In Q4 2017, manufacturers’ optimism rose to unprecedented heights amid the legislative progress made on tax reform, according to the results of the Manufacturers’ Outlook Survey conducted by The National Association of Manufacturers (NAM).
The recent changes to the tax code will likely impact manufacturers, who may not be ready to respond to increased demand for goods. To get an inside look, EBN spoke with Steven J. Bowen, who has been in the consulting business for 31 years. Thirteen years ago, he established his own firm, Maine Pointe, because nobody was addressing the whole of the supply chain and there was no focus on the people aspect. This motivated Bowen to build a values-based organization. He also authored the book, Total Value Optimization, in order to help businesses drive cost and growth.
EBN: What are the best practices for stress-testing procurement, logistics, and operations functions to identify bottlenecks?
Bowen: The number one bottleneck across those three areas is the world of day-to-day analytics. This is because big data (also known as “disorganized data”) has to be moved into organized data and helpful information, which really is insightful information, and this is so that management can make better decisions. Even in the fundamentals of procurement, you better know what you’re buying before you go buy it. There are four levels of details when it comes to procurement, which takes you from the basics of “How much do I spend in this category?” to “How much do I spend to these suppliers? Then you go into what I call the common marketplace specifications, and the detailed engineering specifications. With these four levels of data, you know what you’re spending your money on, and why you’re spending your money on it.
From that perspective, I can say even some of the more sophisticated companies don’t always have that information at their fingertips, and that’s a huge bottle neck. People who do category management and negotiate with suppliers and look at commodity market places can’t do this to the best of their ability without this data at their fingertips. This doesn’t mean companies haven’t made great advancements, because they have, but this is why we’ve created five maturity curves and each one has five ratings to it that go from one through five, which we call our 5 x 5.
In procurement alone, you have a 5 x 5 that sets you up to being able to evaluate how mature your procurement function is and how it operates compared to all the other procurement functions in the world. While you can get specific about data, when you stress test the maturity level, there are people involved and this can be based off of how the team operates. The reason I think it’s important to stress test is that there are so many things within the function that can go wrong, meaning you don’t have the right data, category strategy, or the global information that’s necessary. This is where you run into bottle necks, because if you don’t have the right information, you can’t do the rest of the job, meaning the category management, the design of your strategy for negotiation, and going out to suppliers in the right way.
The second piece in procurement is the six-step process, even though some companies might take four steps or 24 steps. I don’t care so much about the steps, but what I worry about is actually executing the steps. That’s where it breaks down, and when under pressure, people can take shortcuts, which brings me to the human side. They don’t manage just one category, so they have to renegotiate all their categories in 2018, so now they take shortcuts to make sure they get that all done. As soon as you take shortcuts, you create another stress in the system because now you don’t get the full scope of the competitive environment.
I would say the third area of stress-testing (or maturity) is the level of collaboration, coordination, and integration across these functions. And now there are new functions, like product development and engineering design, and you get into sales and the demand forecast, meaning the total supply chain of a company. This also includes suppliers and suppliers’ suppliers, and if you want to have a great collaboration and integration across that whole supply chain, know that it’s really hard to do, because you’re dealing with different organizations and more people.
EBN: What are the reasons investments in equipment and software are projected to continue rising in 2018?
Bowen: I think there are basically two major drivers behind why investment in equipment and software will increase in 2018. Number one is the rapid pace of acceleration. The IoT is not an evolution, it’s a revolution, and it will accelerate at a pace none of us can comprehend yet. Many companies recognize that, and they’ll make investments and will stick to it as best they can. Otherwise, another company is going to, and that company can disrupt an entire industry, and another company can find them on the outside looking in.
Number two: The tax laws that have just changed will drive capital investment in a significant rate. There are two reasons for that, and the first is the overall corporate tax rate, which gives companies more money to work with, and secondly, they’ve also changed the laws around many items from a capital investment perspective, allowing companies to make much more sizeable investments and be able to expense it this year. If you think about it, it goes as a write off against their income, plus the tax rate is down, so there will be quite a bit more money to invest. The corporate tax rate was reduced from 35% to 21%, and that’s huge. This windfall will affect capital investment in a big way.
There’s also a third potential factor in the economy. Immigration and unemployment are two things that have gotten tighter and tighter. We need the investments in technology, software, and equipment, and in robotics and AI, in order to keep up with economy growth and improve productivity.
EBN: What are some of the most common bottlenecks that organizations discover?
Bowen: The number one bottleneck in every company in every sales and operations planning (S&OP) process is forecast accuracy. And you have to have an S&OP process. You have to ask: how fast can I produce? How about lead time? Logistics can’t do their job without this. Various warehouses, distribution centers. Really important to stress test. Stress-testing requires a sophisticated level of expertise
EBN: Is stress testing more important than in the past and why?
Bowen: I think it is. It’s always been important, but it’s much more important in today’s world. In this stress-testing/maturity perspective, it’s very important to understand that the investments you’re making into equipment and software are going to the right places, such as those that are tied into the challenges or bottlenecks you might encounter. Another important point is that the acceleration of change is at a more rapid pace and it will continue to accelerate.
For example, in our business, we help companies make changes that deliver lower cost and more growth. Those companies know what they need to do, but my fundamental education company takes the change they may be able to make themselves in the next two to three years, and bringing that in to the next six to 12 months. That acceleration is very important.
We operate at a pace of 3X compared to other companies working on making changes like this. All of the technology in our business, such as data analytics and crunching data from different systems and putting it all together and making it insightful information for management to make decisions from, used to take three to six months. It now takes us three to six weeks today.
In our business, a typical consultant would spend 26-28 hour of their 40-hour week with their head down in an Excel sheet. Today, there are data analytic tools that have taken that same work and reduced those 26-28 hours down to two to four hours a week. We’re seeing massive acceleration in our business, and we’re already operating at a pace of 3X to what other corporations operate at. My point is that the acceleration of the whole capability that technology-enabled aspects are affording all companies are beyond some of our wildest imagination.
Acceleration is going to occur more and more, making stress-testing more important. If you used to stress test something once every three years, and now you do it once a year, in the future, you’re going to need to do that every month.