Lora Cecere, who presented the Supply Chain Insights Global Summit 2013 in Phoenix, Arizona, brought many important factors affecting supply chain performance to light. One of the big ones that caught my eye was the tremendous gap between companies’ recognition of the importance of agility in their supply chain and the actual performance of their supply chains.
In an April 2012 survey of 117 supply chain executives conducted by Supply Chain Insights, LLC, nearly nine out of ten recognized the importance of supply chain agility as a contributor to their success. However, only about one in four (27 percent) of these same 117 executives ranked their own firms’ actual performance in the realm of agility as “high” (five to seven on a scale of one to seven).
Held Back by Inside-out Thinking
It is my firmly held belief that the most elemental thing that is holding these firms—and others like them—back from reaching for higher levels of agility in the performance of their supply chains is “inside-out” thinking.
Allow me to elaborate.
The vast majority of companies—from the Fortune 500 down—are still strategizing, designing and managing their supply chains focused primarily on the “inside.” That is to say, they are still measuring most internals.
Most executives and managers begin looking at their supply chain focused entirely on measures of “efficiency.” They are looking intently at metrics like COGS (cost of goods sold), “contribution,” gross margins, and cash-flows.
Unfortunately, the cost-world based metrics they are using as guides for decision-making are almost always loaded with allocated costs—thanks to a hyperactive cost accounting department. Since these allocations are virtually always wrong (since they must be based on production estimates and averages), they never represent the day-to-day reality in which their plants and supply chains actually operate.
As a result, these executives and managers “push” and “pull” levers hoping to effect change, but the actual outcomes seldom match their expectations.
What these supply chain leaders should be looking at, in order to get a firm grip on reality is Throughput, defined as revenues less TVCs (Truly Variable Costs). In this world, the reality is plainly evident that the follow equation always holds true:
where delta-P = change in Profit; delta-T = change in Throughput; and delta-OE = change in operating expenses
After satisfying themselves that their “efficiencies” are in order (even if misguided), the next area “inside-out” supply chain managers look at is general “customer service levels.” That may be reduced to having the right product in the right place at the right time.
When they look at failures in “customer service,” they may be tempted to increase their inventories in order to improve the likelihood of having the right product in the right place at the right time. But, if their eyes are open, they will begin to recognize that excess inventories just clog up the supply chain. These inventories actually slow down the entire supply chain’s sensitivity to changes in demand.
As a result, frustrated supply chain executives and managers frequently discover that the very increases in inventory designed to increase customer service levels actually result in nothing more than huge overstocks on some items and an increasing number of missed opportunities and lost sales due to out-of-stocks on other items.
Again, if these managers are open-eyed and open-minded (and not overly-influenced by their cost-accounting department), they may come to the same conclusion that Rick Sather, VP of Supply Chain for North America at Kimberly-Clark, did: that producing in smaller batches with greater frequency will actually increase the flow of product through the supply chain.
This is the next step of growth, but there are generally wrong-headed “efficiency metrics” standing in the way. But, like Sather reported at the Supply Chain Insights Global Summit this month, it is possible to improve Throughput and reduce waste “by many percentage points” even while increasing by “four times the number of change-overs [set-ups]” in production operations.
In fact, Sather’s team has seen “millions of dollars of improvement on one [a single] SKU” as a result of effort leading to smaller batch sizes for both production and transfers, especially when accompanied by supply chain visibility all the way to the retail shelf.
So, by the time an organization has reached this stage in a journey toward supply chain excellence, it is beginning to make the transition from “inside-out” to “outside-in” thinking about how its supply chain really works.
To begin seeing their supply chains truly from the outside to the inside of their operations, requires designing their supply chain and supporting systems to provide “outside-in” visibility. This begins with demand sensing and demand visibility.
This doesn’t have to be fancy. POS (point-of-sale) data in real-time is an unreachable dream for many at the present. But that should not prevent a POOGI (process of ongoing improvement) that constantly works to shorten the actual demand feedback cycle and improve its accuracy.
For example: even if the replenishment cycle is 45 days (presently) from some product line, that does not mean that orders need to be aggregated every 45 days. Begin by having orders submitted up the supply chain every two weeks, so that the actual demand is visibly sooner. Then work to reduce the order-placement cycle to ten days; then to once a week; and ultimately to every day or every other day. Fancy computer systems are optional to achieve this.
Just this simple new visibility into actual demand should facilitate better planning and production across the supply chain. It will also reduce the damaging affects of “the bullwhip,” and encourage supply chain participants to at least begin thinking about smaller production and transfer batch sizes.
Synchronizing Flow with Demand
The ultimate goal of all of this is, as Rick Sather described it, “aligning the lines”—that is, synchronizing the production lines with the shipments lines with the shelf take-away (actual consumption) lines. Doing this maximizes the supply chains throughput while minimizing waste of time, energy and money for every supply chain participant.
Please tell us about your experiences—good or bad—with moving your supply chain toward excellence. Leave a comment here, or feel free to contact us directly.