Were you expecting different results from your supply chain?

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In the last 30 years supply chains have been asked to take on a leading role as a facilitator for the proposed pull methodology, as needed to be more responsive to demands of the customer. This new and reactive supply chain would enable practitioners to quickly act upon demand signals and get products to the customer “just in time.” Since the pull model was already being practiced throughout the production segment of the business, proponents said it would easily transition into the distribution stream. Learned best practices could be moved, easily, from one side of the business to the other.

The problem that almost immediately cropped up was that a pull methodology did not align to all product strategies, due to the required customization needed for the pull process to work. A pull system had always required the customization to be considered acceptable to the consumer, otherwise the delay to get non-customized product was too long and unacceptable.

From this situation the supply chain developed the hybrid push/pull model to help mimic all of the required actions needed to deliver both standard products and custom products. This hybrid push/pull methodology is in place in just about every organization and provides the backbone to supply chain management to this day.

At issue, is that the methodology mimics the same problems the just in time (JIT) or Kanban systems developed in production…..it does not reduce costs so much as push the costs around. In the production model, the costs moved back to the vendor with such things as speed of delivery and increased inventory to anticipate unforeseen demand. The result was a 5-10 percent increase in the cost of doing business with a production JIT/Kanban system. In turn, the internal supply chain of a company did not have the capability of sloughing off costs to a vendor and simply moved costs around to different links in the chain.

At the same time these actions were taking place in the supply chain, organizations were in the process of installing enterprise resource planning (ERP) systems. The effect was to marry the two projects and the systems themselves were willing participants that allowed for silo’d efficiencies. The JIT/Kanban naturally created single locations of efficiencies and the ERP’s internal table system catered to the separation of locations for best results. This marriage of methodology and process developed an "island of efficiency" system where arc data is lacking to overcome the problems of normalized tables, but more importantly mimic'd the JIT/Kanban methods.

This ERP-based JIT/Kanban process is now in place just about everywhere, but inventories continue to climb. Inventories are out of balance, responsiveness is slow and any attempt to solve the problem either increases out of stocks on important products or creates more inventory than what was in place already. In short, costs are up and customer service is down. Even more at risk are when seemingly well-structured supply chains are being pushed to the limit by internal transfers and expedited shipments to create the illusion of efficiencies.

In the end the systems are being pushed to the brink by the reliance on archaic rules and the inability to view demand and cost across the network so that the network acts in concert.

What is the solution? We have seen how the system can be modernized by simply changing the way weeks of supply is validated to deliver a service level and how assigning unique “policies” to individual product/location combinations can take away huge inefficiencies and lead companies to find both reduced inventories AND increased revenues.

This journey has led us to a crossroads. Continue on with the ways of the past or embrace how optimization can transform the organization so it can finally be both responsive and efficient! We’ve seen where we’ve been….let’s see where we’re going.

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About Author

Bob Davis

Principal Industry Consultant

Bob Davis is a Principal Industry Consultant in the Supply Chain Management Solutions group at the SAS Institute. From 2000 to 2013 Davis was Principal Product Manager for SAS Inventory Optimization, Service Parts Optimization and Supply Chain Intelligence Center. Prior to joining SAS, Davis worked for over 20 years with Nestles and ConAgra in their Grocery Products Divisions. While at SAS Davis has helped SAS develop expertise in supply chain cost analysis in the fast moving consumer products industry, inventory optimization, service parts optimization and sales & operations planning. He is a recognized global expert in multi-echelon inventory and replenishment optimization. He has been featured as a speaker and writer on the topics of demand-driven supply chains and service chain processes. He has spoken at such conferences as the Council of Logistics Management, Logicon, BetterManagement Live and Frontline’s Supply Chain Week.

2 Comments

  1. Leo Sadovy

    The observation that inventories and costs have INCREASED within the entire channel considered as a whole is an important and perhaps unintuitive observation and conclusion that I do not think most of the siloed function/domain owners, such as finance, marketing or production, are aware of. A CFO watching only internal inventory levels, or production watching only lead times, or marketing watching only customer sat scores/retention rates, are missing the broader picture and problem. This diagnosis, and your eventual presciption, may lead to one of the most important transformations the production process has seen in years.

    • Bob Davis

      Over the years I have watched buyers battle the inefficiencies of inventory control with replenishment alerts, massive reports and a lot of guts! ERP system can't do full blown inventory optimization due to their table limitations. Yet, companies continue to use these systems thinking really fast answers are good answers. In the end, good optimized inventories doesn't always mean less cost of goods and less expedited shipments....in the majority of engagements I have been involved with the results are from increased market share and revenues. Once the supply chain quits battling itself good things happen!!

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