Executive Briefings

Supply Chain Optimization Is the Hardest Easy Thing You'll Ever Do

Perhaps you've seen the orange juice commercials in which a person working in the grove hands a carton of orange juice to a woman shopping in a grocery story - the ultimate in an efficient, one-step supply chain.  In this case, supply chain optimization is very easy.

Even if the supply chain becomes more complex, the basic parameters of a more efficient supply chain are well-known:  smaller lot sizes, cube out containers, minimize the number of touches, find the most direct routing, and contract for the right transportation capacity.  Finding lower-cost transportation and negotiating the right contract means you will save a lot of money and become a hero within your company.

Often, when companies think about supply chain optimization, they focus on these capability-led initiatives - lower-cost transportation, outsourced IT, and so forth.  While these kinds of initiatives save money and improve performance, the question becomes how do you take optimization efforts to the next level?

In practice, supply chains are seldom as simple as the mythical orange juice example.  There are several things that conspire against simple supply chains.

1. Stochastic demand.  "Stochastic" is just a fancy way of saying that demand is unpredictable.  Since the flow within the supply chain cannot adapt as quickly as demand, inventory accumulates at different points in the supply chain.  Inefficiencies begin to build.

2. Longer supply chains.  As production and consumption are separated by the search for better sourcing terms, more steps are introduced into the supply chain with the resulting effects on inventory buildup.

3. Differing capabilities of supply chain service providers.  Every supply chain provider has evolved differently based on where they were able to develop business.  Different specialties, geographic alignments, and so forth are all part of the different capabilities of each service provider.  As a result, no single service provider can service all the needs of a diverse and globally distributed supply chain.

4. Visibility.  Or more precisely, the lack of visibility.  Given the lack of horizontal  (the supply chain from end to end) and vertical visibility (across different service providers for similar functions), it becomes difficult to make decisions that will drive higher supply chain efficiencies.

This list could be expanded with other factors, but one conclusion becomes clear.  It's not the things that are known within the supply chain that cause challenges, but rather it is the unknown things.  Costs increase because uncertainty introduces additional costs.

Aberdeen reported the following:

Global competition and the increased complexity of global supply chains have led to increased lead-times and pipeline inventory (which includes inventory in transit and in temporary staging). This, in turn, has contributed to increased supply chain management costs. Reducing costs by driving down excessive inventory on hand has become a critical priority for companies in today's economy. But before a company can reduce pipeline inventory or landed cost, it needs to have visibility into them. Hence, improving supply chain visibility has become a key strategic imperative in managing today's integrated supply chain networks.

Visibility is typically defined as knowing "where's my stuff."  However, a more expansive view of inventory visibility is needed to achieve the full benefits of what companies seek.  For this purpose, visibility is defined as the information that will eliminate as much uncertainty as possible from the supply chain.  Knowing "where's my stuff" is one aspect of achieving visibility, but it doesn't address everything.

Following are characteristics of a complete supply chain visibility solution.

1. "Where's my stuff?"  Common messaging standards have helped companies enormously in this area.  Cost of providing this kind of visibility is still a concern for some companies, but most are providing some level of visibility as inventory moves through the supply chain.

2. Common standards for all partners.  No single partner can provide all the needs of a widely distributed supply chain.  If you have five partners in a supply chain, chances are you have five different application platforms and ways of doing business.  Creating a single standard for reporting and measurement will make it possible to get a single unified view of the supply chain, and to make sure all partners are performing well.

3. Demand Forecasts.  Believability is the key aspect of a demand forecast.  Suppose there were a 100-percent accurate demand forecast?  The entire supply chain would perform better, fill rates would be higher and so forth.  Zero-percent confidence in the forecast makes it worthless.  Every company exists somewhere between these two extremes.

Going from Easy to Hard

Keep in mind that the demand forecast will include the manifest demand in addition to the built-for-stock demand (planned demand).  Demand planning has been defined as aligning an organization to an expected level of demand, and demand management has been defined as the set of activities used to maximize profit associated with the resulting inventory.  These are key tools in supply chain optimization.   These two tools can be used to help smooth the flow of inventory through the supply chain which is a key requirement for supply chain optimization.

Were demand forecasts 100-percent accurate, the exact amount of transportation and warehouse capacity would be available, and inventory handling would be right-sized to demand.  However, things don't always work out the way one expects.  Demand planning and management are tools in smoothing flow, and ultimately maximizing supply chain performance from manufacturing to consumption.

