Supply Chain. The bare essence.

When you search through Amazon on "Supply Chain" today you will get 231.813 hits. Probably tomorrow, it will be more. 

The question is what is the relevance and essence of this enormous pile of books?

The objective of supply chain management is simple: "maximum service level with minimum expenses and minimum capital employed" 

In reality this objective triggers a dilemma:

Supply Chain Cloud.jpg

Most companies got stuck in the middle in solving this dilemma. They do invest to some extent, but not enough to reach full customer satisfaction. They end up with inventory redundancy and too high operating expenses to be truly competitive in an operational sense without reaching full service. This is important, because nowadays in order to be competitive a company needs to be efficient and effective at the same time. The time of high service for high prices is over.

Thousands and thousands of companies in the World still suffer from this sub-optimization of their processes. There is a solution to this problem. We have implemented it many times.

The essence of any supply chain improvement process can be captured in 1 word. It is postponement. It is the contrary of how most supply chains are managed.

Most supply chains are forecast driven to some extent and products are pushed through the supply chain towards lower links in the supply chain as soon as possible. Actually there are three reasons for this:

  1. Because supply chain managers are measured on cost-per-unit- they have a tendency to increase batches and minimum order quantities. This stretches lead times and increases volatility of demand and processes.
  2. In the process of globalization of trade we need to overcome physical transportation distances. This is part of the lead time.
  3. The commercial team is measured on invoiced revenue. When inventory moves from one link to the other an invoice is sent with the shipment. We call that revenue despite that fact that this shipment has not necessarily any correlation with actual end-consumer demand. It can be a shipment from manufacturing to importer, which is probably based on a forecast.

So many supply chains are structured to push inventory towards to lowest level of the supply chain, just before the end user (usually retail). In consequence inventory ends up at locations where there is no demand. Forecasts are never 100% reliable. That's how we end up with redundant inventory and lost sales at the same time. The right product is not available and the product on stock does not move fast enough.

Postponement does the opposite. The inventory is aggregated on a high level in the supply chain until the actual demand is known (not 'gestimated'). Only a 'minimum shelf display' is made available at retail level in order to make sure the product can be displayed to customers. All other buffers (necessary to overcome transportation lead time) are centralized on a level where they can service a large geographical area in order to maximize stock turn and stay flexible in where to ship the product to. Product stays on a central level 'as long as possible', that is why it is called postponement. It's also called a 'pull-supply chain'; the product is pulled through the supply chain at the pace of actual end-user demand.

In order to implement a pull supply chain successfully 5 measures need to be in place:

  1. Lead time needs to be minimized. This enables aggregation of inventory and flexibility.
  2. Minimum order quantities need to be minimized. This minimizes process volatility.
  3. Inventory needs to be aggregated. This gives the flexibility to ship the product to the location of actual demand at the right moment in time.
  4. Software that makes the entire supply chain transparent so that all links in the supply chain can respond to actual demand on end-user level.
  5. All links in the supply chain need to implement cash driven performance indicators that show the lost cash caused by inventory redundancy and lost sales on end user level. This is a very effective way to make sure that all links and departments work together in harmony.

The biggest shift in thinking is to abandon the current key-metric, cost-per-unit. The integrated cost-price concept was first used a long time ago. It may have been applicable in these days, but in the mean time it has been proven counter-productive. It triggers batching, process volatility, resource redundancy and out-of-stock. Operating expenses are very relevant, but they should be measured on a tactical level as a percentage of revenue or gross margin, not on an operational level per unit. 

August 2014 | Version 1.0 by Yohyon van Zantwijk


Yohyon van Zantwijk