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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’.