Category Archives: Supply Chain

If You Want to Control the Bullwhip …

… and its effects that can be very detrimental to your inventory levels, associated costs, and overall supply chain revenue, don’t do any of the following:

  1. Second Guess the System and Overcorrect

    This typically happens when a buyer orders early, thinks he needs more “just in case” inventory, or believes that the system has under-estimated inventory requirements. When this happens at each stage of the supply chain, the original order requirements end up increasing significantly. For example, if a buyer at a retail store adds 10%, then a buyer at the local warehouse adds 10%, then a buyer at the central warehouse adds 10%, and then the distributor adds 10%, the supplier will get an order for 146.4% of the original order volume and the supply chain will become saturated with excess inventory.

  2. Last-Minute Unplanned Promotions

    This goes for both buyers and sellers. Buyers, don’t allow marketing or sales to do last-minute unplanned promotions that were not taken into consideration during the forecasts. Without re-running all the forecasts, you can’t know how much more inventory you’ll need, and you’ll over-order “to be safe”. Furthermore, this surprise over-order will cause bullwhip second-guesses up the chain. Suppliers, don’t offer last-minute enticements to get a buyer to buy more. The net effect will be that your buyers will have too much stock, and then drastically cut their orders next time around. These unexpected cuts across the board will result in distributors overcorrecting downward, and then there won’t be enough inventory in the system and sales, and revenue, will be lost by all.

  3. Tweak the Order

    If you have a good, modern, forecasting and inventory management system that can make use of all of your historical data, multiple forecasting algorithms, and run multiple what if scenarios that can take into account multiple assumptions, then, as long as the forecast and inventory plan was generated by a seasoned pro, on average, it’s going to be much better than anything your gut tells you. Tweaking just leads to uncontrolled overcorrections throughout the supply chain.

  4. Increase the Batch Size

    Just because you can get an additional volume discount on order volume or shipping doesn’t mean that you can arbitrarily increase the batch size without consequences. Total cost of ownership, which will have been minimized by your inventory management or strategic sourcing decision optimization system, can involve dozens of variables. For example, there’s the inventory storage cost which could exceed the volume discount, especially if your warehousing cost is high. If you’re currently at FTL, it might put you over to FTL and LTL, and the LTL costs could be much higher. And, of course, the over-order will be followed by an under-order, which could lead to two devastating over-corrections by your distributor who was unprepared for the large swings up and down in order sizes.

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Open Innovation Will Help Your Supply Chain Cope in Lean Times

A recent article in the Harvard Business Review’s spotlight on innovation on “how open innovation can help you cope in lean times” is just as appropriate to supply chain organizations as it is to R&D organizations. In a nutshell open innovation will help you move innovation from the inside out to get the greatest value from your initiatives. Specifically, it will help you:

  1. Become a Customer of Your Projects For example, if you require an important capability that you can neither afford to develop nor acquire on the open market, and it’s something that other organizations would also want, join with these other organizations to fund, develop, and launch the capability … and become the first customer. This is how a number of exchanges, procurement platform providers, and BPOs started in Supply Management. And there’s a good chance it will be how a number of future players in the space start. So if you have a brilliant idea, don’t miss out on your chance to be the one that brings it to market.
  2. Let Others Develop Your NonStrategic InitiativesHopefully your business is in the midst of embarking on a project to focus on its core activities, and hopefully your supply chain organization is following suit. If you are, you’ve probably identified some activities that drain too much time and money for the value they return to the organization and classified them as non-strategic. You’ve probably also identified some activities that, if you had the right strengths, could return a lot of value and should be strategic, but aren’t in the hands of your current staff. In both cases, you should spin out the tasks to outside organizations who can do them efficiently and cost effectively. In the first case, you’d spin the tasks out to a tactical BPO and the second to a consultancy who can act as a strategic partner. Then, every effort undertaken by Supply Management will return value.
  3. Make Your IP Work Harder for YouIf you’ve developed a lot of Sourcing IP (category or commodity expertise, process expertise, etc.), but most of the time it just sits on the shelf and generates no direct financial benefit outside of cost savings on specific categories, then consider licensing the expertise to outside partners and/or spinning off an organization that generates and sells the IP at a profit. For example, if you have a strong market intelligence team in energy and metals, spin off a market intelligence organization which can do the research much more cost effectively, license the content back to you for a dollar, and make the organization’s investment arm a profit.
  4. Grow Your EcosystemLook beyond your four walls, direct customers, and direct suppliers for innovation. Also engage with trade associations, analysts, and industry experts. You never know where the next big idea is going to come from.
  5. Create Open Domains to Reduce Costs and Expand ParticipationOnce you have your ecosystem in place, you need to maximize it. Do that with open domains, exchanges, forums, and other knowledge network tools that will allow everyone to collaborate.

And when you’re done, you’ll be doing more for less and getting more for everything you do.

