Download White Paper:Important Qualitative Supply Chain Decisions
Important Outward-Facing Supply Chain Decisions
- What is Supply Chain Management?
- How is it different than Logistics?
- Why is this paper called “Qualitative” Supply Chain Decisions?
In a prior white paper titled “Important Quantitative Supply Chain Decisions” I stated that quantitative decisions could be considered “logistics” decisions. In addition, these decision are often (but not always) inwardly facing to the firm that is making these decisions. This is, of course, an oversimplification. However, it does help me think of the difference between supply chain management and logistics (which is usually considered a subset of supply chain management).
Simply put, logistics involves mostly quantitative decisions made by a firm regarding how it will produce, ship and store materials (raw, work-in-process and finished goods). Supply Chain Management can therefore be considered the outwardly facing decisions a firm makes with regards to its supply chain partners. Often these are qualitative decisions meaning they are not clear-cut cost minimization, profit and customer service maximization or risk mitigation decisions.
To help everyone understand the full scope of Supply Chain Management we provide our definition below and some graphics on the next page. In addition we define Supply Chain Management as:
- Supply chain management coordinates the flow of products, information and money from suppliers, and their suppliers, through a company to its customers, and their customers, with the purpose of serving customers and maximizing profit.
In the remainder of this paper we will briefly review six qualitative supply chain decisions we recommend you make or be aware may be impacting your business.
- Designing the right supply chain for your products (Lean, Agile, Lean/Agile hybrids)
- Trust and collaboration amongst supply chain partners
- Information technology in supply chain management
- The Bullwhip Effect – reducing demand variation from customer to suppliers
- Aligning suppliers, internal operations and customers
- The hierarchy of strategic, tactical and operational supply chain decisions and downstream effects of higher level decisions
Figure 1: A Logistics Decision Network
Figure 2: A Supply Chain Decision Network
Designing the Right Supply Chain for your Products
- Lean (pull), Agile (push) or AgiLean (push/pull)
(You can find a full description of “Choosing the Best Supply Chain for your Products” on www.supplyvelocity.com’s white paper page.)
Depending on the nature of your products and services you may need a Lean, Agile or hybrid AgiLean supply chain. Lean supply chains will generally be best if you need to compete on cost and demand is relatively known. In this scenario you produce or buy to order with the focus on cost and inventory minimization. The classic example of a product that needs a Lean supply chain is commoditized food products. These supply chains turn inventory very quickly, and because of thin profit margins, are always focusing on cost reduction.
Agile supply chains will generally work best if price is not the critical decision factor and the loss of meeting customer demand is significant. These supply chains produce or buy to stock. Many items that are sold through stocking distributors require agility. A good example of this is spare parts. The cost of not having these products when needed can be far greater than the cost of holding inventory; and customers are usually willing to pay for this agility.
A third, and very popular supply chain design, is a hybrid called AgiLean. (I know it is a bit corny, but it is actually a good description.) In this design you produce or buy to order at a certain level in your product structure. This inventory is stocked and then the supply chain converts to produce-to-order. Technology and fashion products will often use AgiLean; raw materials or components are stocked, but the final configuration depends on specific customer demand. Products can be designed for AgiLean by utilizing postponement, modular design or mass customization. In this scenario the parts are stocked with the customization happening at the very end of the product structure or in the way modules are put together.
Other helpful terminology is push, pull and push/pull. Lean supply chains use pull inventory management and production systems. Pull systems start with the customer. Customers begin the purchasing or production process by placing their order. Agile supply chains use push system. Push is based on forecast where production and purchasing are decoupled from customer demand. AgiLean uses a push/pull combination with careful attention paid to the push/pull boundary. This boundary is the place in the product structure where the AgiLean company would stock materials or components to be produced, assembled or packaged to order.
Trust & Collaboration
- Ways to Collaborate
- Product development
- Demand forecasting
- Vendor managed inventory
- Joint promotions
- When Collaboration makes sense
- 80/20 customers and suppliers
- Strong technology capabilities
- Customers and suppliers do not belong to competitors’ supply chains
- Trust!
(You can find a full description of “Trust & Collaboration” on www.supplyvelocity.com’s white paper page.)
As a professional field, supply chain management only exists because of the concept of trusting and collaborating with your supply chain partners. If not for this concept, logistics would have done a fine job in describing our field. However, as information became easier to share (see next Section IT and SCM) logisticians, schedulers and purchasing managers realized they could coordinate activities with suppliers and customers. This short description will review ways to collaborate and when it makes sense to pursue this strategy.
