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2013

The Inherent Uncertainties of attempting to Balance Inventories with Demand

 

Unfortunately, when you work in the supply chain and you believe—or you’ve been told—that your goal is to “balance inventory with demand,” your life is filled with uncertainty.

 

Stock LevelsUncertainty - elephant.jpg

 

I find that a lot of folks who job it is to balance stock levels at various stocking locations with forecasts for demand are operating under a lot of uncertainty.

  • They are uncertain of how much stock of various items they should have on hand
  • They are uncertain of where the stock they have should be positioned—at the outlets? at the distribution centers? at their central warehouse?
  • They are uncertain which department—finance or sales—is going to beat them about their heads and shoulders next; and whether its going to be for have too much inventory or for having too little

 

Nevertheless, they are absolutely certain that regardless of whatever decisions they make on thousands of items with which they must concern themselves, a great many of those decisions will end up being wrong (to a greater or lesser degree).

 

Fill Rates

 

These same folks are uncertain about what fill rates they should be targeting for various products or product lines. And, even if they have the products and product lines pretty well pegged, they are never certain about which makes, models and colors will sell best—and at which locations.

 

Stock Outs

 

Of course, they are certain that they should try to never be out-of-stock on anything. Because, while they are uncertain about many things, they are certain that they will get a stern talking-to from somebody from the sales department if they don’t have that one product that some customer wants “today.”

 

Over-stocks

 

They are equally certain that they should never be caught in the position of holding “too much stock” on any item. They know this because they are certain that they remember being lectured a number of times by someone from “inventory control” and someone else from the finance department last time they had to obsolete and liquidate big quantities of last year’s best-seller that suddenly lost popularity.

 

What they are quite uncertain of is how to know precisely when last year’s best-seller will become this year’s overstock!

 

 

The Inherent Simplicity and Certainties Surrounding Balancing Flow with Demand

 

Compare the above UNCERTAINTIES with the comfort that must be taken by those who believe—or have been told—that they must “balance the flow of goods in the supply chain with demand.”

 

Reduce Lead Times

 

The supply chain manager who understands that his goal is to balance flow with demand across the supply chain may be absolutely certain that effectively reducing lead times will always lead to better results and improved customer service levels.

 

Reduce Inventories

 

The supply chain executive who understands that his goal is to balance flow with demand may be absolutely certain that, as lead times are reduced effectively, reducing inventories in the supply chain will lead to faster and more accurate feedback on actual demand. It will also reduce the risk of loss due to obsolescence. Reducing inventories will help drive the supply chain toward balancing of flow with demand.

 

Increase Visibility

 

Supply chain executives and managers who have a clear vision of their goal as being to balance product flow with product demand can know with absolute certainty that anything they can do that increases visibility of actual demand across the whole span of the supply chain will help every trading partner to respond more accurately and more immediately to changes in demand. The improvement in visibility becomes the driver for improvements in agility. The supply chain automatically begins to move toward increasing agility when the participants become confident that their resources are being directed toward the fulfillment of actual demand—not someone’s (wrong) forecast.

 

Increase Replenishment Frequency

 

Executives and managers in the supply chain focused on balancing flow with demand can rest in the absolute certainty that increasing replenishment frequency—in conjunction with reduced lead times and reduced inventories—will have a positive effect and will result in measurable gains. They can be certain of this because many other companies have already proven the success of these concepts.

 

Reduce the Size of Production and Transfer Batches

 

Once supply chain managers and executives have a firm grasp on the value of balancing the flow across the supply chain with actual demand, they can know with absolute certainty that any reductions in the size of production and transfer batches will lead to greater agility in the supply chain. Capacity-constrained resources will spend more time making and transporting the right products to meet actual demand and far less time, money and energy will be consumed producing and shipping the wrong products (or even the right products at the wrong time).

 

As a result of all this certainty, supply chain managers and executives who have caught the wave of creating a truly demand-driven supply chain can also be absolutely certain that they will be able to report positive results to the C-suite as a result of their efforts.

 

Wouldn’t you rather be driven by certainty than hampered in your efforts day after day by the nagging uncertainty of attempting to “balance inventory with demand”?

Balancing flow with demand certainly works.

 


 

Let us hear your thoughts on this matter by leaving your comments here or, if you prefer, contact us directly. We look forward to hearing from you.

 

We are continuing our discussion stemming from an insightful white paper published by The Boston Consulting Group, BCG sets forth some very cogent points that should be—indeed, must be—considered by any supply chain managers hoping to increase their success over the coming years.

