Everyone wants to be efficient. Everyone wants to do a good job. And yet, inefficiency abounds.
Islands of efficiency are set up when individual goals of a person or location override the efficiency of the whole network. In the "intended island of efficiency" each person or persons, working in their little link in the chain, think of themselves as pulling their own weight and effectively moving product to the final customer facing location.
What happens when there are barriers set up in technology that short circuit the very best of human intentions and turn “little links in the chain” into what could best be described as inventory “elephants on parade”? Each chain link looks efficient, but when looked at as a whole, the supply chain takes on the appearance of bloated elephants. Each elephant is holding onto the tail of the one in front and blindly following the lead.
More importantly, the further you get away from the initial customer demand the more bloated the inventory gets! What would cause efficient links to turn into an inefficient chain? In almost every occurrence it is a combination of technological shortcomings and human nature trying to correct it and in most cases all that happened was bad decisions are simply made faster.
An "unintended island of efficiency" is created when
- The downstream demand has been accumulated and presented as an aggregated total.
- There is a delay in the initial demand from the original customer.
- Your service level need is an average.
- The upstream supply will expected to be at a 100% service level.
These four issues have created massive problems for companies as they try to move to a more demand-driven supply model. During the period from 1995 to 2005 companies used their newly purchased ERP systems to help counter the problems encountered with supply chain issues. In turn, when it was found that new and better processes needed to be put in place SCM systems continued to build out functionality. The efforts to overcome these inventory problems were most often focused on the great equalizer of out-of -balance inventories: Super sizing the replenishment system with better and better transactional rigor.
In hindsight, were we just making a better and better bandage? The focus might have been better spent looking at why the inventories were out of balance in the first place.
Companies have trouble with supply chains because the chains are based on making each link efficient without a broad and comprehensive view of the total network. In this environment the links in the chain try to slough off costs onto neighboring links or islands. This is one of the key reasons you see supply chain efficiency projects fail over time.
For instance, I once visited a major grocery vendor who was touted as a supply chain visionary. They had won awards for their customer service among all of the major retailers in the US. However, upon looking just below the surface one could see massive expenditures for inter-warehouse transfers to support the high service level requirements. Any increase in sales was quickly gobbled up by increased costs of goods and logistics. What could they have accomplished if the different departments/islands had worked more closely to eliminate costs instead of unwittingly just shifting the costs around?
Erik Kruse's research that was published in his article “From Push to Pull – Perfecting the Means,” September 4, 2003 shows that this individual focus at the expense of the whole has not made supply chains more efficient....they have actually added up to 30 percent more in costs of doing business.
The goal of each company should be to eliminate the the four pitfalls that lead to unintended islands of inefficiencies. These pitfalls are due to cutting the visibility between links in the chain or islands. When each link of a chain is measured as a whole and complete network the cost shifting is slowed and or eliminate.