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If You Won’t Splurge for Supply Management Technology (Rant)

When:

  • Spend Analysis can save you 10% to 15% of your total spend,
  • e-Negotiations can save you 5% to 15% of your total spend,
  • Strategic Sourcing Decision Optimization saves 12% above and beyond what you can save with e-Negotiation alone,
  • Contract Management can save you 13% on your contract labor and professional services spend alone,
  • e-Procurement will quickly reduce maverick spend by 36% or more,
  • Supply Chain Finance / Working Capital Optimization platforms can decrease your cash conversion cycle by up to 83%, and
  • Global Trade Visibility systems can decrease transaction processing time requirements by up to 96%

… and that’s just the tip of the iceberg with respect to the total savings available to you, if you won’t splurge for supply management technology, especially when many enterprise systems can now be obtained at a cost of only five figures a year (which is ten times less than they used to cost), then you’re a Complete Idiot and should join your kin in the tundra biomes of the Arctic. Continental, Delta, United, and Alaska Airlines all fly to Anchorage, and you can book flights through all of the major web portals. Get to it! The rest of us need to move forward.

What About Bob?

Almost nineteen years ago, Touchstone Pictures asked What About Bob?, not knowing what a profound question this would be for the Supply Management space, which had not yet truly emerged, nineteen years later. And before you ask what is that crazy doctor referring to, be assured that I’m going to tell you. But first, a little background.

A little over a year ago, Dennis Moore, Susan Scrupski, Thomas Otter, Vinnie Mirchandani, Jeff Nolan, Jason Busch, Zoli Erdos, and pretty much anyone else who mattered in the Enteprise Blogsphere came together and created the Enterprise Irregulars, a central point where anyone who wanted a multi-faceted snapshot of what’s going on in the Enterprise space could go to get it. Little did we know that would be the first milestone on the path to Analyst 2.0, the new analyst model for the Supply Management space. Shortly after, Jason Busch of Spend Matters decided to double down. He expanded the number of voices he allowed to contribute, increased the rate of publication of his Perspectives, and announced bold new changes coming in 2010, which began with the new Compass publication series, which are essentially an Analyst 2.0 spin on the classic Aberdeen model. (The only difference being that instead of sponsoring one big fat [dry] metric filled research study, you sponsor a four-part series that addresses emerging trends and related issues as well as best practices with a dash of metrics thrown in for good measure.)

Then Mr. Horses for Sources himself, Phil Fersht, decided it was time to go all-in with the new Analyst 2.0 model and formed a whole new Analyst Firm dedicated to Global Sourcing Performance.

And now we have turmoil at the Analyst 1.0 firms who are trying to stay relevant. Gartner acquired AMR, and Andrew Bartolini, who was the VP of Global Supply Management Research (and who succeeded Vance Checketts who succeeded Sudy Bharadwaj who succeeded Tim “Mr. Perfect” Minahan), has departed Aberdeen to create his own Analyst 2.0 offering over at CPORising.com.

There’s so much going on right now, and so much noise being made, that I just have to ask What about Bob? You see, while most of the space is going gaga over all of the hullabaloo surrounding the emergence of Analyst 2.0, they’re forgetting two important truths. One, it’s about substance and quality, not flash and delivery. And two, quietly toiling away over in a little corner of The Ferrari Consulting and Research Group‘s piece of the web, is Bob Ferrari who has been plugging away on Supply Chain Matters for over two years now, bringing you deep thought and analysis on a variety of topics on a weekly, and occasionally daily, basis. He’s good. He’s great. He’s wonderful. And he’s too modest to ask it himself. So I’ll ask it. If you need a real analyst, with decades of experience, including stints at IDC and AMR, What about Bob?

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Supply Chains are More than the Sum of Their Parts

Everyone should read this recent article in Strategy + Business on Virtuous Connections that presents a case study on how local “fixes” that don’t take into account dependencies can actually result in global “breakdowns”. The article, which presented a case study from a large chemical manufacturer, described how numerous attempts to “fix” existing supply chain issues resulted in the creation of additional supply chain issues that were even worse and more costly.

For example, the article describes how:

  • they focussed on pallet standardization, only to find no performance improvement because being able to load a pallet faster doesn’t help much if the products aren’t ready when you need them;
  • they installed a system-wide network that couldn’t handle the volume of incoming orders because management underestimated the range and volume of the company’s channels; and
  • they tried outsourcing warehousing, which made matters worse because their software didn’t integrate with the 3rd party’s software.

But when a more holistic view was taken and Supply Chain focussed on:

  • segmenting customers by strategic importance, which allowed reps to give customers a more realistic picture;
  • eliminating rogue stock-replenishment processes by replacing them with new, standardized processes dictated by a properly selected and calibrated inventory system; and
  • including risk constraints in schedule production that took into account order complexity, which greatly increased schedule predictability,

the results were astonishing. Inventory on hand decreased by 20 percent, shipment costs stabilized in a period of rising fuel prices, and stock-outs fell by 50 percent — resulting in exponential gains.

When they failed to look at the big picture, intended “improvements”, including the selection and integration of expensive new systems, had disastrous consequences because their “side effects” were never taken into account. But when they analyzed the system as a whole, even minor changes had major positive impacts. You need to look at your supply chain as a whole, and select systems that allow you to analyze the supply chain as a whole. Otherwise, that “fix” might introduce a fatal flaw!

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