A Revolution in Supply Chain Management
Revolutionary innovations carry great promises; they capture the imagination and motivate people.
Manufacturing, procurement, distribution, and professionals in other supply chain functions are constantly looking for the next cutting edge.
But – how many innovations in supply chain management are truly revolutionary? How many have lived up to their expectations?
Most innovations in supply chain management reconfigure existing solutions and known methods and technologies rather than adding truly new knowledge or practice. Let’s understand why that is the case and what can be done about it.
Existing Approaches Show Diminishing Returns
Companies have invested millions of Euros in better forecasting techniques and systems, advanced planning and scheduling, various technology-based modernization initiatives (e. g., RFID). However, the results don’t come close to the original business cases. Forecast error is still a significant headache for many supply chain planners and managers. While advanced planning may have improved local asset utilization rates, service levels have not improved as expected. The product mix becomes increasingly complex in an attempt to provide mass-customized products. More and more, players in the supply chain acknowledge a “bi-modal” distribution of their inventory positions: too little of the right items (stock outs) and too much of the wrong items (overstocks).
Incremental change and improvement, labeled “continuous improvement” is common practice in most companies. This is definitely an important aspect of managerial practice. Such change allows a company to maintain its current position in a competitive market of similarly capable players. It is a sustaining innovation in Clay Christensen’s framework from his seminal work “The innovator’s dilemma”.
However, this leads to a critical question. In today’s buyers’ markets consumers and B-to-B-customers have more and more choice and expect shorter and shorter lead times; and more and more of these customers are ready to use their position in the market place to drive down prices and demand better service.
Given these conditions and an exceedingly volatile and complex environment, is incremental improvement still sufficient to secure the long-term survival of an actor in a supply chain?
We believe the answer is “no”.
Rather than looking for more sustaining innovations, companies must focus on disruptive innovation. While the product or service itself might be a good a place for such a change, there is another, even more powerful lever. Look for disruptive innovations in the dominant process design. While the supply chain does not actually alter the product or service, it can change the way how an existing offering is sourced, produced, and delivered. As supply chains are transforming from logistics operations focused on cost management and efficiency into dynamic business networks that facilitate swift (“agile”) responses to market changes and enable business growth, a new opportunity arises for innovative companies to build competitive advantage based on the delivery and market response processes.
A Different Look at Variability and how to tame it
A disruptive innovation takes current reality into account and applies new solutions to existing challenges. The key challenge in supply chain management is variability. What do customers want, how much do they want, when do they want it and where should it be delivered? This variability is passed through the supply chain and its amplification and accumulation is known as the bull whip effect. Small changes in demand or supply lead to huge distortions at other places in the chain.
There is only one way to really avoid this from happening: the decoupling of variability through the strategic selection of control points in the supply chain.
This is where a dynamic buffer stock absorbs variation from upstream (supply) and downstream (demand) sources. Compare this to traditional safety stock or re-order point systems that only account for uni-directional variability!
The next solution element must re-evaluate the role of forecasting. Forecasting is a powerful tool when it comes to medium to long term capacity planning, e. g., in a well designed sales and operations planning process. On the other hand forecasting is subject to variability as well. Even the most expensive and sophisticated forecasting engine and system can not overcome this variability. Forcing certainty on uncertain events is simply impossible. Instead use a “good enough” base and couple it with robust mechanisms to absorb variability and with agile mechanisms that allow to sense changes and then to quickly adapt.
A Robust Solution Leading to Step-Change in Performance
Is this a revolution, yes or no? The future will be the ultimate judge but the jumps in financial and operational improvement are significant. Take the case of a large and well known fast moving consumer goods company as an example. Years of effort and vast amounts of money invested in better processes, higher utilization, more sophisticated forecasting algorithms, and advanced planning systems had not helped… Then strategically placed robust buffers, together with a demand-sensing planning and execution mechanism (an approach called Demand Driven Material Requirements Planning or DDMR), helped cut lead times by over 80% and raise service levels to 99.7% with 45% less overall inventory. Customers, sales, supply chain and finance professionals see significant and sustainable performance improvements due to a small number of key changes in the dominant design of supply chain planning and execution. Some call this change revolutionary.