- As far as supply chain and operational data are concerned, most ERP systems are not configured to store and provide the necessary data for strategic optimisation.
here are the Learnings from things done well during this project
- Extremely well conducted analysis, especially given that nearly five weeks out of ten weeks project time were wasted just in to-and-fro to get the data correctly configured.
- Next time test the quality of raw data before committing to a project timeline, otherwise the project team is stressed to its limit.
some of the project Learnings can be applied across industry
- In oligopoly, small cost advantage can make the difference between being the shark, or being the bait.
- This hub and spoke model can be applied in any industry, given two conditions:
1. sufficient volume,
2. sufficient geogrpahical spread.
Learnings for similar projects
- Allow sufficient time for data transfer and validation.
- Start the clock from once the data is transferred.
We sometimes wonder why our team succeeded where some of the best consulting names in the world failed to deliver results.
- Unlike our predecessors, we used customised supply chain analytics to create and compare alternate business models.
- Turned around the business which had little hope at that time.
- Brought the business from third (last) in the industry to first by engaging the entire business.
- Saved the business from being a target for takeover.
- Five years later the business was able to take over one of its competitors.
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