I had the opportunity to interview an award-winning, fast-moving, consumer packaged goods (CPG) company in the early 2000’s. They were recognized as one of the best supply chain companies in the United States by all of the major retailers and their CPG peers. Indeed, it seemed every time a new award was developed this company or one of its executives would take home the honors.
Imagine my surprise when I found out that there was a very ugly secret in that supply chain. For every filled order at the retailer level there were massive numbers of lateral shipments between upstream, internal warehouses to get the needed product to the proper location. Any profitability generated by those complete orders were quickly being gobbled up by misplaced inventories. What had happened was this company’s forecast was telling them that they had geographical shifts in demand, but their production efficiencies and management team would not let them change the way they did business.
Why do I bring this up?
It’s because this company decided to ignore one of the three tenants of a successful supply chain!
The three tenets:
- Efficient: Achieving maximum productivity with minimum wasted effort or expense.
In a supply chain this is the “inward looking” aspect. You are measuring the efficiency of your system against known KPI’s like “days of supply”, “cycle time”, etc. Most supply chain organizations have this basic tenant in mind when they think of how “good” they are.
- Effective: Successful in producing a desired or intended result.
In this area supply chains take an “outward looking” view. You have a service level agreement or a fill rate requirement that needs to be maintained. Your supply chain needs to deliver something and the recipient’s satisfaction is the focal point.
- Agile: Ability to move quickly and easily.
Customer demand is constantly changing and the ability to shift direction is paramount to being agile. First, you see the change happening via the outward vision found in being effective. Secondly, you shift the inwardly focused KPI’s to adapt to the change.
In the case of our intrepid CPG company the executive team was totally focused on being effective, but refused to change the way they did business. The result was the breakdown of the cross functional teams and getting product to the final customer took priority over everything else. It, finally, took the cost accountants to raise the issue with management when the internal transfer costs were tallied up for the year.
When people ask me what supply chain excellence looks like I tend to use the three tenets to ask these two questions.
- If you sensed a complete shift in demand how long would it take management to recognize the shift and act upon it…how agile are you?
- If the shift is recognized what would be the most difficult measurement to change…efficiency or effectiveness?
What happens is the management team gets hung up in debating the efficiency/effectiveness question when they should have been more inclined to think how long it took for them to recognize the change!
Supply chains are a reactionary process to management direction. Not the other way around. Recognizing change requires the ability to forecast with accuracy and confidence and have management review and respond quickly. This is critical.
I run into the “demand sensing” question all the time as this seems to be the hot marketing topic in the industry, but in reality I always say "sensing" boils down to the ability to have “really good headlights on a dark country road”. You have to have a management team that is willing to accept the change when it presents itself. This is the realm of a good sales and operations planning (S&OP) process. It requires senior leaders to be involved and engaged. Once management becomes “professionally agile” and engaged in the S&OP process the supply chain and its people can adapt to via the shifting of efficiency and effectiveness goals.