Fred Gewant, ILOG’s VP of Americas Field Operations, kickstarted the proceedings today.

Fred has been with ILOG for just over a year but was instrumental in encouraging ILOG to organize DIALOG 08, after a five year hiatus. Fred wants to make DIALOG an annual event, and given the intense interaction and positive energy generated in the first two days, the case for DIALOG 09 is looking very strong indeed! He encouraged everyone to keep the momentum going through day 3.

The weather is warm and sunny here in Palm Springs, but it seems that many flights are still being affected by the severe weather in various parts of the country. Looks like some people might be stuck here for an extra day. Ho hum… Here’s to keeping the momentum going in Palm Springs into day 4!

In what I think was probably my favorite session of the day, Anna Ross from New Zealand’s Fonterra Cooperative Group Ltd. provided an excellent overview of her company’s operations and the many supply chain issues, challenges, and risks that Fonterra faces every day when competing in global markets.

True to the title of her presentation, Anna began with a quite extraordinary list of facts about her employer. Her first slide, and the subsequent statistics, made it quite clear that Fonterra is by no means a jack-of-all-trades kind of company. They are quite emphatically master of one trade: Dairy. Not only is Fonterra New Zealand’s largest company, they alone account for 20% of the country’s exports and 7% of New Zealand’s global GDP. They are responsible for over 1/3rd of all global dairy trade and are the world’s largest exporter.

Among the company’s suppliers are more than 4 million cows from 85 different New Zealand farms. Fonterra supplies over 5,000 customers and millions of consumers worldwide. Probably their most well-known brand is Anchor butter (which my mum’s been spreading on her toast since as long as I can remember, so it must be good stuff!)

I, for one, could not have imagined the insanely complex logistical issues that Fonterra must tackle every day to ensure that my mum can find her favorite brand of butter on the shelf at her local supermarket. Fortunately, Fonterra is an avid user of Logic Tools’ LogicNetPlus which has enabled them to capture and manage the complexity and risk inherent in their global operations.

To start with, it takes about 5-6 weeks for Fonterra to ship its products to their main target markets. Add to that the fact that many of Fonterra’s products have a limited shelf life, and that month-by-month production volumes can vary considerably depending on the season. The company has 24 plants, 130 warehouses, and roughly 535 million different combinations of parameters affecting their supply chain network.

Fortunately, LogicNetPlus is able to handle this kind of complexity on a day-to-day basis without even flinching. It provides Fonterra with a holistic view of their supply chain, and also serves as a tool for long range strategic supply chain planning decisions. For example, Fonterra uses LogicNetPlus to plan new warehouse development projects (where should it be located? How big should it be? What mix of products should we store there?)

LogicNetPlus also helps Fonterra with optimal product mix decisions in their production plants, and helps them reduce the cost of third party storage and distribution centers. And if that weren’t enough, Fonterra has also integrated their supplier’s own supply chains into their model, further increasing the potential for global cost savings.

Food miles is a key concept for Fonterra. Food miles can be used as a measure of carbon effectiveness by measuring how long it takes for the product to arrive at the customer. One of Fonterra’s main markets is England, where around 41% of consumers are apparently purchasing products based on how carbon efficient they are, so Fonterra is keen to appear as green and lean as possible.

Geopolitical risks can also affect Fonterra’s supply or demand which can cause huge storage bottlenecks if delivery is disrupted to certain key markets.

Fonterra also faces climate-related risks. Several years of drought in New Zealand have pushed up prices and competitive pressures to the point where other companies are prepared to “poach” some of Fonterra’s farmers, therefore affecting their milk supply.

When thinking of risk, many people think of major catastrophes such as a warehouse catching fire, ships sinking, and so on. However, Anna explained that a lot of the risk they must deal with on a daily basis, is actually internal - and in particular IT-related risk.

Fonterra uses an e-documentation system to process exports (they export 95% of what they produce). Since they are looking to upgrade this system, they used LogicNetPlus to simulate different scenarios and determine whether their network could cope if for some reason the migration failed and they were without access to their e-documentation system. It turns out that their local storage and distribution network probably couldn’t cope, so they were able to take the necessary steps to mitigate the risk and keep costs to an absolute minimum if things did go wrong.