A transportation planning system can look at different ways to build shipments and move them source to destination.  These tools often use sophisticated mathematical models that, assuming they are given the right set of data, are able to help people make better decisions than they could make themselves.  While there are tools that help plan the acquisition of transportation capacity, in this context they are essentially short-term planning tools that have a time horizon of a few hours to a few days.

The fundamental focus of outsourcing partners is process optimization, usually for operations that are not competitive differentiators.  While these operations must be done well, they don't result in something that would support a higher price.  For most companies, warehousing is such a function. If it doesn't make a pricing difference to customers, then the function is a candidate for outsourcing.

Cloud computing has gotten a lot of press lately, much as RFID has had previously.  When making a decision on whether cloud computing is right for a company, consider what one hopes to achieve.  While it is laudable to avoid an infrastructure investment, it still does not answer the fundamental question, which is what is the desired outcome?  Salesforce.com is successful not because their software is deployed in a cloud per se but because of the functionality of the application itself and that they can deliver functionality on a metered (operating) versus infrastructure (capital) basis.

The point above regarding cloud computing really leads to the larger point regarding the hard part of supply chain optimization: how are all the underlying tools harmonized to achieve better visibility that will allow operators to make better decisions to maintain supply chain flow, maximize utilization, and achieve higher overall profitability?  Were it easy, companies would have already done it, especially in this economic environment.  It is a testament to the difficulty of these issues, and trade-offs that must be made, that they remain unsolved.

Are Consultants the Answer?

It would be self-serving to say that consultants are the only way to cut through this Gordian knot.  However, what is really needed is focus - a focused effort by practitioners at companies to address these issues in a systemic way.  It also requires focus from senior management, as this type of a program impacts on a company's current operations and political centers of power.

However you choose to cut the knot, the important thing to remember is that it's worth it.  While supply chain professionals will always be vigilant on things like transportation contracts and warehouse operations, it is the synergies across these functions that make it possible to optimize supply chains that have a measurable impact on both the top and bottom line.  Create a credible and data-driven business case and you'll be able to make a real and lasting impact on your company.

DePew can be reached at tom.depew@hasemanassociates.com.

Source: Haseman Associates

Perhaps you've seen the orange juice commercials in which a person working in the grove hands a carton of orange juice to a woman shopping in a grocery story - the ultimate in an efficient, one-step supply chain.  In this case, supply chain optimization is very easy.

Even if the supply chain becomes more complex, the basic parameters of a more efficient supply chain are well-known:  smaller lot sizes, cube out containers, minimize the number of touches, find the most direct routing, and contract for the right transportation capacity.  Finding lower-cost transportation and negotiating the right contract means you will save a lot of money and become a hero within your company.

Often, when companies think about supply chain optimization, they focus on these capability-led initiatives - lower-cost transportation, outsourced IT, and so forth.  While these kinds of initiatives save money and improve performance, the question becomes how do you take optimization efforts to the next level?

In practice, supply chains are seldom as simple as the mythical orange juice example.  There are several things that conspire against simple supply chains.

1. Stochastic demand.  "Stochastic" is just a fancy way of saying that demand is unpredictable.  Since the flow within the supply chain cannot adapt as quickly as demand, inventory accumulates at different points in the supply chain.  Inefficiencies begin to build.

2. Longer supply chains.  As production and consumption are separated by the search for better sourcing terms, more steps are introduced into the supply chain with the resulting effects on inventory buildup.

3. Differing capabilities of supply chain service providers.  Every supply chain provider has evolved differently based on where they were able to develop business.  Different specialties, geographic alignments, and so forth are all part of the different capabilities of each service provider.  As a result, no single service provider can service all the needs of a diverse and globally distributed supply chain.

4. Visibility.  Or more precisely, the lack of visibility.  Given the lack of horizontal  (the supply chain from end to end) and vertical visibility (across different service providers for similar functions), it becomes difficult to make decisions that will drive higher supply chain efficiencies.

This list could be expanded with other factors, but one conclusion becomes clear.  It's not the things that are known within the supply chain that cause challenges, but rather it is the unknown things.  Costs increase because uncertainty introduces additional costs.