Collaboration is most often realized in joint product development, forecasting, vendor-managed inventory and joint promotions. (We should be careful to state that it is not limited to these areas.) Joint product development means handing over key aspects of a products technology or functionality to suppliers who have the core capability. Instead of competing on price, a cost is set and the suppliers provide the best technology, features and functionality for that price.
Joint forecasting, price promotions and vendor managed inventory are all ways to improve inventory availability while minimizing obsolete inventory. Joint forecasting and demand planning, in particular, requires a technology investment. Even today, it can be hard to connect different systems. If forecasts and demand plans are shared via spreadsheet, the likelihood of sustaining this information sharing is low. Joint price promotions ensure that the supply chain has built up inventory to meet increased customer demand. Vendor managed inventory may be one of the easiest ways to share demand information. If a customer is managing inventory at your facility you don’t have to share demand, they will see it as it is happening.
The subject of when to collaborate is critical. It should only be done with customers or suppliers who are a large and concentrated part of your business. Otherwise the cost of collaboration can be greater than the benefit. If you don’t have a 80/20 relationship in revenue with customers or spend with suppliers then collaboration is probably not the best strategy. Note, that for some companies they seek to not have an 80/20 relationship with customers or suppliers. This prevents any one customer or supplier from having too much leverage over their business. This type of company has made a decision to be somewhat independent of their supply chain.
Another criterion for collaboration is technology. Whether you are considering joint forecasting or product development, you must have integrated information-technology systems to effectively share information. The final criterion is trust. If your supply chain partners have proven untrustworthy or belong to competitors’ supply chains then sharing sensitive information like demand or product development plans can be too risky.
IT in SCM
- Information technologies that enable Supply Chain Management
- Enterprise Resource Planning (ERP)
- Cloud computing
- Application Programming Interfaces (API)
(You can find a full description of “Using Information Technology to Revolutionize your Supply Chain” on www.supplyvelocity.com’s white paper page.)
As stated in the prior section many researchers and practitioners would state that supply chain management only exists because of advances in information technology. Specifically, we can trace the rise of supply chain management to ERP implementation in the early 1990’s. Looking back at Figure 2 we see that the ability to manage materials and financial resources in a supply chain is really about information. ERP systems are a start because they enable your firm to seamlessly share information. Cloud computing makes data available to employees and supply chain partners easier (than technologies such as virtual private networks or VPNs). In the cloud, data resides on servers through providers such as Amazon, Google, Microsoft and many others. Therefore, access (with appropriate security measures) requires only connecting to the internet. Finally there are APIs, which can be considered the evolution of EDI (electronic data interchange). These software tools allow different systems to talk to each other, allowing computers to share information, so people don’t have to.
The takeaway from this section is that without the right technology support it is hard to truly practice supply chain management.
The Bullwhip Effect
- Customer demand variation increases as it moves backwards (to suppliers) in the supply chain
(You can find a full description of The Bullwhip Effect on www.supplyvelocity.com’s white paper page.)
As I work with supply chain professionals around the world I always know who has a strong technical understanding of supply chain management, they know about the Bullwhip Effect. Discovered by a combination of P&G and a researcher from Stanford University, the Bullwhip Effect describes how demand variation amplifies as you move from the consumer back through the supply chain (distributors, assemblers, component suppliers and finally raw material suppliers).
Figure 3: The Bullwhip Effect
The supply chain community is so concerned about the Bullwhip Effect because of the problems it causes in on-time delivery, inventory shortages and over-stocking and the need to have extra capacity or work unnecessary overtime. The Bullwhip Effect is a financial productivity killer. If this variation is not reduced it creates over-investment in the supply chain that could be used to expand services, products and the use of automation and technology.
There are four primary causes for the Bullwhip Effect. These causes can be overcome. I will put some counter-measures directly below the cause.
- Over-forecasting during upward trends and under-forecasting during downward trends
- Let computers do most inventory reordering
- Economies of scale in transportation require ordering more than what was sold.
- Utilize third-party logistics providers to fill up trucks with smaller and more frequent deliveries.
- Over-ordering during times of limited supply (vendor allocations).
- No easy solution as individual companies will always want to over-order to get what they need.
- Price promotions creating un-natural demand spikes (and valleys)
- Wal-mart has made the most difference with their use of every day low pricing
- If price promotions will be used, planning them with supply chain partners will allow for slow inventory build-up in anticipation of higher demand.