Food miles is just one component of the entire supply chain, though. Just because Anchor butter has to be shipped frozen all the way from New Zealand doesn’t necessarily mean that it is less carbon efficient than locally-produced brands. Many UK farmers, for example, house their cows indoors and therefore require heating and lighting. In New Zealand, cows roam free in fields - which, unsurprisingly, generates far less CO2.

Fonterra is piloting an RFID tracking system for their shipments and gets data direct from their shipping partners so that they can track precisely where their deliveries are at any moment in time.

New Zealand has a reputation as a green and pleasant land and the PR and image value of green logistics is a vital factor that explains Fonterra’s obsession with green logistics issues.

Fonterra’s global supply chain model, which manages over 535 million parameters, takes about 10 hours to run. For the sake of efficiency, Fonterra breaks down this global model into several smaller models. For example, they distinguish between ambient and temperature-controlled stock, and also by region. Their ambient stock model, for example, takes about 2 hours to run. Their China model takes 1 hour, and their US model takes about 40 minutes.

Some companies use LogicNetPlus as a one-time process optimization tool, but Fonterra uses it on an ongoing month-by-month basis. They have found it invaluable in managing their day-to-day business, as well as planning both their short and long term strategies for growth.

Thanks Anna for introducing me to the thrills and spills of global supply chain management!

In this session, Filippo Focacci, product marketing manager for ILOG’s Supply Chain Management (SCM) product line, presented ILOG Plant PowerOps (PPO) and how it was used to radically improve production planning and scheduling in Danone’s dairy manufacturing plants around the world.

PPO is ILOG’s new integrated planning and scheduling solution for the manufacturing process industry, specifically optimized for fast moving consumer goods (FMCG), pharmaceutical, and chemical processing applications.

The models generated by PPO provide management of tank operations, cleaning policies, shelf life and maturation times. They also provide decision support to help planners map the scheduling process and conduct what-if analyses to asses performance. PPO can also be integrated directly into existing IT infrastructure (ERP, etc.) and with the Logic Tools range of supply chain management solutions.

A dairy manufacturing plant requires an extremely complex manufacturing process that includes tank management, flow control and scheduled cleaning activities. The Danone project was designed to address three major business challenges:

• Meeting demand
• Manufacturing efficiency
• Quality

The solution provided integrated planning and scheduling for both intermediary and finished products and modeled all the plant’s key manufacturing and plant floor constraints. Integrated planning and scheduling means that planning decisions made at the same time as decisions about operational capacity. This is the only way to determine trade off between planning decisions and operating efficiency, that is to say between supply chain and manufacturing goals.

ILOG worked with Danone to create custom KPIs to enable them to track performance of the system and simulate various scenarios.

These KPIs allowed Danone to compare optimized plans generated by PPO with previous manual processes created by their experienced planning team. These comparisons revealed areas of the manufacturing process that could be considerbaly optimized. For example, manual planners would build in too margin in certain processes to mitigate risk, but this margin would often be far greater than was strictly necessary for operational efficiency.

PPO’s production smoothing tools help companies like Danone move towards lean manufacturing processes by reducing variability in the manufacturing process.

Danone identified the following key benefits of the PPO solution:

• Information Systems: Full SAP integration, modeling of both finished and semi-finished products with a repeatable core model that could be used as a template for other plants.
• User: Very high user acceptance, easy to learn and use.
• Organization: Manufacturing and supply chain use the same tool and planning is now a daily activity rather than the previous week-long process.
• Process: Improved operational efficiency, optimized service levels and inventory corridor. Ability to deliver executable plans for finished products and white mass as well as cleaning and changeovers.

The first Danone plant to adopt the PPO solution was in Mexico. Danone has since implemented similar solutions in Russia, Argentina, and now Brazil. These are all markets with 20-30% market growth potential per year, bringing Danone very high return on their investment. The largest gains to made with PPO are in markets that have high growth and capacity constraints, where improvements in plant throughput are essential to meeting growing customer demand.

Major synergies are possible between PPO and Logic Tools or other supply chain management applications, such as SAP or Oracle. So while the Danone story certainly represents a breakthrough in production planning and scheduling, so much more is possible.