Aberdeen reported the following:

Global competition and the increased complexity of global supply chains have led to increased lead-times and pipeline inventory (which includes inventory in transit and in temporary staging). This, in turn, has contributed to increased supply chain management costs. Reducing costs by driving down excessive inventory on hand has become a critical priority for companies in today's economy. But before a company can reduce pipeline inventory or landed cost, it needs to have visibility into them. Hence, improving supply chain visibility has become a key strategic imperative in managing today's integrated supply chain networks.

Visibility is typically defined as knowing "where's my stuff."  However, a more expansive view of inventory visibility is needed to achieve the full benefits of what companies seek.  For this purpose, visibility is defined as the information that will eliminate as much uncertainty as possible from the supply chain.  Knowing "where's my stuff" is one aspect of achieving visibility, but it doesn't address everything.

Following are characteristics of a complete supply chain visibility solution.

1. "Where's my stuff?"  Common messaging standards have helped companies enormously in this area.  Cost of providing this kind of visibility is still a concern for some companies, but most are providing some level of visibility as inventory moves through the supply chain.

2. Common standards for all partners.  No single partner can provide all the needs of a widely distributed supply chain.  If you have five partners in a supply chain, chances are you have five different application platforms and ways of doing business.  Creating a single standard for reporting and measurement will make it possible to get a single unified view of the supply chain, and to make sure all partners are performing well.

3. Demand Forecasts.  Believability is the key aspect of a demand forecast.  Suppose there were a 100-percent accurate demand forecast?  The entire supply chain would perform better, fill rates would be higher and so forth.  Zero-percent confidence in the forecast makes it worthless.  Every company exists somewhere between these two extremes.

Going from Easy to Hard

Keep in mind that the demand forecast will include the manifest demand in addition to the built-for-stock demand (planned demand).  Demand planning has been defined as aligning an organization to an expected level of demand, and demand management has been defined as the set of activities used to maximize profit associated with the resulting inventory.  These are key tools in supply chain optimization.   These two tools can be used to help smooth the flow of inventory through the supply chain which is a key requirement for supply chain optimization.

Were demand forecasts 100-percent accurate, the exact amount of transportation and warehouse capacity would be available, and inventory handling would be right-sized to demand.  However, things don't always work out the way one expects.  Demand planning and management are tools in smoothing flow, and ultimately maximizing supply chain performance from manufacturing to consumption.

A transportation planning system can look at different ways to build shipments and move them source to destination.  These tools often use sophisticated mathematical models that, assuming they are given the right set of data, are able to help people make better decisions than they could make themselves.  While there are tools that help plan the acquisition of transportation capacity, in this context they are essentially short-term planning tools that have a time horizon of a few hours to a few days.

The fundamental focus of outsourcing partners is process optimization, usually for operations that are not competitive differentiators.  While these operations must be done well, they don't result in something that would support a higher price.  For most companies, warehousing is such a function. If it doesn't make a pricing difference to customers, then the function is a candidate for outsourcing.

Cloud computing has gotten a lot of press lately, much as RFID has had previously.  When making a decision on whether cloud computing is right for a company, consider what one hopes to achieve.  While it is laudable to avoid an infrastructure investment, it still does not answer the fundamental question, which is what is the desired outcome?  Salesforce.com is successful not because their software is deployed in a cloud per se but because of the functionality of the application itself and that they can deliver functionality on a metered (operating) versus infrastructure (capital) basis.

The point above regarding cloud computing really leads to the larger point regarding the hard part of supply chain optimization: how are all the underlying tools harmonized to achieve better visibility that will allow operators to make better decisions to maintain supply chain flow, maximize utilization, and achieve higher overall profitability?  Were it easy, companies would have already done it, especially in this economic environment.  It is a testament to the difficulty of these issues, and trade-offs that must be made, that they remain unsolved.

Are Consultants the Answer?

It would be self-serving to say that consultants are the only way to cut through this Gordian knot.  However, what is really needed is focus - a focused effort by practitioners at companies to address these issues in a systemic way.  It also requires focus from senior management, as this type of a program impacts on a company's current operations and political centers of power.

However you choose to cut the knot, the important thing to remember is that it's worth it.  While supply chain professionals will always be vigilant on things like transportation contracts and warehouse operations, it is the synergies across these functions that make it possible to optimize supply chains that have a measurable impact on both the top and bottom line.  Create a credible and data-driven business case and you'll be able to make a real and lasting impact on your company.

DePew can be reached at tom.depew@hasemanassociates.com.

Source: Haseman Associates