In the supply chain, the questions do not change; but the answers do.

Quote from a Supply Chain Leader at a Conference in Europe

Yesterday, Peter Bolstorff,  Executive Director, APICS Supply Chain Council, called to discuss the use of the Supply Chain Index by APICS to measure supply chain improvement. Peter is one of the nicest guys that I know, and I am glad to see him at the council. After spending five tedious years on the SCOR council executive board, I know that the governance model limited the SCOR council.

We developed the Supply Chain Index in 2014 as a way to measure supply chain improvement at a balance sheet level. Companies that have the most to lose will drive the fastest rate of change on the Index. After I explained this, I granted Peter permission for the council to use the Index (the use of the Supply Chain Insights content follows the principles of Open Content research). I then said to Peter, “I am glad that you called. I have been wanting to discuss the principles of the measurement system within the SCOR model. The more I work on supply chain metrics, the more I believe that both the SCOR model and the Gartner Hierarchy of Supply Chain Metrics (which I worked on during 2006-2010) reward functional, not end-to-end, supply chain behavior. I see this as a problem. Do you?”

Peter laughed and said, “You have always been such a renegade!” He went on to describe an overview of the 200 implementations that he had worked on, and detailed the benefits. I responded by saying that I believe the SCOR model and the Gartner Hierarchy of Metrics reward functional behavior and improve functional outcomes. I believe this is necessary at the earliest stages of a supply chain transformation. However, as the organization matures, the focus becomes more end-to-end, from the customer’s customer to the supplier’s supplier. I continued by saying, ” I believed that this was especially true in the design of outside-in processes.” I explained that I think both methodologies reward the wrong behavior.  The conversation continued. Peter and I agreed to agree to disagree; and he agreed to meet over dinner to continue the dialogue. I look forward to the discussion. But, until we meet, here in this blog I want to give the renegade’s riposte.

Views of a Renegade

What is a renegade? When Peter called me a renegade I must admit the words stung a bit. Then I thought about it. I believe it is a badge of honor. A renegade is a person that has the courage to buck convention.  There are many negative connotations: outlaw, traitor, deserter, or rebel. After I thought about it for a while, I smiled. For many I am a rebel. I don’t write about convention; instead, I am writing for the visionary that wants to drive breakthrough innovation.

Why do I do this? I reflected on a quote by a supply chain leader, “Today the supply chain questions are the same, but the answers are different.”  Simply put, I want to help supply chain leaders find these new answers.

The Questions Are the Same, But the Answers Are Different

Let’s take an example. I get called frequently to talk to supply chain leadership teams about inventory. Often the CEO hires a strategic consultant to audit the supply chain, and they roll through the organization making inventory promises. What CEO doesn’t like the concept of reducing inventory? It is cash. However, there is much, much more to inventory management today than there was ten –or five– years ago. Let me explain.

Inventory is a sign of end-to-end of supply chain health. Unfortunately, in most organizations there is much talk, but it’s managed by no one actively. In the building of end-to-end- processes (as described in my recent book, Supply Chain Metrics That Matter), the supply chain is a complex system where growth, cost, inventory, asset utilization, customer service, and complexity are tightly interwoven with nonlinear relationships. In most supply chains, complexity has increased without changing the processes to manage the increased complexity. When leaders focus on functional metrics without alignment to an overarching operating strategy and a well-defined metrics hierarchy, they will throw the supply chain out of balance, reducing total supply chain performance.

Over the past decade, optimization capabilities in supply chain systems have improved to improve outcomes; however, very few companies have been able to drive improvements in both inventory and supply chain costs. As a result, we find in our research that nine out of ten companies are stuck at the intersection of inventory turns and operating margin. I wrote a report when I was an AMR research analyst in 1996 on the advancement of multi-tier inventory analytics. Ten years later, as the founder of Supply Chain Insights, I am tracking the progress and adoption of companies with the use of the technologies to see if it makes a difference. I am in the middle of the research (software briefings, talking to references and tracking company results). The final report will publish in the Supply Chain Insights March newsletter.  As I reflect over a decade, there are five ways that the processes have changed:

• Inventory management is not the same as replenishment. In the early forms of Advanced Planning Systems (APS), inventory management was an extension of Distribution Requirements Planning (DRP) and Material Requirements Planning (MRP). This is not true any longer. Instead, the process requires the addition of a step to calculate safety stock looking at the volatility of lead-times, demand and supply.
• Need for the design of buffers. The supply chain has two buffers: inventory and excess manufacturing capacity. Today, most companies do not have excess manufacturing capacity: they have either outsourced manufacturing or increased the asset utilization of their manufacturing assets. The environments are strained. As a result, in the management of inventory processes, it is critical to design an inventory buffer to absorb demand and supply volatility. This design also usually includes the analysis of push-pull decoupling points and the opportunities for postponement. With the redesign of the global multinational manufacturing company, the design of buffers has increased in importance.
• Less about levels and more about the form and function of inventory. While there are many technologies that give us better information about the right inventory levels, there are few technologies that can answer the questions of what form (e.g., raw materials, semi-finished goods, finished goods) and where should the inventory be held (i.e. customer location, supplier distribution center, a third-party intermediate,etc.). And, what is the right function (e.g., cycle stock, safety stock, in-transit inventory, slow and obsolete, and inventory to support market launches) of inventory. This requires the design of the network and the adoption of specialized technologies. It is essential to results at the intersection of costs, inventory and customer service.
• An extension of outside-in processes. Some of the most exciting inventory techniques are the extension of techniques to sense demand and reduce safety stocks or translate product segmentation into improved cycle stock management. The awareness of the use of these technologies is low and not well-understood.
• Optimization has increased faster than our ability to use it. Overall, the technologies have advanced faster than companies’ abilities to use the new tools. When I wrote the report on multi-tier inventory optimization at AMR in 1996, less than 1% of company’s were using multi-tier inventory optimization. Today, the number is the same. While many companies have bought the technologies, they are seldom applied to a solve a multi-tier problem. In the market, we find technology companies fighting holy math wars, while in the trenches most supply chain leaders struggle to understand the concepts. For technologists, it is still very much a missionary sell.

We will be discussing these and other supply chain transformation questions at our upcoming Supply Chain Insights Global Summit in Scottsdale, AZ on September 9th and 10th. The agenda will showcase the Supply Chain to Admire work for 2015, share insights on how supply chain excellence can drive new business models, and set the stage for supply chain leaders to detail how they have driven supply chain excellence. In the countdown for our global summit, we will be doing monthly quantitative surveys and writing 2 to 3 reports a month. Our philosophy at Supply Chain Insights is that we give to you through open content because you give to us. If you want to help, we would love your input on our  Inventory Optimization Survey and the Supply Chain Center of Excellence Survey.