In this session, Andrew Reese hosted a discussion with Rob Wehrman from 3M, Anna Ross from Fonterra and Derek Nelson and David Simchi-Levi from ILOG. The session explored strategies for handling complex supply chain networks and touched on challenges like green logistics, risk management and rising transportation costs.

The session provided real insight into the complexity inherent in manufacturing and shipping on a global scale. Below are a few snippets from the discussion…

Fonterra: We use local offices (”mini-Fonterras”) around the world staffed with people with local knowledge to reduce the complexity of managing our global supply chain.

3M: Our biggest issue is data availability. Global infrastructures are expensive to manage and hard to standardize. You probably wouldn’t think of Post It Notes as complex, for example, but with over 300 colors (including at least 15 different shades of yellow!) to manufacture and deliver to markets worldwide, the humble Post It note is perhaps more complex than you might think!

Fonterra: We involve people in the modeling of the supply chain and explain to them how the data is processed. People are less likely to trust a new kid on the block who comes in with a fancy new solution that changes the way they’ve been managing their warehouse inventory for the last 20 years. Involving employees in the process helps everyone learn more about the product and fosters employee buy-in for improving these processes.

3M: Reducing complexity should not be an objective in itself, though. It’s likely that you can actually make more money by making your supply chain more complex. At the same time, there’s a certain amount of chaos built into the system. If left unchecked, a supply chain will always tend towards complexity because of the push towards local solutions that optimize local processes but fail to take into account the bigger picture.

Fonterra: We thrive on complexity. Staying on top of that supply chain is invigorating. If your supply chain isn’t complex, then you probably don’t have a very good supply chain or a competitive business model. Tools like those from ILOG are making the challenge of managing that increasing complexity easier and easier, so don’t be afraid of complexity. If you have the right tools to manage that complexity, you stand to generate considerable competitive advantage.

3M: Another import issue to take into account is the skill sets of your staff. Very few projects fail because of technical issues. People in your team who are able to identify the real problems behind your supply chain inefficiencies are invaluable. They need to be able to interpret your SCM data intelligently and use the system to identify appropriate adjustments. If your system reveals inefficiencies in shipping semi-finished goods between two different plants, it might suggest investing 60 million dollars or more to consolidate the production into a single plant to improve efficiency. However, if the underlying problem is in fact a simple issue of insufficient stock level management in one of the plants, you could save yourself a whole lot of money by digging a little deeper into the problem. Your staff need to be able to identify those failure modes and go beyond the surface data to investigate ways to improve the system in the most intelligent way.

Fonterra: We have a mix of older, more experienced supply chain planners and younger graduates with more up to date operations research and supply chain theor. The challenge is getting these two groups to work together effectively. We need to stay aware of new techniques, but also temper the enthusiasm of the younger generation with the reality of what is possible.

David Simchi-Levi: 10-15 years ago, supply chain management systems were designed for leading experts. These days they are aimed at business level users. It’s like purchasing a car. You don’t need to be an experienced mechanic to purchase a car these days. You’re concerned about issues of usability and practicality for your needs, but you don’t want to have to get under the hood with your oil can and wrench every time you want to go for a drive.

Fonterra: Green logistics is a huge issue for Fonterra. Every project we embark upon must include a carbon emissions impact study or it doesn’t get funded. Find out more in my session later today.

3M: One of our corporate values is to minimize our impact on the environment. We’ve not yet implemented carbon footprint evaluation into our supply chain, but we are following progress in this area carefully.

David Reese: To sum up, complexity is increasing. It’s unavoidable. Deal with it. When handled effectively, complexity can bring you significant competitive advantage. Think global when optimizing your supply chain activities. Technology itself can create unnecessary complexity if not managed correctly. Ensure you involve cross-functional and interdisciplinary teams in your SCM decisions.

Moderator:
Steve Nunez (SN), product reviews contributor, InfoWorld

Panel:
Maura Cole (MC), Business System Specialist, aigdirect.com
Darren Koch (DK), Senior Manager, Revenue Management, Hotwire
James Taylor (JT), author of “Smart (Enough) Systems“

The session started with questions from Steve:

SN: How do you work with linking your business processes to rules?

MC: We work with Excel to test the rules. This is a fully manual process, although we can move to production quickly. Rules are changed as part of a scheduled release.
DK: We tread the line between responsible/frenzied. There are no requirements beyond those in the heads of the analysts. Scripts cover the QA process. We can implement in as little as two hours. About half of that time is automated.
JT: There is the recognition that in an emergency things can be changed immediately. This is one of the big benefits of implementing rules.

