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Healthy paranoia drives investment in supply management – Part 1

Global Logistics & Supply Chain Strategies Magazine (online version) has an article in their recent edition on Investment in Supply Management. The article was authored by Jean V. Murphy.
The lead-in into the article reads,

With the growth in offshore sourcing and manufacturing, supply lines have become longer, more complex and more vulnerable to disruptions. Concerned companies are meeting this challenge with a disciplined approach to supply management.

While in the past (or even today), supply chains experienced bullwhip effects on a local or regional level. Several factors contributing to the bullwhip effect are summarized below:
* Forecast Errors
* Lead Time Variability
* Batch Ordering
* Price Fluctuations
* Product Promotions
* Inflated Orders
Now imagine that the scenario confronting supply chain managers in a global context. Will there be a global bullwhip effect? Maybe yes and maybe no. If you looked at the contrinbuting factors above, all of the above factors exist in the global supply chain but because of a larger lead time (not Lead time variability which is also a factor), the effects are either going to be highly exacerbated or well damped.
Perhaps, highly exacerbated effect is easy to imagine because multiple orders to cover non-existent demand would quickly spiral out of control given longer lead times. However, there is also the possibility that one might find a well-damped effect. The volumes of inventory that have to be maintained are going to be quite large at all points in the supply chain and this serves as a buffer in the system.
If you’ve had the opportunity to play the beer game and had a situation wherein a particular node in the game had a lot of inventory at some point early in the game, that node would buffer the upstream nodes from the imaginary demand occuring in the supply chain.


The article begins by recounting that

Supplier quality, reliability and performance are increasingly critical for companies under constant pressure to both innovate and reduce costs through method like lean logistics and offshore sourcing.

Lean logistics and offshore sourcing? Is this like saying “You can use this” and “You can’t use this” at the same time for the same goal. No, not really but it could appear that way.
Offshore sourcing is easy to define – its finding, making, manufacturing or procuring raw materials or finished goods overseas.
So what is Lean Logistics? As the linked article makes clear,

Supply chains are meant to pull, not push, inventory through the supply chain. This is exactly what lean logistics is also about-removing waste and variation from supply chains; it is what Kanban, Pull, is about with Lean Logistics.

Now, imagine a kanban across the seas. Is it even possible? Here’s what a global lean logistics program entails – see what it entails:

Lean Logistics has many challenges. Global Lean Logistics especially has the challenge of the additional time required for shipments to move door-to-door over the long distance. In addition, there are many parties involved with each shipment. Some reports say that up to seventeen parties can be involved with one shipment-suppliers, truckers, freight forwarders, terminals, customs brokers, railroads, ocean/air carriers and more. Bringing lean across such an extended, multi-transactional supply chain is daunting. Often the parties are working together and at odds with each purchase order/shipping transaction.

The answer has to be is that it is possible but is it Lean? One definition of Lean is that it is the deliberate elimination or reduction of waste in a system. Another definition of Lean is that it is all about flow (of materials, goods, information etc) – increase in flow or speed of the process. The situation with Global Lean Logistics is that it is fraught with what can be charitably called discontinuous flow spread out over multiple agents and over a long lead time. It is possible to stretch a definition i.e. Global Lean Logistics over such a system but in the end one must ask – Is it Lean?
Sudy Bharadwaj, VP and Research Director at Aberdeen Group recounts,

“Best-in-class companies are more than worried, they are paranoid”

And further,

“Their paranoia is well-founded. Pressurs to reduce inventories leave many companies in all industries with only enough inventory for a relatively short period of time.

Furthermore, Sudy notes,

“These proactive, best-of-class companies met customer requested ship dates an average of 90% of the time vs. 40% for lower performers. And they achieved this service level while reducing inventory by 39%, compared with a 22% reduction for average and laggard companies.”

Something doesn’t seem right – it looks like a free lunch can be had after all. But perhaps I am assuming things that aren’t being proposed here at all. My first question is – reduction in inventories by best-of-class companies by 39% with respect to what timeframe? The last year? The year before global procurement/manufacturing went live?
If anything it seems to me that Sudy is arguing that inventories that have been bloated up because of global sourcing/manufacturing have been cut by more than a third. Firstly, that means that firms have been cutting the fat out of their system but also affecting the unit cost (the accounting way of seeing things) by driving it up.
My second question – They did this while keeping service levels at 90%? So, while they had one third more inventory than they needed in the first place, what was their service level? It is well known that you can cut down the inventory in your system if you’re willing to tradeoff the service level required for the customer – so the question naturally arises, what was the service level before the inventory cutting went into effect. Like I said, something just doesn’t seem right.
Nevertheless, the Aberdeen study cites the following essential ingredients of effective supplier management:

Visibility and performance measurement as two essential ingredients of effective supplier management
An understanding of the total costs of doing business with a supplier and supplier collaboration

And among the technologies cited as key to the above capabilities:

Supplier enablement
Supplier portals

Next, Jean reports on the results of an Accenture survey of global procurement executives,

Companies that get supplier relationship management right can typically realize an additional 2 percent to 3 percent savings over and above the 8 percent to 10 percent they would get from typical strategic sourcing.

Further,

Additional savings comes from post-contract activities such as contract compliance, supplier measurement and joint process improvement.

Randall Moore, an Accenture partner identifies four things that companies need to do well in order to have a high performing SRM program. They are:

1. Segment suppliers and identify those who should be integrated into the firm’s supply chain
2. Strong contract management capability
3. Supplier performance measurement
4. Integration and collaboration

An important observation by Jean is that SRM (Supplier Relationship Management) has an uncertain home within a firm and is addressed differently by different SCM software providers such as i2

believes SRM is a core part of supply chain management, for example, but its slution set has some PLM-type capabilities as well.

In the next part I will focus on supplier management and supplier networks and the steps that firms have been taking to structure their relationships vis a vis their suppliers.

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Category: Strategy, Supply Chain Management

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One Response

  1. Yes in Transportation and Trucking Industry are many competitions and many challenges. In this type of market the Provide the quality services and also create own market

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