Total Value Optimization: Transforming Your Global Supply Chain Into a Competitive Weapon

More Praise for Total Value Optimization

Together, purchasing, logistics, and operations are responsible for well over 80% of the cost in most companies, and influence at least that much working capital and cash flow. To achieve supply chain competitive advantage and drive shareholder value, a firm must have excellence in the supply chain functions of purchasing, logistics, and operations. That requires not only functional excellence individually within these critical functions, but also integrated excellence collectively. As described by Steven Bowen, the Total Value Optimization (TVO) framework, resting on a foundation of data analytics, is the best approach we have seen to achieve integrated supply chain excellence in logistics, operations, and procurement.

Logically written, this book provides clear, practical advice underpinned with insightful stories and examples which should be read by a wide range of people, including CEOs and senior leadership, supply chain management, and management in other functions such as sales, marketing, and finance.

It’s often said that shareholder value (or owners’ equity) depends on supply chain excellence, which can only be achieved if the supply chain functions (procurement, operations, and logistics) are individually excellent and also work in an aligned, collaborative manner to achieve the full potential for the organization. That’s a nice platitude, but what does it really mean in practice?

The Total Value Optimization (TVO) approach provides a reality check on the health of your current supply chain, then lays out a clear and compelling pathway to outstanding customer service with minimum cost and working capital investment.

Near the end of the book, Bowen poses the question: How many leading businesses can you think of that are as dominant today as they were twenty years ago? In the rapidly evolving innovation and global environment, only the nimble will survive. An unprecedented wave of innovation is engulfing today’s supply chain professionals; and they know that they will have to adapt to survive. New breakthrough developments, such as drones, driverless vehicles, Internet of Things, big data, cognitive analytics, blockchain, etc. seem to be everywhere. In addition, the world is becoming flatter in a globally seamless environment. As the author points out, we are entering Industry 4.0, the fourth Industrial Revolution. The Total Value Optimization (TVO) approach provides a pathway through this maelstrom of innovation. Mastering these new developments will allow a company to move up to Level 4 and then to Level 5 in the TVO framework, unlocking huge benefits.

—J. Paul Dittmann, Ph.D., Executive Director,

Global Supply Chain Institute, University of Tennessee

TOTAL VALUE OPTIMIZATION:

Transforming your global supply chain into a competitive weapon

Copyright © 2018 Steven J. Bowen

SJDB LLC

PO Box 271

Duxbury, MA 02331

No part of this book may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems, without permission in writing from the author. The only exception is by a reviewer, who may quote short excerpts in a published review.

The information presented herein represents the views of the author as of the date of publication. This book is presented for informational purposes only. Due to the rate at which conditions change, the author reserves the right to alter and update his opinions at any time. While every attempt has been made to verify the information in this book, the author does not assume any responsibility for errors, inaccuracies, or omissions.

Total Value Optimization Pyramid™, Total Value Optimization Maturity Curves™, TVO Functional Attribute Model™, Maine Pointe Total Value Optimization Guaranteed™, TVO Self-Assessment Tool™, TVO Analysis™, TVO Journey Map™, Understanding the DNA of Total Value Optimization (TVO)®, A pragmatic way to assess the Maturity of your company and identify EBITDA, cash & value opportunities across procurement, logistics and operations®, Maine Pointe Academy™, Maine Pointe™, Redefining Consulting™, are registered trademarks and copyrights of Maine Pointe LCC. All rights reserved.

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TOTAL VALUE OPTIMIZATION

Transforming your global supply chain into a competitive weapon

Steven. J. Bowen

1. Title 2. Author 3. Business/Money

Library of Congress Control Number: 2017914012

ISBN 13: 978-0-692-94610-7

Steven J. Bowen

SJDB LLC

This book is dedicated to

all of our colleagues in the sincere interest of helping our existing and future clients achieve new levels of success in their businesses.

Acknowledgments

This is my first time writing a book, and it has been a rewarding, inspiring experience in large part because it’s given me a chance to reflect on the work of all the people involved with Total Value Optimization (TVO).

Over the past six years, since the inception of TVO, and for thirteen years in total, many people have been involved in setting the stage for TVO to become the way to turn a supply chain into a competitive weapon.

Regardless of how this book is received by the business world, I have enjoyed writing it, and the true joy comes from being surrounded by such fantastic people who made this possible. I cannot begin to mention all those involved, which is truly hundreds of people; please know you are each a blessing in my life. I do, however, want to take a moment to mention and thank those who have led our entire team through this journey.