 

Realigning Performance Metrics and Incentive Plans

SupplyChainManagement_2.jpg

 

The BCG report suggests that “[t]he ultimate goal of a DDSC (demand-driven supply chain) is to ensure the best service at the lowest cost.” Of course, in a general sense, this should be the goal of every supply chain. It is, however, worth noting that successful supply chains are capable of delivering more that goal than are traditional supply chains.

 

More importantly, I believe that even this statement is far to general. If the for-profit organization is honest with itself, then the real goal of the supply chain is to increase Throughput while holding the line on operating expenses (or even reducing them) at the lowest possible increase in investment (which includes inventories). Subscribing and working diligently toward this goal maximizes ROI (return on investment).

 

This goal may be simply stated in the formula shown here:

TOC ROI.jpg

The formula may be read as: “ROI = (the change in Throughput less the change in operating expenses) divided by the change in investment.” Throughput, here, carries a very specific accounting definition being revenues less truly variable costs (TVCs).

 

The authors of the BCG white paper also correctly assess that movement toward any goal is accomplished most effectively when “the performance targets and incentives of all supply-chain players must be aligned so that everyone is marching in the same direction.”

 

If some supply-chain participants remain entrenched in cost-world thinking, they will invariably end up being at odds with those who have been captured by Throughput thinking. The upside for improving Throughput has no theoretical limits and, properly effected, virtually no down side. On the other hand, there are very finite limits to cost-cutting and very a definite down side. In fact, many formerly very successful companies who saw themselves as “cost-cutters” in years gone by are simply no longer in business. Even Wal-Mart's demand-driven supply chain is focused primarily on assuring increasing Throughput, not on cutting costs, to produce increasing profits.

 

DDSCs are successful and achieve rewards for all the supply chain participants because everyone in the supply chain wins when Throughput is increasing. Only one—or a very few—can win when the focus is on cost-cutting and the downward spiral of cost-world thinking.

 

Cogently Managing the Trade-offs between Cost and Service

 

In this area, I may have some disagreement with the BCG authors of the report we are discussing. If I understand what the authors are saying in regard to this topic, it would seem that they are suggesting that “complex analytics” are required to calculate the cost-benefit results of various options in the DDSC.

 

I simply do not believe that this is true.


If there are unmitigated risks to movement toward the development of a demand-driven supply chain, those risks are found primarily in taking half-measures or attempting to “do” demand-driven without understanding the cultural shifts that are necessary to making a DDSC work effectively for all the trading partners.

 

In my opinion, it is a mistake, for example, to attempt to reduce inventories in the supply chain without taking what should be these parallel and essential steps:

  1. Increasing the agility of the supply chain
  2. Reducing the replenishment cycle time
  3. Buffering against “Murphy” with capacity and flexibility
  4. Reducing the size of production and transfer batches wherever possible
  5. Increasing, inasmuch as possible, visibility of actual end-user demand all across the supply chain

 

Effecting Change in the Corporate Culture

 

“To work, DDSCs require major organizational and behavioral changes,” the authors of the BCG report opine, and I could not agree more.

 

Sadly, it is for this very reason that too many organizations and their supply chains will forego the generally dramatic benefits and growing profits to be delivered by DDSCs.

 

Too many small business firms are bound by written and unwritten policies and procedures that have become organically entrenched in the very fiber of the enterprise. No one is willing to challenge these. The excuse—even if unspoken—is, “We’ve always done it this way,” or “It’s never been a problem in the past, so why should we change anything now?”

 

It is also on this very point that having someone from outside the company—outside “the forest” and away from “the trees”—who can bring tools to bear in assisting the executives and managers in unlocking “tribal knowledge,” can be exceedingly valuable.

 

Contrary to popular opinion: people do not hate change.

 

What people “hate”—what people militate against and undermine—is change for which they are not yet convinced there is an enduring benefit.

 

Unlocking tribal knowledge and helping executives and managers discover their own reality and design their own solutions brings all the negatives to an end.

 

No one fights against the solution they have designed.

 

This is the real corporate culture change that leads to a process of ongoing improvement (POOGI).

 


 

We are interested in what you have to say. Please leave your comments here, or feel free to contact us directly, if you prefer. We look forward to hearing from you soon.

 


We are continuing our discussion stemming from an insightful white paper published by The Boston Consulting Group, BCG sets forth some very cogent points that should be—indeed, must be—considered by any supply chain managers hoping to increase their success over the coming years.