SN: Do you have the ability to rollback if there’s a problem?

DK: We don’t have the kind of system eBay use. We normally just apply two rules at a time so we can pull these out if we need to.

SN: Do you have a governance process

MC: Yes, we have a team that are responsible for looking into this.
DK: We’re much lighter on this. I’ll approve changes and then pass these changes out to all engineers. Once this stage gets approved, the changes are pushed out to production. The original push for changes will come from the analysts.

SN: What is the process for passing rules down from business analysts?

MC: We don’t currently have the business analysts interacting directly with the rules. We’re interested in looking into the ILOG approach that can bring business analysts closer to the rules. We do currently let business analysts change the parameters of the rules - just not the logic.
DK: The IT department works on the BOM and keeping the site up. We originally started with a table that gets mapped to output.
SN: What is the biggest requirement for a BRMS?

DK: Speed of use. We’re constantly changing and trying new things. We make changes and we measure the effects.
JT: It’s interesting that some resources have to move. Business users need to add headcount - IT will loses some. This can cause organizational problems in dealing with this.
DK: We didn’t see it, but our organization is smaller.
MC: Our business analysts are not directly involved so it did not increase the resource requirements.

SN: What were the biggest challenges you face?

MC: Testing of the rules. Billing is complicated and these rules are difficult to change quickly. A lot of the rules are shared, and there’s a possibility that if you break something you can break something else further down the chain.
DK: We don’t have that problem as we don’t share rules across lines of business. We try and keep things in a linear process. All our rules are run realtime. For instance, when you book a flight, the rules are running while the bar moves across the screen.
MC: Performance is very important. A team checks that performance remains within company standards.

SN: Any unexpected benefits?

MC: When we put down the underwriting rules, no one in the business knew what the rules were. By exposing these rules, there’s new awareness of what’s going on. This transparency (not just to IT) is a good thing.
DK: We found something similar. eg. what is the process and how do things happen? We could go through the rules and look at the process, rather than having to rely on a software engineer.
JT: You will see IT and underwriters looking around the same screen - something that never would have happened in the past.

SN: Where is the IT function within the process?

DK: They concentrate on the BOM. They also vocalize the BOM.

Audience questions:

Question: When your business users starting writing rules, how did you test?

DK: We transitioned the testing. We had a script that sent thousands of simulated user searches through the rules. This helped us pinpoint problems.
JT: If business users are involved, there’s generally investment in automated testing. Tests that are meaningful to the business users, not just IT.
DK: We do have an error correction program. We never have the same mistake happen twice!

Question: Who were the sponsors for the deployment of rules?

MC: IT were the sponsors. Many IT analysts come from a business background so they were more aware of the business needs.
DK: For us, the push came from business users - an executive saw the value in the flexibility rules could offer and approached IT. The option was to buy or build. IT decided to buy.
JT: In my experience, both IT and business can be sponsors. IT tend to be IT-centric. This often adds another round to the implementation. The BOM needs to be redefined for the business perspective.

Question: How many rules did you start off with?

DK: We started by replicating a table with 10-50000 rows. This led to about 10 rules. Now we have 20-30 rules.
JT: Many of the best case studies have a very few number of rules.

Question: How do you manage the versioning if one rule is modified for another team?

DK: Our org is small - only 2-3 people change the rules. We keep it small and self-contained so that doesn’t really happen.

Question: How many people in the group change rules without changing the rest of the application?

Audience poll result: of those who responded, majority change rules without changing app.

Question: Is there anyway to extract the rules and see dependancies?

MC: Billing rules are embedded within use cases. These rules are pulled out to Excel spreadsheet and this can help spot dependancies.
JT: Another technique is to externalise the decisions from the use cases to cut down on the number of changes. The decisions change a lot more than the use cases.

Question: As you migrate the rules did you have any challenges?

DK: Security and access with our other systems. These systems are changed by engineers, not business users. The business users are sometimes overlooked and not told of these changes.
MC: We used a phased approach for migration. This worked for us.