Mark Montanari, in his work with San Diego State University, first coined the phrase Total Value Optimization (TVO) in relation to developing our strategic procurement practice. Bryan Youd, Rex Clothier, and Jim Mynaugh—our practice leaders for logistics, strategic procurement, and operational excellence—worked hand in hand with Simon Knowles, our chief marketing officer, to develop and fully extend TVO across the entire supply chain. Their efforts, along with great support from Steve Ottley (analysis & data analytics), Collin Ziemerink (global quality), David Jadwin (business development), and Bill Forster, who has been at my side for the past thirteen years, made TVO into what it is today! Thank you all.

I know everyone else on the team would agree that without the leadership of Simon Knowles, our mad scientist of branding and positioning, all of what TVO has become would never have been possible.

As Simon presented TVO to our entire company two years ago at our annual meeting, I happened to be sitting next to one of our consultants, Blake Gasaway. I thought Blake was doodling, not paying full attention. I asked Blake what he was so intently drawing, and it turned out to be the first rendition of the TVO Pyramid. That doodle quickly advanced into what we are sharing with you in this book as the graphical representation of TVO. Thank you, Blake! And thank you, Simon, for inspiring such creative thinking across our team.

As a first-time author, I often wondered why authors would make acknowledgements or dedications to family. Now, I appreciate my family from a different perspective and must thank them. To my wife Deb, who has been my love and soul mate for thirty-two years, and the soul behind our company, I thank her for her understanding and patience when, in addition to leading our company, I added the intense effort in 2017 to create this book on Total Value Optimization. To my children, Natalie and Grant, I thank you for your understanding when I wasn’t available. I hope you see that if a chemistry major who turned away from English classes in college found a way to write a book, you, too, can do anything you put your mind toward in turning dreams or challenges into opportunities.

Contents

Introduction

Chapter 1

Supply Chain: The Ultimate Competitive Weapon

The Challenges of Leadership

Your Supply Chain

Supply Chain Management Issues

Chapter 2

Reality Check:

Your Current Supply Chain Situation

First Step: Get Real about Your Company with the TVO Assessment

On Time In Full (OTIF)

Inventory Levels and Turns

The Importance of Your Supplier Relationships

Chapter 3

The Total Value Optimization Pyramid

Data Analytics

TVO Data Analytics in Action

Leader & Organizational Improvement

Sales & Operations Planning (S&OP)

Chapter 4

The Supply Chain Maturity Curve

Total Value Optimization

Chapter 5

TVO Maturity Curve: Procurement

Procurement Myths Debunked

A Dramatically Transformed Global Context

Implementing a TVO Procurement Strategy

Challenges and Solutions in the Grocery Industry

Chapter 6

TVO Maturity Curve: Logistics

The Internet of Things (IoT)

Artificial Intelligence (AI)

Zappos, Amazon, and the Kiva Robots

The Impact of 3-D Printing

Chapter 7

The Heart of Your Company: Operations

1. Theory of Constraints: Increased Throughput (Capacity)

2. Cycle Time Reduction: Getting Faster (Velocity)

3. Labor Productivity

4. Inventory Management

5. Lean Production

Chapter 8

TVO Maturity Curve: Operations

Systems, Process, & Technology

Maintenance

Productivity and Throughput

Best-in-Class Supply Chain Operations

A Candle Manufacturer and Lean Manufacturing

A Company Defines Its Journey

The Rio Tinto Copper Mine and Self-Guided Trucks

Chapter 9

Harnessing the Power of Data Analytics:

The TVO Foundation

Industry 4.0

Big Data

TVO Case Study: Commodity Chemicals

Chapter 10

The Human Factor: TVO’s Lubricant and Glue

Step 1: Get Sponsorship and Buy-In from the Top

Step 2: Know Where You Are Today, and Map the Path to the Future

Step 3: Validate Opportunities

A Global Manufacturer’s Company Culture and How It Changed

Chapter 11

The TVO Action Plan

Full-Stack Solutions

The Challenges of Growth by Acquisition

New TVO Competitive Advantage

Chapter 12

Into the Future

You Can Count on Uncertainty

About the Author

Introduction

You’ve opened this book because you know your supply chain is the backbone of your company. Its performance determines the health of your daily operations and the long-term success of your enterprise.

Like a backbone, your supply chain is a complex mechanism. A lot can go right with it, and a lot can go wrong. When it’s at its best, it can support the activities of a thriving, healthy business. When something’s wrong, the pain can be acute—even bad enough to keep the company on the floor, unable to get up.

