Operational Definitions

Operational Definitions were a large part of what W. Edwards Deming used to advocate in his teachings. Chapter 9 of his book, Out of the Crisis is dedicated to this concept. “Operational Definitions, Conformance, Performance.”

In the opinion of many people in the industry, there is nothing more important for a transaction of business than the use of operational definitions.  P. 276.

The concept, while being critical, is nothing complicated.  Basically an Operational Definition defines a word, term, or concept that has a distinct meaning in a specific organization or business.  People cannot communicate effectively or hope to solve problems and improve operations if they do not all have the same understanding of the various terms being bandied about in the workplace. 

One of the first things to be done is to define terms as precisely as possible.  In our business, we run across this every day while working with prospects, clients, etc. In fact, just recently while presenting at a conference on S&OP. The attendees in our session were all seasoned Supply Chain professionals from well known companies. During the Q&A at the end of our talk we experienced a basic Operational Definition difference.  In response to a question, we talked about the risks of making changes in orders within lead times.  An attendee raised his hand and said “Don’t you mean outside of lead time?”  It was immediately clear to us that we were operating under different Operational Definitions.  His outside of lead time was our inside of lead time.   We all meant the same thing however:  If changes are made to an order when the promised delivery date of that order is less time than it will take to get the materials, schedule, and complete the production, then that order is at risk. 

So, who was right? While we believe our operating definition of within vs outside of lead times is more using it. We throw around terms like Forecasting Accuracy, Inventory Turns, Days Coverage, Cash Cycle, and many others all the time. We assume, whoever is speaking or writing an email assumes, his or her audience is using the terms in the same way we are using them.  This is not something we should ever assume.  Even when we are the audience, we cannot be sure the speaker or writer has a clear operational definition of the terms he or she is using. 

There is something that all teachers say.  There is no such thing as a stupid question. This is, in large measure, true.  The teacher, professor, or instructor always follows up the statement with the following explanation, If you are not fully understanding or grasping what is being discussed, there are probably others in your same shoes.  I believe the second statement may be truer than the first.universally used, there is no right answer to this question.  The term needs to be defined by the people.

The problem in both classrooms as well as in the workplace is that no one wants to look, well, for lack of a better term … stupid.  It is a fundamental human trait to avoid being embarrassed.   Also, if we are to question a term or concept, it needed to be done very early in the business relationship.  If we wait a few weeks which then turn into months we find that  asking a basic clarification or definition question is really embarrassing.  Everyone assumes that everyone else understands.

Although it is quite possible they do, the question still remains, do they understand it the same way you are relaying it. In many cases, the answer is “NO.”

We won’t take this lying down!

The International Monetary Fund (IMF) has been in the news over the last couple of days. Unfortunately, for reasons that have nothing to do with the IMF. This post has nothing to do with that but more importantly for a forecast they released back in April. On April 25^th the IMF released the first meaningful forecast or prediction of when the United States would fall from being the leading economic power in the world.  The prediction which came from this was a bit of surprise in how soon they believed this might happen.

It does not take any sophisticated prognostication to reveal that China would be the country most likely to take this number one position from the United States.  First off, they are the most populous country in the world.  They have 1.4 billion people.  India is second with 1.2 billion and the United States is number three with 310 million.  The population of China is 4.5 greater than that of the United States.  If the consumption and productivity per capital in China were to be 25% of their American counterparts, China would be ahead of the US in these categories.  

Secondly, we have been hearing the “giant sucking sound” that H. Ross Perot talked about when he was speaking out against NAFTA in his 1992 run for President.  Perot was wrong in stating all industry jobs would be going to Mexico.  Instead they all went to China in a relatively short order.  This “giant sucking sound” was not just heard in the US, it was heard in Europe and Japan as well.  

The figure to the right, from the IMF, shows the ranking of GDPs of the top ten countries in the world in millions of USDs in 2010.  China is number two, having edged out Japan for that position recently.  China is only poised to grow.  The US having lost so much of our manufacturing base will wane in our opinion. We see it already in the shrinking middle class and changes in the distribution of wealth here.  