 

Supply_Chain_Management metaphor.jpg

 

Improving data collection and analysis

 

Implementing a demand-driven supply chain (DDSC) requires participants to share data on the individual SKU level and to do so on a near-real-time basis. Certainly, this data must be accurate, if the system is going to work. But these data must also be timely.

 

While the most crucial data to be made available across the supply chain is end-user actual demand on the SKU level, it may also be helpful to have available the following data for some trading partners:

  1. Work-in-process
  2. Finished goods or intermediate products in-transit
  3. Quantities on-hand for finished goods, components and raw materials

 

Since some smaller end-user outlets may not have systems capable of tracking and reporting daily consumption, the DDSC exchange infrastructure should provide an on-line ordering system that makes demand data from such outlets available to the supply chain partners as soon as it becomes available via a replenishment order.

 

The DDSC participants should see the sharing of data in near real-time as being a key contributor to synchronizing of the flow of product across the entire supply chain. By providing timely and accurate data on actual consumer demand, the damaging “bullwhip effect” can be reduced or eliminated. When these data are used in conscientiously applied program aimed at reducing the length of replenishment cycles and dramatically down-sizing transfer batches (independent of purchase pricing agreements), everyone in the supply chain reaps the benefits.

 

Rethinking Operations

 

In their white paper, BCG admonishes, “Companies should analyze their production capabilities and remove any obstacles [to] agility.” Without stating it in so many words, it is clear that the BCG study has come to the conclusion that, in the demand-driven supply chain, the participants must (1) balance the FLOW of product (not inventories or capacities), and (2) buffer against attacks of “Murphy” using capacity (not inventories).

 

The BCG study emphasizes “flexible manufacturing,” including reduced set-up times, the use of a flexible labor force, the availability of external capacities, and small batches. Cultivating these practices and capabilities help supply chain participants respond quickly to spikes in demand and make up for lost time due to the occasional attacks of “Murphy” without becoming overburdened with operating expenses when dips in demand occur.

 

Also highlighted by BCG in the report is the need for flexibility in logistics. Rethinking logistics and methods becomes essential when smaller transfer batches and more frequent replenishment—both cornerstones of demand-driven supply chains—become the objective.

 

Key to operational improvement in most organizations must be the rethinking of what are likely to be longstanding (even if unwritten) policies and procedures around procurement. The shift from cost-world thinking to Throughput thinking is not easily made, but the benefits are likely to be profound. Recognizing the unquantifiable costs of lost sales, lost customers and lost reputations requires cost-world thinkers to shift from being “precisely wrong” to being “approximately right” when it comes to discovering what it takes to make more money tomorrow than the firm is making today under its old policies.

 

 


 

 

In our next article in this series, we will cover:

  1. Realigning performance metrics and incentive plans
  2. Cogently managing the tradeoffs between cost and service
  3. Effecting change in the corporate culture

 


 

 

We would like to hear your comments. Please feel free to leave them here, or contact us directly with your comments and questions.

In an insightful white paper published by The Boston Consulting Group, BCG sets forth some very cogent points that should be—indeed, must be—considered by any supply chain managers hoping to increase their success over the coming years.

 

While almost every U.S. firm has sought to reduce the cash it has tied up in inventories over the last decade—and especially the latter half of this decade, The BCG’s recent research shows that those companies that have created advanced DDSCs (Demand-Driven Supply Chains) carry about one-third less inventory while improving delivery performance by 20 percent. And, they accomplish this at dramatically lower supply chain costs, as well.

 

Consider the following:

  • The DDSC’s real-time visibility into demand and supply levels tends to stimulate unprecedented supply chain performance by the partners involved.
  • Participants in DDSCs find that they can reduce inventory levels throughout the supply chain without doing damage to customer service levels.
  • The lower costs and improved visibility found in DDSCs tend to benefit all supply-chain participants, not just a few at one end of the supply chain or the other.

FIG SupplyChain ExtendedCollaboration.jpg

 

Nevertheless, as we have discussed in other articles, creating a DDSC is not simple at present. There are really few to none plug-n-play solutions in the marketplace—especially for the small-to-midsized business enterprises (SMEs) of the world. While the willingness of potential players in supply chains is growing—as more and more trust in cloud-based and SaaS (software-as-a-service) is blossoming—there is still the hurdle of finding a solution that is right-sized and right-priced for the middle-market.