Aligning the Supply Chain
- Supply chain performance measures
- Vendor managed inventory
- Buy-back agreements
- Coordinated price promotions
All the prior sections lead up to the topic of alignment. This is what we are trying to make happen in supply chain management… allow different firms to work together to increase the supply chain’s profit and improve the service provided to the end customer. However, this is the hardest to achieve. Firms can align on planning functions, but to create true alignment supply chain profitability must also be considered. Many researchers have suggested boundary-spanning supply chain performance measures. However, to date (with the exception of cross-ownership) we cannot find examples of firms that subjugate their profitability to other supply chain partners, by choice.
Despite this problem there are examples of firms aligning on financial measures. As mentioned above in the Trust & Collaboration section firms can invite their vendors into their facilities to manage inventory, or even run certain operations. The IT outsourcing community has taught us a lot about aligning with vendors. Manufacturers and distributors / retailers can coordinate on price promotions so that the supply chain wins and everyone accepts lower margins to gain a temporary higher share of demand (and hopefully improved cash flow). Another alignment tool are buy-back agreements. In these agreements manufacturers and retailers would set a price for unsold inventory. The supply chain benefits because retailers would be less likely to stock-out if they knew that they could sell back un-sold inventory. Of course, it could backfire for the manufacturer when they get back un-sold inventory.
The Hierarchy of Strategic, Tactical and Operational Supply Chain Decisions
- Strategic Decisions
- Greater than 5 year impact
- Customer service goals
- Facility location
- Information technology platform
- Product development / design
- Tactical Decisions
- 1 – 5 year impact
- Vendor selection
- Facility operating principles
- Transportation modes
- Operational Decisions
- Daily, weekly, monthly impact
- Scheduling
- Inventory replenishment
- Carrier choices
I will not discuss the bullet points above, other than to emphasize that as you make supply chain decisions you realize that strategic decisions affect tactical decisions which affect operational decisions. Determining what type of customer service you want to provide will inform every other decision. Once you build a new factory or distribution center it will likely be used for many years and will impact what vendors you use, what transportation modes you use (ship, rail, truck) and even product design (postponement). These same decisions will impact scheduling production and people, how often you replenish inventory and what carriers you use to transport goods. Therefore, don’t expect great operational performance if you haven’t located your facilities optimally, chose the right technology platform or selected vendors whom you can trust.
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“We are pleased that Essex selected Supply Velocity, Inc. as our Lean Implementation Partner. At one facility, we have saved over $350,000 in work-in-process inventory, reduced throughput time from 2 weeks to minutes and increased inventory turns 3 to 8 times per year. All these results are in just 6 months. Our return of investment is very high.”
“Isolating a problem, finding short, and long term solutions with measurable results is what was promised and results is what was delivered by Supply Velocity. Upon launch of the Lean Six Sigma Selling System, we knew more about our customers, our products, and were able to create a solid plan to increase sales of our most profitable products. Within months of implementation, our booked sales jumped 60% and our most valued customers were getting direct, active, and calculable attention.”
“Supply Velocity is driving instrumental change in our inventory management processes. This is critical for us to be competitive in a supply chain environment with numerous disruptions. They are making change happen, which can be challenging in a 182 year old organization.”
“Our experience with Supply Velocity was one of the best values we have ever had from a consulting project. Cyril Narishkin brought a structured lean methodology, invaluable experience and engaging facilitation skills to help us streamline a very complex and disjointed sales order process. Just as importantly, our team now has the knowledge and process competencies to address other business improvement opportunities going forward.”
“Closure Medical recently completed a major reorganization in order to enhance our ability to rapidly create innovative medical devices. We hired Supply Velocity to help us map out the process and service flows of the new organization that would maximize our product development process (PDP). In four weeks, Supply Velocity helped us envision a new PDP structure, develop measures and accountability for each step, and gain consensus within the organization. Supply Velocity’s focus on speed and accountability helped us complete a critical project in a timely fashion.”
“C&R was struggling with labor productivity. The construction crews were often missing materials that they needed to do their work. This caused significant idle time. Supply Velocity, Inc. and C&R used value stream mapping and visual management tools to make dramatic improvements in operations. Most importantly, two years later C&R is sustaining and improving on the implementation. C&R’s return on investment was 11:1. C&R had a record year last year in both sales and profits and would not have been able to pull it off without the changes Supply Velocity, Inc. helped us make.”