When a company is in pain, making a diagnosis can be difficult for someone who isn’t experienced. At first glance, your supply chain may even appear to be acceptably healthy. With no obvious signs of disease, it may be tempting for the CEO or equity partner to think, Well, the pain is mild and we’re managing through it, so let’s do the best we can and strive for improvement. Time and time again, I’ve seen leaders who take this attitude end up on the floor with a backache that won’t quit, or a migraine that seems to come out of nowhere.

Whether your supply chain is causing pain right now or if things seem to be okay, perhaps even reasonably good, in today’s extremely fast-changing environment the reality is that just about every company in every industry can benefit or create real competitive advantage from having their supply chain optimized.

I use the word optimized deliberately. Optimize doesn’t mean only cure or fix. The dictionary defines optimize as a transitive verb meaning to make as perfect, effective, or functional as possible. While this can mean fixing problems, it can also mean taking a seemingly acceptable supply chain and making it stronger and more resilient, able to carry heavier loads. It becomes an asset rather than a liability—or, as we say, it becomes the ultimate competitive weapon.

That’s exactly what you need to do with your supply chain, and this book can help you do it. I’ll take you step-by-step through the optimization process and show you the key interventions that will take your company to the next level and make a measurable difference to your bottom line.

As I said, supply chains can be fearsomely complex. Just ask a company like General Motors, which manufactures nearly ten million vehicles a year in 396 facilities in thirty-five countries. With each vehicle having an average of thirty thousand parts, that’s three hundred billion parts, each of which needs to be delivered on time and in full, to then be assembled into a defect-free vehicle that will please the customer.

To break down this complex mechanism into easy-to-understand parts, I’ll present the Total Value Optimization (TVO) approach and system.

These words have been chosen carefully.

Total means we don’t skim the surface. This book digs down into the nuts and bolts of your supply chain, from procurement to logistics to operations. It examines every step of your supply chain and shows you that even mildly irritating problems can have big repercussions both upstream and downstream. Improving even small details can nudge your earnings before interest, taxes, depreciation, and amortization (EBITDA) upward and bring your company to a higher level of profitability. Your supply chain is a vast collection of moving parts, and each and every one of them matters. When you optimize enough of them, you start to see a dramatic difference.

Value is the name of the game. In the old days, leaders thought of their supply chain as an expense. It was a necessary set of functions to support getting your product manufactured and sold. This book can show you how to transform your supply chain into the ultimate competitive weapon. Today its potential value is more important than ever, as companies look inward and outward to access untapped profit. Think about it: Would you rather sell a million units at a profit of five dollars a unit, or a profit of six dollars a unit without changing the price per unit? Of course you’d rather make the extra dollar in profit without raising your price. The only way you can do that is by extracting the hidden value in your supply chain. You need to drive down costs while driving up both quality and on-time, in-full delivery.

Optimization means moving toward peak performance. It means continuous improvement and the reduction of waste. It means leveraging advances in technology. It means getting the most out of your people, including your leaders. It means putting the customer first. It means focusing the entire company on its mission and meeting or exceeding every one of its goals.

It’s an axiom in business that you can only improve what you can measure. I agree, which is why this book presents the TVO Pyramid—a graphic representation of the Total Value Optimization journey. As you’ll see in the pages ahead, the TVO Pyramid rests on a sturdy, three-sided foundation of data analytics. Supporting the center—like a central pillar—is leader and organizational improvement. The three sides of the pyramid, converging at the peak, are the three functional areas of procurement, logistics, and operations. Most engineers and architects will tell you the triangle is one of, if not the strongest, structural supports you can use in building anything. Each of the TVO Pyramid’s three sides has five levels, and the higher you climb, the more the pressure and compression makes your supply chain that much stronger. You can guess that Level 1 is as bad as it gets—fortunately, few of the companies we work with are at Level 1 in any of the three functional areas. Level 2 is better, and so on, up to Level 5, which is as good as you can get. The goal is to bring all three functional areas—procurement, logistics, and operations—up to Level 5. Believe me, it can be done—and this book will show you how to get started.

The book begins with a cautionary tale about one of the most famous supply chain disasters in history. Mistakes were made at nearly every point in the buy-make-move-fulfill process, from the substandard materials to the human operational decision to maintain the scheduled course despite obvious external threats.

No CEO or equity partner wants to be a part of such a disaster, whether it happens suddenly or slowly over time. With the help of this book, you can guide your company safely through dangers and make your customers very happy.