 

It is also worth noting that the transition to any kind of DDSC is not always easy for long-established SMEs. In part this resistance comes from the very fierce independence upon which many of these firms were founded to begin with. Old habits, old processes, old business structures and old thinking die hard, hinder change and, too frequently, limit the success achieved, as well.

 

In addition, half-measures, if instituted, often yield far less than half the desired results. Some half-measures may actually make things worse rather than better—increasing costs or operating expenses, for example, while creating no positive returns or benefits for any of the supply chain participants.

 

Negative experiences with half-measures and spotty attempts at Lean or methods without an accompanying cultural shift in the organizations involved also take their toll. Such failures and false-starts make it all the more difficult to get supply chain participants committed and involved in fresh attempts at supply chain integration and collaboration.

 

Six Factors for Success

 

In their referenced white paper, The Boston Consulting Group has identified six factors that they believe are critical to the success of building and sustaining a truly demand-driven supply chain:

  1. Building the right technical infrastructure
  2. Improving data collection and analysis
  3. Rethinking operations
  4. Realigning performance metrics and incentive plans
  5. Cogently managing the trade-offs between cost and service
  6. Effecting change in the corporate culture

 

We will discuss these briefly over the next several articles.

 

1.  Building the right technical infrastructure

 

It is the end-to-end visibility of demand and supply data across the supply chain that makes DDSCs really work. It is essential for the participants to be joined together around a data-exchange platform that provides both visibility and security. Visibility is essential to make DDSCs work, and the security is essential to make it safe for the participants to share sensitive data. Each participants must be fully confident in knowing that they have absolute control over their data—knowing precisely which data will be shared with which participants in the supply chain.

 

Since it is inevitable that trading partners will change over time—some with more frequency and some with less—DDSCs can become exceedingly costly for the participants if each data interface becomes an exercise in customization and modification to create the connections between the various trading partners. Ideally, the right technical infrastructure is one where mappings between source data (in an inventory, warehouse or ERP system) and the exchange platform (in the cloud) can easily be created and set to active with the involvement of not more than a minimum of technical skills.

 

Security between trading partners should also be manageable by folks with typical computer skills, and the security must be flexible, as well. A trading partner should be able to designate which kinds of data (e.g., data columns) and even which specific data sets (e.g., SKUs, product lines) will be made visible to which other (specific) trading partners. Changing these settings to include more or less data should be simple and take only minutes.

 

The data exchange itself must, of course, demonstrate reliability and speed. Similarly, the platform must be flexible, scalable and offer robust trading features. But the exchange can offer much more to its clients. It can offer intelligence that helps reduce errors between exchange partners by monitoring transactions and developing heuristic methods that might call users’ attention to pending transactions that may contain data entry errors (i.e., too many zeros in an order quantity; the order for ‘model 1001’ when the customer always before has ordered only ‘model 1010’ in that product line). The exchange can even be used by participants to help identify new sources for the products they want to purchase. After all, finding another source already on the exchange means the time to connect and begin DDSC collaboration could be minutes or days, instead of weeks or months.

 

 


 

 

In part 2, we will talk about IMPROVING DATA COLLECTION AND ANALYSIS, and more.

 

Don’t forget to let us know your thoughts on these matters. Leave your comments here, or feel free to contact us directly, if you’d like.

I recently read an article entitled “The humble hero” from The Economist. The article was about containerization of shipments and the impact of container freight innovation on the supply chain worldwide. Some of the statistics were no less than astounding.

 

Port Statistics Worldwide.JPG

 

Containerized freight was an innovation introduced by Malcom McLean, “an American trucking magnate,” as The Economist magazine describes him. Containerized freight and the first prototype container ship was introduced in 1956. When the costs of shipping containerized versus standard cargo were calculated on the first shipment, the results were amazing. Containerized freight came in at $0.16 per tonne to load, only 2.7 percent of the cost of lading loose cargo lading on a standard ship (running $5.83 per tonne).

 

What was Malcom McLean’s real insight?

 

Malcom McLean may was truly a supply chain innovation pioneer—before the term “supply chain” had even been invented.

McLean’s insight was to recognize the real business in which shipping companies were participating.

 

For hundreds—perhaps thousands—of years, the ships that plied the seas as trading vessels along with the men that owned them and sailed them thought they were in the business of moving freight over the oceans and seas. As a result, all their focus was on improving how the ships moved over the water. They sought to make the ships sleeker, faster and safer for the cargo while on the water.