Martin Brotschul, senior manager, Supply Chain Strategy Practice, Accenture

In this talk, Martin focussed on the impact of climate change on supply chain business models.

Customers are stepping up to environmental responsibility and demanding sustainability from the supply chain that produces the goods they use. The push has come from Europe but the US is catching up. Many companies are interested in instituting change before legislation is imposed upon them. Companies are also beginning to see how moves towards sustainability can have a significant impact on brand value.

For a typical consumer good, only 12% of the carbon footprint comes from storage and distribution. However emphasis is in this area as this section of the supply chain is highly visible - it’s the truck you see at the end of your street or a towering storage facility.

As the price of oil rises, this will be passed on to consumer goods. Other options include reducing distribution network or looking at new fuels such as biofuels. Trucks can switch to the electric model.

Companies that are already beginning to look into some of these approaches include M&S, Sainsbury’s, Innocent Drinks, Green & Blacks, Walkers and Hewlett-Packard. From the list it’s evident that early advances are being made in Europe. However, US companies are beginning to become more active -the most visible example being Wal-Mart.

What does the future hold?

As well as reducing carbon emissions, manufacturers will have to look further into the external social costs of the goods they produce. One example is battery manufacturers offering ways to dispose of dead cells.

In this session, Bob Bixby, ILOG Chief Science Officer, discussed how optimization has become a key component in addressing common business and manufacturing problems today. He explained what has and hasn’t changed in approaches to optimization over the many years that he has been in the business.

Bob used IBM’s East Fishkill 300mm semiconductor wafer manufacturing plant as an example to explain the benefits that optimization and automated scheduling can bring to highly complex manufacturing processes.

People have been trying to find ways to improve process optimization for years, of course. The difference today is that processes are now so complex that traditional methods can no longer cope. It’s no longer feasible to try and optimize an entire project. Instead, optimization solutions must break down processes into separate sub-processes and optimize those individually. The old generation of solutions, despite enormous progress in processing capacity, required too much time to generate optimum solutions. even with a turnaround time of less than 24 hours, solutions would often be obsolete before they could even be implemented.

By combining constraint programming optimization, process modeling and decision management systems, ILOG’s optimization suite can be used to build real-time optimization solutions. Bob’s slides contained plenty of statistics from the IBM Fishkill application, showing how this approach has been used to bring dramatic optimization improvements.

He highlighted, for example, the 25.3% reduction in cycle time (production time + waiting time) that the ILOG solution was able to achieve in certain plant sub-processes, which contributed to overall efficiency improvements of around 6%. Considering that the plant handles some 15,000 batches a day, that’s a considerable achievement and represents considerable cost savings for the plant.

These cutting-edge optimization solutions are no longer a nice-to-have. They are essential for survival in today’s white hot competitive environments.

David Simchi-Levi, MIT professor and co-founder of LogicTools, a division of ILOG

In this talk, David concentrated on the major trade-off facing supply chain operators - that between increasing plant capacity without increasing risk.

Redundancy

It’s difficult to build a forecast to build in risk. One way is to go through scenario (what-if) analysis. The problem here is that it can be difficult to predict every possible scenario and to determine which scenario will best fit your situation.

David suggests another approach - one borrowed from the financial sector - of working out the lowest cost portfolio and working in some redundancy to cover risk. The example used looks at the structure of the total cost function as you change the number of distribution centers. The graph looks something like a narrow-bottomed frying pan. The main point is that in a number of different scenarios, total cost does not change dramatically. Therefore you can pick the scenario with the maximum redundancy at this lower cost level. There may be a slight increase in total cost as a result of this, but risk is reduced substantially.

Network planning

Why is concentrating on the distribution network important?

• Consumers are demanding this more and more
• Europe now offers financial incentives for companies that cut carbon emissions
• High carbon emissions means low SC efficiency
• Future legislation is expected in US more in line with those in Europe

By applying network modeling, you can design a distribution network that satisfies customer demand yet minimizes carbon emissions. The key is to find the right trade-off between cost, service and carbon emissions.

Risk pooling

Inventory is can be stockpiled at different points in the supply chain for risk pooling. Overall the supply chain will be more efficient and maintain forecast accuracy.

In closing, David signaled the significant increase in the level of risk over the last few years. This is where supply chain planning can provide real value.

