Creating the Optimal Supply Chain - Review (Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management)
18 October 2006In Part 1 of Creating the Optimal Supply Chain, a report made available publicly by Supply Chain experts from BCG and Wharton, I reviewed the section titled You Can’t Manage What You Can’t Measure’: Maximizing Supply Chain ValueYou Can’t Manage What You Can’t Measure’: Maximizing Supply Chain Value. In this post, I want to review the next section of the report titled - Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management.
When I’m having my groceries checked out at Walmart, the clerk almost always asks me the following question in some form or the other:
“Did you find everything you wanted?”
And invariably I answer - “Yes!” whether or not it is true. I can only think of one time when I was searching helter skelter for 1 particular product (a baby boppy pillow) that I told the clerk. And I set a chain of events in motion. The clerk didn’t know where I’d find it. So she called up her manager and she led me straight to the product even though I had been searching that exact aisle for a good 10 minutes.
Ofcourse, there’s no such thing at Walmart.com and that I consider a slip up. Amazon.com addresses this question in a different way by serving up recommendations that my buying/searching profile conjures up in their algorithmic search technique on their page but coming to think of it whether it is 1-click checkout or a haphazard checkout online, none of these retailers bother to ask me this question.
In this section of the report, the authors contend that,
But the process of getting the right product to the right place at the right time at the right price — the traditional touchstones of supply chain success — remains a challenging and often-times elusive goal.
And,
…a recent study in the Harvard Business Review found that improved performance hasn’t always followed: “Despite the increased efficiency of many companies’ supply chains, the percentage of products that were marked down in the United States rose from less than 10 percent in 1980 to more than 30 percent in 2000, and surveys show that consumer satisfaction with product availability fell sharply during the same period.â€
Remember that the above results of the survey by HBR are at a time when outsourcing has become/was becoming a primary manufacturing/procurement trend. I would venture that with the longer leadtimes that many firm’s encounter because of offshoring/outsourcing in manufacturing/procurement, more inventory is flowing through the supply chain which increases the risk of “not having the right product at the right place at the right time and quite important in the right amounts.” Moreover, it would be expected that consumer satisfaction would also fall sharply when stockouts occur on a regular basis.
Supply chains in many other industries suffer from an excess of products and a shortage of others owing to an inability to predict demand. One department store chain that regularly had to resort to markdowns to clear unwanted merchandise found in exit interviews that one-quarter of its customers had left its stores empty-handed because the specific items that they had wanted to buy were out of stock.”
Shockingly, the report observes the following - “…suffer from an excess of products and a shortage of others owing to an inability to predict demand”. How is one to think about demand uncertainty? There is a significant component of demand uncertainty that cannot be predicted - a true unknown and all efforts to predict anything around this fundamental uncertainty is going to come up a cropper. Integrating downstream POS (Point of Sale) information well into the firm’s manufacturing/procurement system shortens the time for this valuable information to reach and affect decision makers but even then that fundamental demand uncertainty exists and what you’re working with is shortening the time between the demand event and the response event. No matter how many heuristics one puts up to this task of prediction, genetic algoriths or neural nets, using historical information to make predictions, these solutions rest on a continuum of predictions that will either exceed/fall short of the actual demand that will manifest. The real question then centers around response to demand that is beginning to appear from out of the shadows of uncertainty - Can you quantify your firm’s ability to respond to such information, to use such information and execute with such information in hand? How long does that take - a week, 2 weeks, 10 weeks or 6 months? How much of that response time is written away in transportation lead times from China or India or some other low cost manufacturing base?
So what is the proposed solution to this connundrum from the experts?
Supply chain experts from Boston Consulting Group (BCG) and Wharton agree that a careful coordination of supply chain elements and a high level of collaboration are among the primary criteria for creating successful supply chain management. Indeed, in a world of heavy competition, these two supply chain elements - so often taken for granted - can mean the difference between the merely functioning and the profitable when it comes to procuring goods and services from vendors around the world and delivering them to global consumers as fast and inexpensively as possible.
Furthermore, Steve Matthesen notes
My clients are going to broader ranges of SKUs [stock keeping units] in a finer and finer segmentation of customer needs, in order to meet the demands of a growing general consumer trend that says, ‘I want what I want; I want it cheaper; I want selection; and if you don’t have it, I’ll go somewhere else to find it.’ The more of this kind of complexity you have in a supply chain, the more difficult it becomes for things to work.”
The overriding question is whether the customer is really willing to pay for the finer and finer segmentation vis a vis his expressed need for a particular set of options. Then depending on the overall business strategy of whether the company is willing to acquire market share or some other strategy, a set of constraints for the supply chain are generated. The only way to deliver highly customized solutions to a customer while maintaining some semblance of a flexible and agile supply chain is to introduce late-stage customization for the design, products or service. Dell has taken a different approach - the organization and supply chain is tuned to turn on an actual customer order i.e. reality rather than a prediction about reality which is the model that a host of other computer manufacturers and retailers continue to struggle with.
