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Agere management expected its planners to accept most of the system s recommendations. Instead, they were overriding the system more than 90 percent of the time.4 Why Agere s product-focused business units were responsible for acknowledging orders. Planners within these decentralized business units changed order due dates constantly in response, they explained, to changing customer needs. In other words, the planners information was more current than that of the planning system, and overrides were necessary to meet the performance goals for order delivery. Agere also had a centralized planning group responsible for allocating production capacity to the various product groups. Not surprisingly, this group had a hard time responding to the constant stream of changes in order priority. This turmoil spilled into manufacturing, where production managers had to reshuffle their production schedules constantly to respond to the newest set of priorities an inefficient approach, to say the least. When he investigated the root cause of this inefficiency, Peter Kelly, executive vice president, global operations group, found that while some reschedules were indeed due to actual changes in customer requirements, in most cases planners were deliberately gaming the system to secure a higher priority for the orders they were managing. Kelly wanted a planning process that was optimized at the highest level of the supply chain, not one geared to the needs of the various business units. He felt that effective supply chain planning would never occur as long as localized business-unit pressures and incentives drove the planners. To solve the problem, Kelly created a new supply chain planning organization that centralized planning activities and the responsibility for order management. Within six months, plan overrides had declined from more than 90 percent to less than 50 percent. And as the number of overrides decreased, the time spent by planners on manual calculations and reprioritization was reduced greatly. The planning group became much more focused on ensuring data accuracy within both the planning system and customer orders, dramatically improving shipping performance from 75 to 95 percent and inventory turns by two turns during the next 12 months. Agere had a clear catalyst for undertaking a major organizational restructuring: a failure to leverage its technology investment and a processdriven operational improvement plan with clear ownership. But you don t have to wait for an adverse event to prod you into refitting the organization to your supply chain processes. Where should you start First, put aside any organizational charts and focus instead on the activities within your
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CHAPTER 3 Core Discipline 3: Design Your Organization for Performance
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core supply chain processes. Group the major activities, keeping in mind that every participant in each process is both a customer and a supplier and that every supply chain event or task has both an input and an output. Identify the people responsible for executing the plan, source, make, deliver, and return processes, focusing on the tasks they perform rather than on the name of the group to which they report. As you begin to sketch the lines around the groups responsible for supply chain planning and execution, remove the real or perceived boundaries between functions and bring complementary skill sets closer together. By setting up a new supply chain planning department, Agere was able to both consolidate planning activities within a centralized group and remove the boundaries between the business units and the supply chain organization. Be aware that removing the borders between groups destroys the traditional functional organization and may result in managers becoming individual contributors, presidents reporting to managers, or whole groups dispersed and reallocated elsewhere. In some cases you may create an entirely new division organized around supply chain processes. IBM did just that in 2002, when it established the integrated supply chain (ISC) organization.5 Within just 12 months, IBM pulled together all the pivotal functions of the supply chain, combining its front-end customer support teams, manufacturing, procurement, and logistics into a new unit. In so doing, it brought together about 19,000 employees in 100 locations in 59 countries. IBM had long used a solutions-based business model one that combines technology, products, and services and wanted to adapt its supply chain to support this model. It found that just changing the reporting structure, moving like skills together, and breaking down the walls between manufacturing, procurement, and distribution yielded immediate benefits. The next steps were to establish common goals and objectives, well-defined roles and responsibilities, and a strong management system with clear measurement and accountability. Kraft Foods North America also created an organization designed around core supply chain processes with the expectation that streamlining the supply chain would reduce the cost of goods sold and improve the company s bottom line.6 It structured an organization that encompasses all the activities that go into delivering products to customers, from planning and production scheduling to transforming raw materials into finished goods and then packaging and distributing those goods. The goal of an effective supply chain organization is to optimize the end-to-end order-fulfillment process not individual functions all the while achieving the lowest total cost. Kraft willingly invests in
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