12 March 2012

The biggest supply chain management mistake over the last 30 years?

I would have to say that the biggest mistake made in SCM over the last 30 (or more) years is the industry’s reliance upon forecasting.

  1. Forecasts are virtually always wrong. They may be wrong by a little bit, or they may be wrong by a lot. But they are--for all practical purposes--always wrong. The forecast may be wrong and you have too much inventory--which your firm may call "good' ("Great job! We didn't have an out-of-stock.") or it may call it "bad" ("Hey! Wake up! We are holding too much inventory!"). The forecast may also be wrong and you have too little inventory, which (again) management may call either "good" ("Great job! We sold out of that!") or "bad" ("Hey! Wake up! We lost sales on that because we ran out of stock!").
  2. Forecasts only lead to one of two conditions: over-stocks and out-of-stocks.
  3. Forecasts offer no assurances of being responsive to the market.

Personally, I believe that if the industry had spent as much time, effort and money on increasing replenishment frequency (reducing lead-time), improving supply chain visibility (end-to-end), making inventory management more agile (providing rapid response to changes in end-user demand) and better understanding and management of sudden demand changes (seasonality and similar events) there'd be a more sales, lower prices, reduced obsolescence and happier supply chain managers everywhere today.

Replenishment frequency

Both Lean and Theory of Constraints management have certainly taught us that replenishment cycles should be as short as possible. One-for-one replenishment is ideal. But short of that, daily is better than weekly; weekly is better than every two weeks; and so forth. When the costs of obsolescence, lost sales, lost customers (due to lost sales), marketing costs required to recover for lost customers, and the many other costs associated with out-of-stocks (on the most popular times) and over-stocks (on the "dogs") if find it hard to believe that most organizations would not perform better with more agile suppliers and logistics even if the so-called "cost of goods" might be marginally higher. Correct valuation of Throughput certainly should teach us that lesson in many, many cases.

End-to-end supply chain visibility

One of the things wrong with today's supply chain is that the manufacturers actually believe that they have made a "sale" when then they sell the product to the distributor. In turn, the distributors believe that they have made a sale when they unload some product on a wholesaler--and so forth on down the supply chain.

The truth is, until the end-user has made a purchase, all the other "sales" have simply put inventory into the supply chain. Inventory that will become obsolete or eat demand for newly-introduced products when liquidated at "discounted" prices. Either way, it's bad for profits in the supply chain.

Imagine how much better it would be if the manufacture (in Malaysia, or wherever) knew within 24 hours precisely how many finished goods were being purchased by end-users every single day. They would know how to pace their production and manage their inventory buffers--as would everyone else in the supply chain!

Inventory management agility

Instead of setting inventory policy once a year, or even several times a year, systems should dynamically adjust for changes in demand (via supply chain visibility) constantly. And, instead of complexity and hard-to-understand formulas, inventory managers should be able to respond to simple visual signals indicating the condition of inventory in their direct control--as well as signals coming from across the supply chain.

Managing sudden demand changes

Supply chain systems should be able to rapidly analyze historical data and identify SDC (sudden demand change) items by simple rules. The systems should then help the supply chain managers understand how to manage build-ups and build-downs for SDC items based on the supply chain production capacities for each item or group of items.

Personally, I think time, energy and money spent in these areas--some of which is now happening--would do a "world" of good (pun intended).

What do you think?

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