“We used Supply Velocity to rethink our sales process. By analyzing the entire process we found wasted time in our Sales, Admin and Operations departments. Streamlining this process created extra time for each Sales Rep, allowing them to spend more time with Customers and increase the value we add. Gross profit margins are up 40%!We are now using Supply Velocity to help us rethink our entire Strategic Plan.”
“Supply Velocity’s Lean Six Sigma System has given us new tools to help improve our sales performance. We have learned new ways to analyze our business which makes problem solving more accurate and has made us better leaders.”
“In 2015 we began working with Dr. Mitch Millstein to optimize our inventory locations supporting e-commerce and in-store inventory needs. From this work we developed a new omni-channel warehousing and inventory plan that entirely redefined our approach to warehousing, inventory management, store distribution and fulfillment. As a result of the analyses by Dr. Millstein we have begun the move to an improved omni-channel design by reassigning MSAs to new warehouses, greater leveraging of in-store inventories to satisfy e-commerce demands, and exploring acquisitions of new warehousing space in strategic locations. We have already seen an improvement of $300,000 from both more efficient shipping strategies due to better inventory management.”
“We engaged with Supply Velocity to help us embed process improvement at all levels of the business. Our team learned from Mitch to let the data drive decisions, to use Lean tools to help us see our processes critically and objectively, and to create a control plan to manage all of the tasks that were the outcome of the data study.The project turned out to be very significant to the company and most importantly, our customers. We reduced our customer wait times by 40%, and cut in half the labor cost to fulfill customer orders.
Some results are not able to be measured. However, as a result of this project, we have started to build a Lean mindset and culture, which is part of our strategic mission to save our customers money. Supply Velocity has been a valued partner in this mission.”
“For several years we have worked with Supply Velocity to support us with their expertise on Lean Operations and Supply Chain Management. Supply Velocity has helped us implement Lean, improve our inventory systems, and educate our people. They are professionals who are always available to help us as needed.”
“I am thrilled to provide this testimonial for Supply Velocity and their outstanding work in implementing Lean Warehouses and processes at Crescent Parts & Equipment through the COVID pandemic. With their data-first focus and Mitch’s exceptional coaching and experience, they transformed our business into a more supply chain-oriented organization, enabling us to grow while prioritizing employee safety and creating a better work environment. Supply Velocity’s expertise in Lean methodologies and their comprehensive evaluation of our customers have been instrumental in optimizing our operations and increasing customer satisfaction. We highly recommend Supply Velocity to any company seeking to implement Lean processes and enhance their supply chain efficiency.”
“Supply Velocity has helped Clean succeed in a number of ways. First, they provided the education that kicked off our Lean Process Improvement journey. They also facilitated a number of large supply chain and process improvement projects including: 1) building quality into our direct-labor productivity incentive program, 2) designing the layout of our garment warehouse, and 3) streamlining our route service process.We have integrated the methods that Supply Velocity taught us into our management and strategic planning. In the process our quality measurement has improved 22% from 2013 to 2015, we have reduced required annual labor by 2200 hours from the garment facility layout project and we’ve seen 50% decrease in error rate. Obviously the numbers speak for themselves, but just as important, Supply Velocity has been fun to work and have become true partners. They have “taught us how to fish” so our internal teams are able to implement change on their own, with the skills we learned from Supply Velocity. This relationship has been invaluable.”
“In the spring of 2003, the St. Louis Area Chapter of the American Red Cross engaged Supply Velocity, Inc. to perform a study and make recommendations to streamline office processes, maximize cash flow in purchasing and warehousing and restructure and enhance our maintenance department. Supply Velocity, Inc.’s process was methodical, flexible, staff-oriented, inclusive and, above all, trackable.In the last six months, our Chapter has realized expense savings of over $380,000 annually, and significant improvement in intra-company service levels has been attained. Supply Velocity, Inc. will return to the Chapter periodically throughout the next 18 months to audit our newly implemented processes. We have been pleased with our results and Supply Velocity, Inc.’s professionalism.”
“Supply Velocity gave us the tools to analyze our business and processes based on the facts and numbers versus our perceptions. Our common quote was “Let the numbers lead us”. The key for our organization was how quickly we moved from classroom to actual project initiation. We were able to jump in, start using the tools and see a difference right away.
The get-into-action approach was good for our culture.”