Notes Marin Gjaja,
“The first hurdle to coordination and collaboration is within the four walls of your company,” said Gjaja. The basic principle behind supply chain organization, namely, “getting the right product to the right place at the right time at the lowest possible cost, is not something that most companies are organized to do well. You are cutting across organizational boundaries, where individuals may be more interested in local optimization than global supply chain issues.”
Since I work in optimization aimed at supply chain consulting, I am well aware of the situation that Gjaja describes. Most of my work deals with global optimization rather than local optimization considerations but from a supply chain design point of view. However, this topic deals with the nitty gritty of structuring how the supply chain assimilates and directs resources and functions from a wide spectrum of firm’s internal components from marketing to logistics and, procurement to warehousing.
If you look at the customer service center example, you have a mix of business rules, operating processes and incentives that are set up as an individual function, and [meeting those] optimums will come at the expense of the company’s global optimums. This is at the heart of a lot of internal dysfunction in a supply chain, and it really comes down to establishing cross-functional coordination and collaboration.”
Wharton’s Cohen agreed. “I would argue, in fact, that if you haven’t figured out the internal problems - collaboration, coordination and information sharing
- you are probably out of businesses,” he said.
Furthermore if a firm cannot get its internal act together, there is always the external collaboration with suppliers and partners that a firm has to worry about:
A second hurdle comes when a company approaches this problem outside the company’s walls. “You have fewer levers that you can pull from an incentive standpoint when it comes to working on collaboration and coordination with suppliers and others outside the firm,” Gjaja noted.
However, a slightly different view is formulated by another author in this report. He calls it the ‘Right Supply Chain’
For Wharton’s Fisher, the essence of supply chain management problems boils down to “shortages and failure to get the product, and having too much of the product. Prevent that from happening at a reasonable cost, and that’s supply chain management.
Fisher argues that there are essentially two types of products and he classifies them on the basis of the demand characteristics and supply chain effects that these products produce in their supply chain lives.
In the paper, he argued that products fall into one of two categories: primarily functional or primarily innovative.
He further elaborates on the functional product groups,
According to Fisher, functional products, which include products like milk and food that satisfy basic needs and can be sold in a wide range of retail outlets like grocery stores, are characterized by: predictable demand and easily matched supply and demand patterns; low profit margins; an average stockout rate of 1% to 2%; virtually no forced end-of-season markdown; and low product variety. A functional product requires a supply chain that delivers what Fisher calls a “physically efficient process,” one designed to “supply predictable demand efficiently at the lowest possible cost.”
And about innovative product groups,
But, said Fisher, innovative products like new computer systems, video entertainment products and some fashion trends (like jewelry) have unpredictable demand; an increased risk of shortages or excess supplies; a potential for higher profit margins; high product variety; an average stockout rate of 10% to 40%; and an average forced endof-season markdown of 10% to 25%. Innovative products require a “market-responsive process” supply chain, designed to “respond quickly to unpredictable demand in order to minimize stockouts, forced markdowns and obsolete inventory.”
I think this is a great way to achieve a broad classification of product groups for supply chains. In the past, supply chain professionals would rely on something like an A, B, C classification of products or some pareto classification which was based primarily on volume or margins provided which is really to think the supply chain through the lens of efficiency (in the case when volume is the primary consideration) or profitability (where margins or revenues based classification is undertaken). The above groupings of functional and innovative rely rather on product and demand characteristics and how that affects the supply chain directly. Great suff!
Towards the end of the topic, the authors highlight the difficulty that is encountered in dealing with uncertainty - specifically demand uncertainty. But the authors end on a cautionary note.
Which begs the question: Despite increasing attention paid to supply chains, why are very few firms successful at integrating processes and aligning incentives?
The more pertinent question to ask is why the meta-level principles of supply chain organization where it is more art than science has not so far gained as much traction as it should have. A supply chain consists of several interacting layers of technologies, people and processes and I think that’s where the problem lies - it is hard enough to wield these three interactions but how do you wield them in the face of uncertainty. That’s the real challenge.
Says BCG’s Gjaja: “My suspicion is that the complexity of product-based companies where supply chain is relevant is expanding at a faster rate than information technology can keep up with. By that, I mean that the number of products and different options and customers is expanding - say it’s 100 products times 100 customers times 100 different ways of getting there. You can see that you get this multiplied effect of complexity. The tools you have to deal with it can only evolve so quickly. It will always be a very difficult challenge - it’s one of those perennial issues in management, one of those evergreen topics that you just have to stay one step ahead of.”
I will end by disagreeing with the above view. While the possible solution space is rather large when it comes to structuring the supply chain, the kinds of optimization tools that I develop are designed to address these large solution spaces and show possible routes through a large solution space. However, even today, firms that I consult with are in the habit of freezing their supply chain designs on an annual basis and some even thinking 2-3 years out. I see that as an indication that a number of people have still not woken up to the notion of using a firm’s supply chain as a source of competitive advantage. And that’s why I love this field.
Tags: Optimal Supply Chain, BCG, Wharton, Supply Chain Strategy, Supply Chain Collaboration and Coordination, Sustainable Competitive Advantage, Supply Chain complexity, Globalization effects on Supply Chain
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