The first step toward TVO Optimization is a reality check. You need to be honest about your current supply chain situation. This means taking a hard look at your procurement, logistics, and operations, and determining where each lands on the TVO Pyramid. Are they at Level 2? Maybe at Level 3 or 4? And how about your leadership? And is your data analytics doing its job? They all depend on each other, and as one rises, it tends to help the others rise too. But if one lags behind—many times this starts with company leadership—then none of the others can reach the top of the pyramid.

The book covers all the bases, including your supplier relationships, sales & operations planning, the Internet of Things (IoT), artificial intelligence (AI), 3-D printing, cycle time, and leadership and organization improvement. We discuss lean manufacturing and the three enemies of lean: muda (waste), muri (overburden), and mura (unevenness) among other applicable methodologies in all types of operations.

There’s much, much more.

The TVO Pyramid rests on a base of data analytics. This is the technological underpinning of any effort to turn a supply chain into the ultimate competitive weapon. Today, managers are awash in a sea of data, and it’s easy to either tune it out or misinterpret it and get the wrong conclusion. As they say in the computer business, garbage in, garbage out. What we want is the right data in, the right conclusions coming out. We reach beyond and look at the factors in the digitalization of the supply chain as well.

Equally important is the center pillar—leader and organizational improvement. As is often the case, data is bad (there really was disaster dead ahead!), and a disaster never would have happened in the first place if the leaders had been more aware. Over and over again, I’ve seen that the companies that become stronger and move up the TVO Pyramid are the ones helmed by leaders who are willing to say to themselves, We’re not perfect—we can improve! This attitude of striving to be the best flows down through the organization from the C-suite to the loading dock. You can’t fake it. It’s hard work and takes serious commitment to follow through.

Throughout the book I’ll offer real-life case studies—some taken from the public record and others from our deep caseload of clients whom we’ve had the honor to serve. (Of course, client confidentiality is maintained—it’s what our valued clients both expect and deserve.) These stories will provide assurance that no matter how dire your supply chain problems may be, there’s hope for the future, and if you’re dreaming of disrupting your industry through the supply chain, TVO can take you further and faster on such a journey. With the right leadership and outside expertise, your supply chain can be transformed from a pain point to the ultimate competitive weapon.

Ready? Let’s get started!

Chapter 1

Supply Chain: The Ultimate Competitive Weapon

In the highly competitive world of business, some enterprises thrive while others fail. Some are profitable while others lose money. Some hire more employees and provide generous pay packages, while others lay off workers and freeze wages just to stay afloat. Some stay in business while others vanish beneath the waves.

You can’t always tell from the outside which companies are doing well and which ones are doomed. Most organizations strive to appear healthy. They want the public and their investors to think everything’s fine. This impulse to put on a happy front may even happen internally, as managers tell the boss in the corner office that all is ship-shape when it isn’t, or the CEO tells the stockholders that cash flow is robust when the accountants say otherwise. Too often, a company is sinking and its leaders are either unaware or have a vague idea that danger lies ahead but don’t quite know what to do.

Following is a true story that provides a valuable lesson.

On the cold, clear night of April 14, 1912, a majestic ocean liner was steaming across the Atlantic. This powerful ship had been hailed as the world’s largest passenger vessel. Built at the venerable Belfast shipbuilders Harland and Wolff, it was nearly nine hundred feet in length, able to carry over two thousand passengers in unrivaled comfort, and was instantly recognizable by its sleek design and four distinctive funnels. Her first-class passengers enjoyed luxurious cabins, with some even equipped with private bathrooms. Onboard amenities included the lavish Grand Staircase, a Georgian-style smoking room, a Veranda Café decorated with palm trees, a swimming pool, Turkish bath, and a gymnasium.

The name of the vessel was the RMS Olympic. She was en route from New York to Southampton, England.

Meanwhile, two hundred miles to the north, her sister ship, the RMS Titanic, was steaming in the opposite direction, from Southampton to New York. The Titanic and Olympic, along with the Britannic, were three of a kind, identical in nearly every way. If you saw them side-by-side, which occasionally happened when they were in port at the same time, you wouldn’t be able to tell them apart. The only reason that Titanic held the crown as the world’s largest ship was because she was completed a few months after Olympic and registered a higher gross tonnage due to her particular interior configurations.

On that moonless April night, the Titanic, steaming blindly at full speed through a field of pack ice, grazed an iceberg. Two