“We used Supply Velocity on our Warehouse optimization project. One of the key characteristics of Supply Velocity is that they listened to our requirements and provided a clear path for our Warehouse processes using lean tools and our future sales growth as objectives.”
“Myerson engaged Supply Velocity, specifically Ray Davis to visit our plant in Trinidad to conduct a two day assessment of our production procedures and provide us feedback on areas for improvement and where applicable, areas for future analysis.Put simply, we got everything we paid for and in addition to more in depth analysis, we got specific tasks that were immediately actionable. Our local management team found Ray to be engaging, highly credible and insightful based on his wide experience. In other words the cultural differences and lack of specific industry knowledge weren’t impediments to things we could implement immediately and on our own. In a nutshell it was money well spent and will pay itself back many times over.”
“Mitch Millstein and his team helped guide our shop fabrication division in the re-layout of our custom pipe and steel fabrication facility when we moved into a new building. It is not only the results but how he helped. We were involved in every step. I personally did time studies and was able to see the non-value added steps required to manufacture in our old layout. When we created our new layout, everyone was involved, from the executive team to our direct labor force. With Mitch’s help we increased our throughput by a 3x multiple, while providing more competitive prices to our clients as a result of the efficiency improvements.This has enabled us to not only make more money but also to expand our commercial reach and serve more, and larger customers. I would recommend Supply Velocity to any company that wants to make improvement in supply chain and operations.”
“We are using Supply Velocity’s Lean Six Sigma methods to analyze a variety of processes including rationalizing SKUs (stock-keeping-units). By using math to evaluate SKUs we took some of the emotion out of our decisions. We expect significant increases in sales and productivity from reducing poor performing SKUs.”
“Your process encourages this group to work together, better communicate and have fun doing it.”
“Many thanks to all three Supply Velocity presenters. I think you guys took a very difficult time for learning and capitalized on everyone’s time and training needs. I truly hope this helps your business as this was a considerable undertaking on the part of Supply Velocity. Outstanding!!”
“In thirty years of hiring consultants, Supply Velocity, Inc. was the first to tell me what they were going to do, set a price they stuck to and substantially exceed my expectations. I have recommended them to friends and acquaintances. They were true partners in assisting with the turnaround of an acquisition we had been struggling with for two years.Their math-based technology, solid down-to-earth facilitation skills, and positive, patient and enthusiastic attitude combined to make our implementation of Lean a very rewarding experience.
We increased our production by 50% in the first month of implementation and continue to see improvements. Improvements have not only been realized in productivity, but also in quality and morale. We have increased profitability by $2M on flat sales of $10M.
Based on Supply Velocity, Inc.’s integrity and our results, I will continue to refer them to others and utilize them in the future as we expand our company through acquisitions.”
“The role of the Erie Insurance Marketing Department has been evolving over the past several years – from a support role to a more critical role of driving growth in our organization. Because of our increased workload and desire to prioritize the most critical projects, we hired Supply Velocity to teach us the skills of Lean Six Sigma.Participants included the Promotions, Market Research and Agency Licensing sections of the Marketing Department.
We learned valuable tools to help us to prioritize based on the voice of the customer.
I firmly believe these skills made a difference in how we work every day. We are moving new projects forward, eliminating or changing ineffective processes, and we are a much stronger department. We continue to use the tools to help us with our highly-complex and time-consuming projects. Supply Velocity helped us to accomplish our goals.”
“Supply Velocity created visibility within our Assurance Services Group… visibility of performance, Client-service, employee satisfaction and processing time. Using the Supply Velocity System, Audit Report Cycle time is down over 50%. We are using his strategies to create greater Client loyalty.”
“Supply Velocity has provided the technical expertise and political capital to move our project forward. They have just the right amount of push and the right amount of support. Supply Velocity has helped us make real changes to improve efficiencies in logistics without jeopardizing our performance. We’re happy and our customers are happy.”
“Anheuser-Busch Precision Printing had been implementing Lean Operations on our own for the past two years. We needed to move faster and partnered with Supply Velocity, Inc. Through Supply Velocity, Inc.’s mathematical workflow balancing and visual management tools, dramatic improvements were achieved. The entire converting operation was rearranged based on Lean principles. The result is a 20.6% productivity improvement, enabling us to operate with 23 fewer people in production.”
“In a time of volatile supply chain disruption, Supply Velocity is helping us develop Demand and Supply Planning processes to proactively tackle these new challenges. They are genuine partners, working with our team, facilitating and teaching.”