 

For the most part, they entirely ignored the fact that, while it might take them only three or four days to sail from point A on the globe to point B, it could take the ship two weeks to be unloaded in port B and reloaded for its next journey. Only 20 percent of the ships time was being spent on the water. The other 80 percent of its time was spent in port being unloaded and loaded.

 

Perhaps it was McLean who first had the innovative insight to recognize that shipping and trucking lines were in the business of satisfying customers with the delivery of goods—satisfying manufacturers and distributors who were trying to get their goods into customers’ hands and satisfying consumers who were trying to get goods from distributors and the manufacturers who made the goods.

 

McLean recognized that manufacturers and distributors weren’t in one business while his trucking company was in another entirely different business. Instead, McLean perhaps saw that from raw materials producers to retailers, increasing the flow of goods through the pipeline—the “supply chain”—made the world a better place and helped everyone make and save more money.

 

How much was the impact of this innovation?

 

The graph above shows some of the impact of McLean’s innovation and improvements in the flow across the supply chain. Allow me to summarize some of the impacts on the supply chain over the five year period between 1965 (when containerization was adopted worldwide) and 1970:

    • Labor productivity at the docks grew by more than 1,760 percent. This, in turn, allowed shipping companies to increase the size of their ships (from an average of 8.4 tonnes in 1965 to 19.7 tonnes in 1970) while, at the same time, spend less time in port.
    • Door-to-door delivery times dropped dramatically to half or less and became more consistent at the same time.
    • Reduced risk was a huge side-benefit of containerization: falling demand for labor on the docks reduced the bargaining power of the unions and slashed the number of strikes and slowdowns that hampered the movement of freight through the ports. Additionally, since containers could be sealed at the factories, losses from theft and other causes declined greatly. This reduced supply chain risk was manifested in sharply falling insurances costs. By 1970, insurance rates on shipments fell to about one-sixth of their 1965 rates,
    • Ports became bigger and more efficient, while smaller, less efficient ports were closed. Europe had eleven major loading ports in 1965. By 1970, it had only three. This led to greater stability and reliability in both the time and costs related to transshipment of goods.
    • Increasing speed and reliability of shipments across vast distances enabled increasing reliance upon just-in-time production and inventories, further increasing efficiencies and reducing costs.
    • More types of goods could be traded economically in closed containers. Goods that may previously been subject to huge in-transit losses from theft or damage could now be traded routinely worldwide.
    • The broader array of goods helped accelerate the industrialization of emerging economies in China and much of the Pacific rim.This can be seen in the sharp fall of value of goods in transit between 1965 and 1970.

Extrapolating from this lesson

     

    Too many times, in businesses I visit, their view is too much within their own organization and industry. Like the shipping companies of a now bygone era, they think what they do every day is what their business is all about.

       

      Generally, it is not so.

       

      Allow me give you a couple of examples that come to mind:

      • In the 1980s, IBM and Microsoft saw themselves as being companies that supply computers and operating systems to businesses. Reluctantly, IBM was persuaded that they should also supply computers to “people”—hence, they finally introduced “the personal computer” or “PC.” On the other hand, Apple Computers saw themselves—especially with the introduction of the Macintosh computer—as a company that provided a way to get the machine out of the way and let the people improve their lives by leveraging computing for fun and profit. It was Apple Computers and the Macintosh that forced Microsoft and the “PC” computing industry to give us the Windows operating system. I cannot imagine the vast scale of computer adoption worldwide if we all still had to use the arcane “MS-DOS” commands and non-WYSIWYG applications to trudge through our work.    

      • As an early adopter of cellular phone technology (I’ve been carrying a cell phone since about 1987), Motorola appeared to have been a company that saw itself as delivering technology to business. For Motorola—until driven by innovation by their competition—cell phones were cell phones, and nothing more. It took innovative companies like Nokia and, ultimately, Apple, too, to cause this industry to see that could deliver “better living” to millions in hundreds or even thousands of ways.

      Don’t get your head so buried in your own business or industry that you find yourself thinking that your business is “making X” or “delivering Y” or “selling Z” to this or that market. If you do, you will miss opportunities for innovation and higher profits.

       

      If you’re not in the business of making people’s lives better through an innovative and connected supply chain, chances are you are not making as much money today as you could be.

       

      Here’s the question I ask almost every client when I meet with them the first time:

      What are the five or ten things that are keeping your firm from making more money tomorrow than you are making today?

       

      Chances are, the answers are not what you think they are.

       

       


       

      We would like to hear from you on this matter. Please feel free to leave your comments here, or contact us directly, if you prefer.

