@ Supply Chain Management

SC Digest has an article by Dan Gilmore, editor, on Creating a “Living Supply Chain”, a concept put out by Dr. John Gattorna of the Sydney Business School (Australia) and Cranfield School of Management (UK).
So what is a living supply chain?

In part, because in the end, it isn’t driven by networks and assets and technology, but by people. Somehow, too many of us tend to lose sight of that. “The reality is that it is people who drive the supply chain, both inside and outside your business, not hard assets or technology,” Gattorna writes. “They are in fact living systems, propelled by humans and human behavior.”

Ok. This is also why management is an art and not a science, its why management consultants are paid mega bucks whether or not the strategies that they recommend are finally put into action or fall by the wayside. So what’s new about that?
Most of my recent posts about supply chain collaboration namely, REA, a semantic model for Internet supply chain collaboration and Using Prediction Markets for Collaboration deal with essentially how to structure one’s supply chain around people and ideas around this particular subject.
One of John’s key observations about a dimension of competitive advantage that is begging for exploitation is recounted below,

It is the failure to understand that human element, or indeed the lack any real body of knowledge in this area of supply chain, that is a major force in why some many strategies go unrealized, and many efforts at collaboration produce little value. Harnessing that dimension is the next and only real source of competitive advantage. “If you can understand and correctly apply a more enlightened approach to managing this ‘human factor’ in the supply chain, you’ll discover a primary source of performance improvement. It’s all there for the taking.”

While harnessing the power of people within the supply chain is not the only real source of competitive advantage but it is one of the important sources and should be tapped. Well, then the automatic question is – HOW?

So when you start thinking about improving your supply chain, remember the 45-45-10 rule: success is dependent 45% on people, 45% on systems (because they should help drive human decision-making) and just 10% infrastructure, says Gattorna.

While that may be true for supply chain success, I wonder what is the breakup for people-systems-infrastructure as far as the total supply chain costs are concerned – now, wouldn’t that make an interesting study?
Dan seems to agree about a basic point of supply chain network optimization which he recounts is,

I think that last point is true, however, once you’ve done some level of “network optimization,” as I agree with those who argue that a huge preponderance of a supply chain’s costs are locked-in based on your supply chain design.

However argues Gattorna essentially – what are you optimizing?

Ah, but supply chain design – now there’s the problem, according to Gattorna. The functional nature of how we organize are supply chains, and the misalignment both internally and with customer requirements is the root cause of excessive supply chain cost, supply chain complexity, and ultimately challenges in growing revenues and profitability.
Because of how we are organized, we often have literally hundreds of supply chains running through the business. The complexity of these many supply chains and “interfaces” between internal functions and external suppliers and customers in fact makes the true supply chain largely invisible even to those responsible for managing them. “Value is either created or destroyed through the management of these interfaces along the chain or network.”

I cannot agree more with this description because that’s what I have also discovered that while there is one supply chain management team within a firm, there are literally tens if not hundreds of supply chains running through a firm. What’s more, the firm’s characteristics changes as a supplier or a customer with respect to other firms on the basis of its ordering or fulfilling patterns which is to say that just as there are tens of supply chains, there are also tens of a firm when you look at the behavior of the firm within the supply chain. But there is only one supply chain management team. As you might have guessed – their behavior is likely to be in dissonance as a result. And merely designating the supply chain as living is hardly going to change that behavior – what you need is a supply chain psyhcologist or psychoanalyst.
The main point of the book according to Dan is the following:

Our strategies for customer segmentation, and how we align our supply chains with those segments, are all wrong.

And the solution,

The only right way to segment customers is by their buying behavior, of which there are generally only three or four main types (though customers can move between types over time or for a period of time). While many SCM pundits have discussed crafting differentiated supply chain strategies, Gattorna argues most have focused too heavily on either product characteristics or channel segments (e.g. retail, wholesale, industrial, etc.).

This is a point that I have referred to in an earlier post on Creating the Optimal Supply Chain – Review (Avoiding the Cost of Inefficiency: Coordination and Collaboration in Supply Chain Management). In that article, Fisher argued 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. The two product types that he identified were,

In the paper, he argued that products fall into one of two categories: primarily functional or primarily innovative.

And further clarifying,

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,

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.”

If you mapped the above two product classifications to the figure in the article Creating a “Living Supply Chain”, then essentially you split it into two vertical halves based on the predictability of demand. The “Living Supply Chain” goes one step ahead and integrates the dimension of supply chain collaboration into this product characteristics dimension.

I find this line of analysis to be very promising when it comes to structuring and implementing supply chains and will be on the lookout for the next installments of the “living supply chain”. Finally, Its alive, its alive, its alive…

HT: Randy Littleson @ Kinaxis blog

Tags: Living Supply Chains, Dr. John Gattorna, Dan Gilmore, SC Digest, Product Mix, Customer Segmentation, Creating the Optimal Supply Chain, SCOR