The surprising part of the IMF prediction is how soon they see China taking over the number one position.  They are predicting that this could happen as early as 2016!  When we read this story, we expected a much bigger reaction from the government and citizens.  There did not seem to be much furor over this at all.  The lack of reaction concerns us even more than the IMF prediction.  

Sure, the US economy will continue to be strong and there have been some movement of manufacturing coming back to the United States (on-shoring). But, as we have commented in other blog pieces, change happens faster and faster in our times.  Change occurs faster than we can react to.  If the 2016 prognosis is correct, it is practically an inevitability given we are mid-year 2011.

This does not mean, we should take this lying down.  Not at all.  Not one little bit.  Cadent Resources, Inc. is a small company but we believe in and are committed to US manufacturing and distribution.  We want to see a strong and vibrant industrial base in the US not simply because it would be good for our business.  We believe it would be good for the entire country.   

We call on all segments of our society to take advantage of our excellent universities to encourage our young people to major in and become the best in world in:  

• Engineering & Sciences


• Mathematics & Computer Sciences

We encourage our government, universities, and corporations to not only encourage such educational initiatives but to develop real workable programs geared to grow manufacturing and manufacturing jobs in this country.

It will not be easy, but we believe strongly that we need to do this.  This forecast from the IMF should be the rallying cry for our nation.

What is Activity Analysis? Part 4, The People Dominant Process

We believe that inventory is the final arbiter of supply chain performance. To get it right takes more than just good clean data and using the proper calculations for Demand Planning, Inventory Sizing, and Manufacturing Planning. It requires well conceived business policies and the people part of the process.

The DemandCaster review is only the first part of our Activity Analysis. When the DemandCaster part of the analysis is complete we review the following people dominant processes:

• SKU management:  How is the number of finished goods determined and managed?  How are products born? How are they phased out? Is there any set review of the product portfolio? If these questions are hard to answer and if the answer to the last question is “no.” There will be room for improvement and there will be excess inventory due to the complexity of the portfolio.  


• This part of the Activity Analysis must be done with Finance and Marketing.  Finance is needed to determine the profitability of the various SKUs.   Marketing is involved to determine what the profitability threshold should be to decide which products in a specific category to keep and which might be candidates for discontinuation.


• Artificial Sales Peaking: This is an issue we have written about before at Cadent Resources. If the monthly or quarterly peaking is significant, it can dominate the planning. If such peaking occurs, it is usually dominated by SKUs and perhaps promotions. This, of course, needs to be verified. Activity Analysis of Artificial Sales Peaking is critical to developing protocols and strategies for sound and viable inventory management. 


• Looking at peaking and SKU classifications are not enough.  Manufacturing capacities and run rates must also be evaluated.  High period end peaking could be too much for make-to-order systems (the kind we all want to operate) to keep up.  This part of the Activity Analysis could easily determine how much of a given period, be it month or quarter, needs to be run in a make-to-stock mode.


• Promotion Management:  Are promotions a significant part of the business?  If so, part of the Activity Analysis must focus on promotions both in terms of planning and execution. How effective is the planning of the promotion?   Were the SKUs to support the promotion or offer availability in the right quantities in the right DCs at the right time? How effective was the sell through?  These numbers need to be available for each promotion so the data can be sliced and diced by product line and the various types of promotions from volume discounts like BOGO style deals to specialty packaging.


• In the case of specialty packaging, which is exclusive truly to consumer packaged goods, the question of selling out the promotion is key.  If these promotions do not sell out, the remaining stock can easily become Excess & Obsolete.


• Again Finance should be involved to help evaluate the effectiveness of each promotion in terms of both sales generation or lift and ultimately the profitability.  These numbers are not often easy to capture even with some of the best ERP systems.


• Demand Planning: The people part of Demand Planning is simply when people think they are smarter than statistical forecasting.  The risk is to impose managerial will, desires, and wishes into the process and overriding the results of the statistical model.  There are certainly occasions where this is called for (e.g. there are extraneous factors in the marketplace such as natural disasters, material shortages, and abrupt economic events).  In lieu of these random shocks, the hardest thing for smart driven managers and executives to do is… nothing.  Let the system do what it was designed to do. This is very difficult to do.