Jon Ferraiolo works for IBM but works more or less full time heading up the OpenAjax Alliance. Ajax is the power behind mashups, and because mashups take components from different suppliers, interoperability, and therefore the work of the OpenAjax Alliance, is critical.

IBM quickly recognized the importance of defining an agile, open source industry group to defined standards for the industry.

The key concepts behind Web 2.0 are community, collaboration, user experience, and user generated content. Going beyond user-generated content, mashups allow the creation of user-generated applications.

Mashups are about self-service application development, enabling organizations to move to the next level of innovation, speed, and agility by allowing users to combine and remix different sets of data in new ways. In this way, mashups can provide insight into corporate data that was simply not possible before.

Many people are unclear about the difference between mashups and portals (including Jon). Portals typically provide a predefined set of mini applications or widgets. Mashups allow users to reach outside the organization and combine external feeds with existing data sources to create their own widgets and personlized dashboards.

IBM has developed several technology platforms to assist in the creation of mashups and widgets:

• Mashup hub
• QED wiki (screencast here)

These technologies are being fed into IBM’s commercial application Lotus Mashups which enables instant deployment of custom mashup widgets (which Jon described as “prepackaged application components”).

IBM of course is not the only company developing and producing widgets and mashup technology. The amount of innovation going on in the mashup/widget space is extraordinary. However, this also represents one of the biggest challenges facing the industry: interoperability.

The Open Ajax Alliance is working to create the Open Ajax Metadata wrapper standard, as well as open source transcoders for various proprietary widget formats to allow different mashup technologies to work together easily.

The other major challenge of course is security. IBM and the Open Ajax Alliance are developing and promoting a secure runtime environment for mashups, that is being dubbed, appropriately, “SMASH” (for Secure Mashups).

Sandy Carter, vice president, SOA and WebSphere Strategy, Channels and Marketing for IBM

Sandy Carter is responsible for driving IBM’s cross-company, worldwide SOA marketing initiatives. She is considered an expert in the SOA field and is author of The New Language of Business: SOA & Web 2.0.

Innovation that matters to CEOs:

• Extend the ability to collaborate inside and outside
• New innovative business model and processes
• Leverage information for business optimization

Most CEOs are looking for change at a dramatic level. The change needs to be at the level of both business and IT in order to have a significant effect.

This is where service orientated architecture (SOA) comes in. SOA differs from other technologies in that it’s service-oriented: SOA implementation is as much about business as technology.

This need for change has lead to the development In the field of business analytics, there is a move from KPIs to KAIs - that’s Key Agility Indicators. IBM have developed a benchmarking tool to show KAIs for different industries. Forrester and Gartner are due to publish reports in this area.

Sandy then went on to list key characteristics that make companies agile:

Evolutionary

Change business scenarios on-the-fly using current systems as building blocks. Smart SOA is the key. Start with a single project. Keep it simple. Then extend in an end-to-end fashion.

IBM practices what it preaches and does implement SOA. From 2002 there has been a roadmap for SOA implementation, moving towards the ‘Factory in a box’ model. The key is agility, rather than cost-cutting. IBM concentrated on how quickly it could switch suppliers. This helped make the business more agile and allowed it more flexibility in negotiations with suppliers.

Business-led

Allow your customers to make their own changes. Many companies find this difficult, as it means giving up a degree of control. However, Web 2.0 is driving the transferal of power to the consumer. This is possible through the adoption of dynamic platforms and the building of web-based communities. Sandy gives the example of her custom mashup dashboards she uses to track her business within IBM.

The provision of business policies is also important. Policies should be incorporated with business rules. Policies are in business language - not logical IT language or limited to strict procedural flow. These policies, once defined, are translated into business rules.

Collaborative

Continuous collaboration of business and IT delivers value, according to recent study by McKinsey/London School of Economics. Collaborative changes between IT and business far outweigh individual business process or IT process changes.

At the employee level, there is a new ‘collaborative’ skill-set appearing. This group have both strong business and IT skills. IBM has been at the forefront of training for these skills, which help individuals build the link between process and SOA. Gaming technology is used for teaching as simulators are more effective than a classroom teaching environment. IBM has developed online simulations that have been adopted by more than 2000 universities.

Closing note: make sure you understand what influences change in your business area and act accordingly.