SCM30: What Can We Learn From Supply Chain Management Mistakes?

RayKaraffa

Welcome to the first blog post in the SCM30 series. Throughout 2012, Kinaxis will be exploring the past 30 years—as well as the future—of supply chain management. Though supply chain management concepts have been in practice since the turn of the last century, it is widely agreed that the term was created by Keith Oliver in 1982—you’ll find more details on that in the post below.

SCM30

 

Watch for the SCM30 posts on alternating Fridays over the next few months. These blog posts will be fueled by conversations on the Supply Chain Expert Community discussion forum. Look for the next discussion to start there on Monday, March 26.

This blog article is the result of a compilation of shared insights and observations of experienced practitioners in the supply chain management field. This author regrets that all of the insights could not be published in order to maintain the brevity of this article. The full contributions can be viewed here.

2012 marks the 30th anniversary of the term “Supply Chain Management.” Keith Oliver, as a consultant with Booz Allen Hamilton, coined the term in 1982. The following is his definition as explained by SupplyChainRecruit.com:

Supply chain management as a concept has been widely accredited to a Booz Allen consultant named Keith Oliver who, in 1982, defined the concept as follows: “Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.”

SCM as defined by Keith Oliver could be construed as Macro Supply Chain Management (Macro-SCM), since it involves the global network processes from the initial raw materials to the ultimate consumption of the finished product linking across supplier-user companies. These functions lie within and outside a company that enable the value chain to make products and provide services to a customer.

Micro Supply Chain Management (Micro-SCM) could then be construed as the non-global activities concerned with planning and controlling the rates of purchasing, production, distribution and related capacity resources to achieve targeted customer service levels within a company. This could be a replacement for the old term of Production and Inventory Management since it is now included within the broad definition of SCM.

Micro-SCM would then also be involved with the body of knowledge relating to the evolutionary progression of Material Requirements Planning (MRP), Manufacturing Resource Planning (MRPII) and Enterprise Resources Planning (ERP). This body of knowledge began back in 1957 when 20 production control managers met in Cleveland, Ohio, to form the American Production and Inventory Control Society (APICS), which is currently referred to as the Association for Operations Management.

Keith Oliver along with Tim Laseter, the co-author of “When Will Supply Chain Management Grow Up?” in the Fall 2003 issue of strategy + business, had a few ideas of their own regarding mistakes made in SCM and their suggested solutions.

The first mistake discussed was the reliance on forecasting. Forecasts are just guesses and are usually wrong. They have a major result on inventory. The resulting inventory could be thought of as good (you are not out of stock) or bad (you have way too much inventory).

In the case of the forecast being wrong, there could be good and bad consequences also: good (we sold out) and bad (lost sales due to out of stock).

Forecasts, since they are merely guesses, require constant vigilance and adjustment to history in order to keep the stock-out wolf away from your door. The good thing about MRP is that you don’t have to guess on every part number like you do with the classic order point formula. MRP has product structure, therefore, you only have to guess at the independent demand level and MRP will derive the rest of the forecast changes from the product structure. This makes it easier to adjust your forecast to current history.

Replenishment frequency was the next mistake discussed. Both Lean and the Theory of Constraints taught us that the replenishment cycles should be as short as possible. That means that one-for-one replenishment is ideal.

We always “talk the talk” of Lean, but seldom “walk the walk” of Lean. Once you leave the Lean seminars and walk out onto the shop floor, you can talk with planners who are not following good Lean MRP principles.

This author believes MRP facilitates Lean very well through the use of discrete, lot-for-lot order quantities with true and accurate lead times. I have seen it and I have done it. All too often, planners join in the mass hysteria of ordering lots and lots of material and parts in fear of stock-out situations.

They also over-inflate lead times in an effort to give suppliers and the shop floor more time to deliver on time. This artificial inflation of lead times in an MRP planning environment only releases orders earlier than needed into sometimes an already overloaded shop floor supplier base.

What we need to do is build the integrity back into the MRP system by following good MRP principles and cutting lead times to the bone and ordering discretely in a lot for lot to achieve Lean manufacturing. Lean manufacturing doesn’t have to be limited to manual kanbans. It can be achieved through the use of sound MRP principles.

Inventory management agility, or lack thereof, is another suggested SCM shortfall. Systems should dynamically adjust for changes in demand via supply chain visibility constantly. Our Kinaxis RapidResponse Control Tower concept would facilitate this functionality.

Inventory managers should be able to respond to simple visual signals indicating the condition of the inventory. Here again, RapidResponse, with its widget capability, could supply managers with tablet inventory graphics beginning at version 11.0.

Systems should be able to rapidly analyze historical data and identify sudden demand changes by simple rules. Our RapidResponse alerts functionality would solve this requirement nicely.

The move toward the outsourcing model in the mid-90s appears to be another major SCM mistake. Determining where to place the manufacturing base has been a constant headache for supply chain managers. The cost base often persuaded these decisions, superseding issues in relation to geography, lead times, time zones, language, market placement, logistics and distribution.

Supply chain people are expert in global management of the product manufacturing movement and less inclined to factor cost. Speed is of the essence. Finance people approach from a balance sheet perspective.

Distance is the main dilemma. How long will it take to move material from one end of the globe to the other, which adds to the lead time of the delivery of the product? Freight charges become a massive headache and an additional ten days can be added for freight lead time. Sea freight is slow.

Expediting costs are unmanageable and are being employed far too often, decimating product margin. Material backlogged in international hubs is awaiting paperwork and duty payments specific to the region.

There are difficulties of trying to run a production line remotely, in a different time zone and off your ERP system where visibility is non-existent. In the United States, the informal system of shortage meetings and hot lists are the actual way things get shipped anywhere close to on time. A lot of companies are finding it next to impossible to run a world-wide shortage meeting to get the job done. These meetings and hot lists work somewhat better locally than halfway around the world.

Inventory costs have increased exponentially through a developed hub system housing geographical locations to reduce lead times and enable faster reaction to changes in customer demand.

The end result of all of this was a lower manufacturing cost base on paper, designed to increase margin but in reality the supply chain had to scramble to react to this decision.

When you look at the Kinaxis RapidResponse Control Tower concept, you can realize that this new approach would have avoided this dilemma 15 years ago.

Another major SCM problem appears to be a constant shift to whatever seems easier instead of focusing on the hard and prolonged work of changing processes and corporate culture. How many times have we heard of companies only implementing partial modules of an ERP solution? The reason is always that the rest of the solution “just doesn’t fit our business. We’re unique and we don’t want to change our processes.” This results in disparate system silos.

We have to move our companies away from departmental system silos and work to a single version of the truth. I’ve been searching for a way to convey this in some of my blog articles for some time now, and it really came to me after watching a video posted on SuppyChainBrain.com. In this video entitled The Control Tower: Breaking Down Enterprise Barriers!, Kinaxis CEO, Doug Colbeth describes tying together all parts of the enterprise and eliminating silos. He describes the Control Tower as a single platform with a single version of the truth. No silos.

Again, in order to limit the length of this blog article, I couldn’t post all of the suggested insights from the online discussion, but if you are interested in reading more on this topic, the full contributions can be viewed here.

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