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What is wrong with Supply “Chain” Management?
By
Keith Launchbury, CFPIM, CIRM, CSCP,CDDP
The term “Supply Chain Management” was first coined during the first World War to
refer to the process of supplying armies with the materials that they needed to fight
battles. In those days it was a relatively simple matter of trying to protect the
supply lines from attacks by enemies. Supply lines were linear, materials flowed in
one direction only, and the concept worked, the same is not true today
There are 10 major problems with Supply “Chains” today:1. Supply “Chains” assume linear relationships
The business world today is not comprised of simple linear connections between
consumers, retailers, wholesalers, producers and suppliers. In reality there are
multiple supplier channels and multiple distribution channels that exist
simultaneously. Take bottled water as an example, think of all the possible
locations where a consumer can find a product, and the number of different ways
the product could have arrived on that purchase point.
2. Supply “Chains” only flow downstream
The basic assumption in a supply chain is that information flows upstream from the
consumer through the retailer, to the wholesaler to the producer and up to the
suppliers supplier, while products and services flow downstream. This is not true.
Many products are returned to supplier as rejects for refund, rework, replacement
or repair, and these flow upstream, while information flows downstream. Reverse
logistics means bringing products back up the supply “chain” and it is as important
to do this right, as it is to get product to the customer in the first place.
3. Supply “Chains” are rigid and inflexible
When products are transported by carriers the products are unavailable for use. The
longer the transit time the more the shipper is reliant on the accuracy of the sales
forecast. Most supply chains are full of products that are in transit before being sold
to a consumer, and once the product is loaded into a package, and shipped it is on
its way and it cannot be changed in midstream. Business today is dynamic and
changes by the minute. Supply “chains are still planned by the day, commitments
are made to bring in products by ship from global suppliers and these processes
take weeks to complete. Inventory in transit is not accessible or available for use,
and changes cannot be made once the product is put onboard a container ship.
4. Supply “Chains” are not integrated
Every business entity in the supply chain is using their own version of an ERP
system with their own individual numbering and naming conventions. These ERP
systems do not share common protocols or standard formatting of data elements,
and as a result information does not travel quickly across the supply chain. The
concept of ERP 2 is that there is seamless visibility of information up and down the
supply “chain” across enterprises using different ERP systems. This is still a long
way off. Most businesses do not have this level of integration internally, and much
less across their entire supply network.
5. Supply “Chains” plan at the speed of night
At the heart of every ERP system is a planning engine called Material Requirements
Planning, it is the mechanism by which a bill of material for a finished product can
be exploded into the required quantities of components and offset in terms of lead
time to determine the correct timing of the components required. There are two
ways of running this MRP program, one is called regeneration and this is typically
where a complete new plan is generated once a week, the other is called net
change and this is typically an update to the plan which is done every night. So if
there is a supply chain that is comprised of 7 levels from the consumer to the
suppliers supplier, then the information will be passed from one level to the next at
the end of every working day, and thus it will be one week before the changes can
be communicated to the last link in the chain. This is planning at the speed of night.
6. Supply “Chains” are cost centric not flow centric
Most companies treat shipping products to customers as simply a cost based
transaction, decisions are usually made on the basis of ways to save money rather
than ways to streamline product flow. I conducted a supply “chain” activity analysis
for one company on a relatively simple product, intravenous saline solution for
injection, basically sterilized salty water in a plastic bag. This product took 92 days
from start to finish, it went through 83 process steps of which only 6 added value to
the material from the customers perspective. The product traveled over 7000 miles
to reach the customer, and in some cases expired on the shelf while in transit or
storage.
7. Supply “Chains” contain far too much waste
In most supply “chains” there is rampant waste, materials are packed in excessive
disposable packaging, products are loaded and unloaded multiple times, materials
are received, inspected, put into storage, stored, counted, picked, packed and
shipped to other storage locations where the same activities are repeated. Needless
transportation of goods consumes fossil fuels, creates pollution and the emission of
carbon dioxide. Products deteriorate as they are stored on shelves, and once the
shelf life has expired the products are discarded. Inventory is only an asset if it is
moving to a customer who needs it now. Most distribution systems are full of
products that customers do not need now, and shortages of products that are really
needed. It is not an inventory problem it is a planning problem. One of the
challenges for most businesses is how to avoid creating excess inventory while
maintaining excellent customer service.
8. Supply “Chains” are too slow
The roll out of Amazon Prime Now in major cities across the world will have a
profound impact on the design and operation of supply “chains.” Amazon is raising
the delivery bar expectations from overnight delivery to within two hours delivery.
This will become the new standard to be met by suppliers who wish to sell products
to customers. It will change the way we think about retailing, and it may force
many traditional companies out of business. It has a huge impact on the supply
“chain” Now the supplier has to be capable of capturing demand in real time, and
responding to those orders with rapid delivery of products. Traditional supply
“chains” cannot be modified to work this quickly. Waiting all day for a FedEx or UPS
pick up is simply not acceptable any more.
9. Supply “Chains” contain too much risk
All inventory contained in supply “chains” is company money at risk. The Captain of
a cargo ship has the right to jettison cargo if they believe the ship is in peril.
Unfortunately for the owner of the cargo, this often means the items expected
never arrive. Insuring goods in transit costs money, and the loss of cargo means
that customers will not receive their goods on time. In some areas of the world
piracy is rampant, and products can be stolen on route. Even worse for some
companies, products can be tampered with on route to the customer if the supply
“chain” is not secure. Counterfeit products may be exchanged for real products, real
products may then be diverted to third parties, and all of this constitutes inherent
business risk.
10. Supply “Chains” are not intelligent
In today’s dynamic business world, suppliers and customers are often
interchangeable. Business is comprised of fluid relationships, sometimes a one off
transaction, other times as a long term partnership. In most companies today, it is
not a supply chain, it is a complex system of connections more akin to the internet
than a linear supply chain. The internet is not powered by a linear chain of
computers, but a vast complex of interconnected servers, where transactions are
sent by intelligent routers to any computer in the distributed network with the
available capacity to handle the transaction. This is the way smart supply networks
should work today. Intelligent software should be capable of directing and
redirecting products to destinations to avoid supply chain hazards, and the potential
for late delivery.
It is time to replace the outdated notion of supply “chains” with the new concept of
smart supply “networks’.