The above processes where “the people part” is significant are often the hardest processes to analyze and evaluate.  This makes them the hardest processes to manage and improve.

What is Activity Analysis? Part 3, Inventory Planning and Optimization

In our previous two blogs, we have discussed Activity Analysis in different ways, now let’s talk about Inventory Planning and Optimization and how it comes into play with our Activity Analysis.

Luckily, many of us have sophisticated computer systems, even Enterprise Resource Planning (ERP) systems like SAP and Oracle to assist in this effort to organize the mountain of data into actionable information and act on that data we do! We plan, replenish, and optimize inventories based on this data… assuming it is correct.  

It is impossible to conduct a meaningful Activity Analysis without good and sound data. This is one of the biggest issues for those first embarking on a serious and in-depth Activity Analysis. The data may not be clean and probably will not be up-to-date. This is part of the natural entropy of something that has not been tightly managed for a few years.  

When we first engage with a client, we use our DemandCaster® software to conduct an Activity Analysis to determine the size and scope of the improvement opportunity. When we begin to load the data into DemandCaster® there are invariably issues with the data structure and the completeness of the data.  The first thing we must do with the assistance of the client is organize and scrub the database. Only then, can we proceed with the Activity Analysis.

In the case of inventory management, the core of the work we do at Cadent Resources, Inc. for our clients, our Activity Analysis covers the following:

1.   Demand Planning: We will evaluate the accuracy of the Demand Plans historically. The Demand Plan is the cornerstone on which all material, manufacturing, and inventory management is built. We will look at Mean Absolute Deviation and Mean Squared Deviation. Using the same historical data, we will best fit a statistical forecast to the client data and compare our accuracy to theirs.  

2.   Inventory Sizing:  We then turn our attention to calculating what the inventory could or should be versus what it currently is. With more accurate data from the above mentioned data cleansing, we use DemandCaster® algorithms to size the inventory by materials based on the ABC classification of the materials and the demand placed on the buffer (again, it only customer demand and variability for the buffers that are used to fill customer orders).

3.   Manufacturing Planning: Manufacturing scheduling must be optimized for lead times, set up times, machine availability, throughput, quality, and demand to ensure the inventory buffers are properly stocked and replenished.  

These three analyses are very detailed. They would be most cumbersome to do using spreadsheets and tare not necessarily easy to do in ERP systems unless they have a specific supply chain analytic module.

What is Activity Analysis? Part 2, Warehouse Layout and Re-Layout

Last week we posted a blog about Activity Analysis, we learned this is basically the task of delving into and capturing the complexities and nuances of whatever complex process you are attempting to manage or improve.

Now let us consider the layout of a new warehouse or the re-layout of an existing warehouse as this requires an extensive activity analysis. For the purpose of this discussion, let us assume our product is consumer packaged goods.  Warehouse layouts cannot and should not be done on the back of an envelope even though this is done surprisingly more often than one might guess. In this kind of analysis, the buffer sizes of the various materials that will be stored in that warehouse must be calculated as they need to be known at the peak demand period. This requires knowing the demand by month on each material. If the warehouse is for finished goods, another level of analysis must be considered.  The demand analysis referred so far is only useful in determining the storage requirements for the materials or SKUs. Frequency of inbound deliveries and size of the deliveries will be needed to determine the number of receiving doors and unloading staging areas.

To determine where in the warehouse the materials will be stored and in what kind of racks requires knowing the profile of the sales orders. This will determine how often an item is picked and in what quantities. For instance, are the goods picked in pallets, layers, cases, or individual units? This will determine if a pick area is needed. The order profile will help determine the number of shipping doors needed as well as the unloading staging areas.

In putting it all together, it can be determined average and peak product movement and flow through the facility. This will be used to determine the variety and numbers of material handling equipment (think lift trucks) and the shift and staffing requirements for the facility.

Even this description does not do justice to the depth and level of data needed to drive a proper warehouse design project.  It does however give a flavor of the mass of information needed in conducting an Activity Analysis.

Is it any different for Inventory Planning? Absolutely not! The detail of the data and the organization thereof into actionable information is the lifeblood of inventory planning and optimization. I will look forward to discussing this further in our next posting.