For a hundred years or longer, businesses have used inventory to protect and defend themselves against variability. Even the APICS Dictionary states as much, using the term “protect” with reference to “safety stock”—yet another telling term.
Even the terms used highlight the defensive position taken by most business enterprises.
Of course, this strategy worked reasonably well when product variety was small and variability was low. In my lifetime, I have seen huge increases in product variety. When I was much younger, I can easily recall that toothpaste brands ranged to a dozen or so and occupied a fairly small amount of shelf-space at the stores. The same was true of many other products ranging from canned goods to cigarettes.
Today, however, there are nearly as many varieties within a single brand (e.g., Crest toothpaste) as there were brands of toothpaste in my childhood. Similarly, cigarettes and other tobacco products have undergone huge growth in brand proliferation over the last several decades.
As result, even if consumption of “toothpaste” as a generic product may be relatively steady, that relatively constant consumption rate may show very large demand variability over the range of 30 or more varieties. Therefore, attempting to use inventory in a defensive way—i.e., safety stock—to cover demand variability becomes an overwhelming affair encompassing very large investments in inventory and the space to store and, potentially, display the large inventories.
Supply Chain Managers Are Running Out of Options
Supply chain executives and managers have labored for the last 30 or so years over what most have considered their three basic options:
Cost Cutting
Going back 30 years and beyond, we easily see that most organizations looked almost entirely inward. They looked for every possible means to cut costs. Some even look up the supply stream—toward the source—trying to eek out even more cost-savings from their upstream suppliers.
Unfortunately, cost-cutting has very definite limits. There is only so much a firm can cut costs before it starts affecting productivity, quality, customer service or other factors that soon begin leading to reduced revenues, as well. This explains why, of the Fortune 500 companies who self-identified as “cost-cutters” in the 1980s, almost a quarter were no longer found among the Fortune 500 firms a decade later.
This maximum boundary for cost-cutting improvement in most companies is in the range of ten percent (10%).
Productivity Improvements
The next big thrust (after cost-cutting) was productivity improvements. This was still inward-looking and, unfortunately, almost entirely focused on making improvements to departments, work centers, and other silos. There was almost no recognition of the fact that improving the “efficiency” or “utilization” of an individual department or work center does not necessarily contribute to an improvement in the “system”—the entire enterprise.
This was highlighted to me when I heard (back in the 1980s) that one of the (then) Big Four auto-makers in the U.S. had undertaken a project to improve their accounts payable processing. They invested several millions of dollars in this “improvement” while losing several billions of dollars in their competition with foreign auto companies from Japan and Germany.
Clearly, improving “accounts payable” did not contribute to the performance of the enterprise in terms of real Throughput and profit on the bottom-line.
Typically, the maximum boundary for productivity improvements is about 20 percent.
Automation
The falling cost of ever-increasing computing power beginning in the 1980s and continuing even until today has caused almost every firm to seek improvements through automation of a wide array of production and other business processes across the enterprise.
This approach, while still inward-looking, has likely contributed more to the improvements in U.S. (and worldwide) productivity over the last 30 to 40 years than any other single factor. (The world owes a huge debt of gratitude, in my opinion, to Microsoft Corporation and its competitors for their contribution towards making computing power and applications affordable.)
Still, the maximum boundary for improvements from automation in most enterprises sits at about 50 percent.
It’s Time Consider a New Approach
It’s time for a new approach to take-hold in supply chain management. It is high time to re-evaluate supply chains from the outside-in, as Lora Cecere adamantly advocates (see posts on the recent Supply Chain Insights Global Summit).
Seeing the supply chain from the outside-in moves the focus of the enterprise from the “defensive” position (which began with inventory and safety stock) to the “offensive” position. The offensive position is the one that innovates to find new ways to create and serve markets at the end of a supply chain that works to synchronize the flow of product.
You will note that safety stock is about managing what is static and internal to the supply chain, whereas, working toward synchronizing the flow of product with demand is all about managing what is moving in the supply chain with what is external (the actual demand).
What is the maximum boundary for a supply chain focused on “flow” and synchronizing the flow through agility?
No one knows with absolute certainty.
However, it has been demonstrated by some that improvements in the range of 5,000 percent are not out of the question when supply chain agility is closely coupled to actual demand through high levels of visibility. The truth is, there is no theoretical upward boundary for such an approach.
What Keeps Firms From Avidly Pursuing This Approach?
Simply stated, what keeps most firms from avidly pursuing supply chain agility and demand-driven supply chain management is bad metrics. While management accounting is still focused on cost-cutting, productivity improvements (as measured by “efficiencies” and “utilization”, for example), and automation (as a cure-all), companies and supply chains will still be bound by bad metrics that actually militate against agility and becoming demand-driven.
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