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Closed Loop Operations Management June 3, 2008

Posted by Brian Sohmers in bpm, Business, collaboration, enterprise 2.0.
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Aberdeen Group recently released a white paper called “Technology Strategies for Closed Loop Inventory Management“. This paper explains how inventory has and will continue to be the lifeblood of supply-chains and as such, needs to be properly managed.

Inventory drives revenue and efficiency for companies by reducing capital (with few inventories in stock) and simultaneously increasing customer service levels. – Aberdeen Group.

Those companies following the principle of closed loop inventory management can:

  1. Determine safety stock targets
  2. Replenish inventory into distribution buffers
  3. View end-to-end inventory
  4. Respond quickly to market events
  5. Segment inventory based on customer service requirements

Closed Loop Operations Management

Decades ago, closed loop quality management was in vogue and most companies today have achieved this through total quality management programs. It’s certainly refreshing to see closed loop inventory management being discussed which is a must for a high-tech company to compete in today’s global market place, but the focus on just quality and inventory falls short. What sets best in class companies apart from the competition is closed loop operations management. Closed loop operations management encompasses inventory, quality, production, accounting, and other value added activities that help bring products to market.

Closed Loop Systems

Before exploring the attributes and benefits of closed loop operations management, let’s quickly review what a closed loop system is. In an open-loop system, there is no feedback. Inputs are calculated based on desired outcome only. An example of open loop management in high-tech operations is setting inventory levels, production schedules, and supply chain plans based on just sales forecasts and orders. A closed-loop system, on the other hand, is one that is controlled based on both desired outcomes and feedback from the system. Applying this principle to the former example, would mean that inventory levels, production schedules, and supply chain plans are determined not just by sales forecast and orders, but also feedback from ongoing operations. 

Having a closed loop system provides the following advantages over an open loop system:

  1. Disturbance adjustment (such as actual yields and cycle-time)
  2. Guaranteed performance even with model uncertainties (No supply-chain planning model matches the real supply-chain perfectly)
  3. Reduced sensitivity to communication errors (developing the plan is one thing, but errors can develop when communicating it, especially to trading partners)
  4. Improved reference tracking to plan

Visibility

So the different between open and closed loop operations management is the use of feedback from ongoing operations. One of the problems operations folks face today is they spend much time, effort, and money on planning to optimize operations by minimizing inventory, decreasing cycle time and lead time, and improving on-time delivery, but they lack visibility and execution ability to achieve their targets. As a result, buffers (inventories, freeze periods, longer lead times) are routinely accepted to insulate plans from disruptions, leaving decisions to be local in time and function, often based on historic performance at best.

To close the loop between planning and execution companies need to establish feedback through visibility to monitor for issues and trading partner compliance to instructions,trade laws, and environmental laws, systematic root-cause analysis, and decision supportfor proactive and concerted responses. This ensures plans actually happen rather than just replanning to adjust to reality. This is an ongoing process where visibility is established to continuously monitor and enable management by exception. Once alerted to an issue, the impact is assessed, a root-cause analysis is performed to help narrow down possible corrective actions, and different “what-if” scenarios are modeled to plan a response. The closed loop operations management process also leads to continuous learning and process improvements. It’s not enough to plan on having a lean supply chain with short lead times, you need to achieve it through closed loop operations management.

Real-Time Visibility

Gaining visibility into the complete picture is essential for closed loop operations management, but this is easier said then done. There are a variety of reasons that make it difficult to achieve high quality visibility. Before we discuss the challenges, let’s take a look at how to measure the quality of visibility in a closed loop system. There are two main factors that determine quality:

  1. Resolution – how much feedback or visibility a companies has into operations including outsourced manufacturing
  2. Latency – how quickly or real-time this information is gathered and available for KPI tracking and exception management

The drive for high quality visibility with high resolution and low latency feedback is simple. If you don’t have a complete picture of your current operations or the picture you have isn’t current, the feedback in your closed loop system becomes less useful decreasing your control over operations. An example to illustrate this in high-tech operations is a sudden increase in cycle time for a particular outsourced manufacturing process. If your organization doesn’t have visibility to this or doesn’t become aware of this increase for days or weeks, your ability to make the appropriate adjustments to reduce its affect on downstream operations and ultimately to the end customers is significantly diminished. With real-time visibility, the problem is acknowledged right away enabling an immediate response, minimizing the impact downstream. It’s not enough to have visibility, you need to have complete, real-time visibility into your operations including outsourced manufacturing.

The bar for visibility into operations has been raised in today’s demanding business environment. Two main market drivers responsible for raising the bar are the increase in the speed of business and globalization. Faster product lifecycles and increased customer fulfillment demands are changing the speed at which business is conducted. This in turn, increases the cost of any latency in responding to demand or supply-chain changes. Responding to a quickly changing environment requires real-time information. Secondly, the move to globally dispersed business models, where over 50% of the information needed to efficiently run operations resides outside your four walls, makes it increasingly challenging to achieve high resolution visibility. Hi-tech companies can no longer afford to take a hit on business agility when they outsource their manufacturing. All participants in the value chain need complete visibility for faster, better decisions.

Intelligent Operations Management

To address these needs and close the loop in operations requires a new category of solutions. Intelligent Operations Management has been recognized by leading analysts as a new and unique category of enterprise software that aligns business objectives with operational systems. Using real-time information from all parts of your extended enterprise, IOM completes existing infrastructure allowing better access to information, more effective collaboration between business units, and better operational decision-making. By closing the loop with Intelligent Operations Management, companies are able to control costs, improve service levels, decrease lead times, and address pricing pressures. Those companies who follow the principles of closed loop operations management enabled through an Intelligent Operations Management solution are best equipped to compete in today’s global business environment.