      The other day I was thinking about the weather forecast, and its inherent uncertainty. I was reminded of what someone once told me was the true meaning of “a 30 percent chance of rain.” It means this:

      There’s a 30 percent chance 100 percent of us will get wet; or there’s a 100 percent chance that 30 percent of us will get wet; or there’s a 70 percent chance the weatherman’s 100 percent wrong.”

       

      WeatherForecastGrid.jpg

       

      Of course, this humorous depiction of weather forecasting is nearly 100 percent accurate. Here’s how the weatherman comes up with that “30 percent chance of rain” in his forecast.

       

      The meteorologists divide the forecasting area into 100 equal geographic portions—a grid.

       

      However, since weather has so many variables—many of them unknown (more on that later)—the meteorologists cannot predict precisely which areas of the grid might receive “measurable precipitation.” Given the expected size of the weather system and its general direction, they can “guess-timate” about how much of their forecasting area might be affected by the approaching weather system.

       

      The forecasters may, therefore, be able to predict with considerable certainty that “n percent” of the forecast area is likely to get rained upon, but they cannot predict precisely whichn percent” will be the recipient of the rain.

       

      As a result, it may be truly said: a 30 percent chance of rain means that there’s a 30 percent chance that 100 percent of the area will get rain; or a (near) 100 percent likelihood that 30 percent of the area will get rain. There is also, however, a 70 percent chance that none of the forecast area will get rained upon.

       

      The need is not for more powerful computers

       

      Back in the mid-to-late twentieth century, meteorologists made the bold claim: “Give us powerful enough computers and we will be able to forecast the weather with 100 percent accuracy.”

       

      Since that time, computers and computing science have worked together to prove one thing to meteorologists: the problem is not having enough computing power; the problem is that we don’t understand all of the factors at work in creating and changing weather patterns.

       

      The butterfly effect

       

      “The term [butterfly effect] comes from the suggestion that the flapping of a butterfly's wings in South America could affect the weather in Texas, meaning that the tiniest influence on one part of a system can have a huge effect on another part. Taken more broadly, the butterfly effect is a way of describing how, unless all factors can be accounted for, large systems like the weather remain impossible to predict with total accuracy because there are too many unknown variables to track.”

       

      Consider your supply chain

       

      All that we have said so far regarding weather forecasting has precise parallels in any forecasting methods you may seek to apply to your supply chain. Instead of a geographic area divided up into 100 parts, you might have a hundred (or more) outlets for your products, or you might have hundreds of different makes, models, styles or colors to manage in your supply chain.

       

      On the aggregate level, it may be relatively easy and (more or less) accurate to predict, for instance, “we are likely to sell 30,000 units from our XL1000 product line over then next 90 days.”

      However, predicting which models, styles or colors among those 30,000 units will sell in which of the 100 outlets is much, much more difficult to predict. And, because of “the butterfly effect,” no one in your supply chain can even know all the factors involved in creating the specific demand that leads to the movement of a specific model, style and color off the shelf at a particular outlet. And, if someone did happen to know that “a butterfly flapping its wings” in South America was going to affect demand in Akron, Ohio, they would not know the precise value to attach to that affect in the demand forecasting formula.

       

      Meteorologist change in focus

       

      You may have noticed, as I have, that over the last couple of decades the weather folks on TV and radio—and those at the National Weather Service, as well—have largely surrendered on the idea of ever being able to predict the weather with 100 percent accuracy.

       

      Instead, they have wisely sought to narrow their focus to those things that are most important. For them, that appears to be saving lives and reducing damage to property by being able to report up-to-the-minute details on weather that is likely to create such losses. They have created new mechanisms and new alliances (with “weather watchers,” “storm chasers,” and broadcast and other media outlets) to capture the effects and warn people who are likely to be affected by “breaking weather.” (For supply chain managers, read: “actual demand.”)

       

      Wisely, meteorologists have chosen agility and responsiveness to changing demand in near real-time over the unfruitful pursuit of “perfecting the forecasting mechanisms.”

       

      Beware the butterflies

       

      Our supply chains will always be subject to butterflies.

       

      And, there’s a reason the weatherman (I use the term generically, and mean no offense to all those fine women in the position of weather forecasting and broadcasting) predicts only a 10, 20, 30 (and so forth) percent chance of rain. I’ve never heard a weather report that said, for example, “And, there’s a 32.8 percent chance of rainfall today….” Nevertheless, the buyer needs a specific number for ordering product, and the manufacturer must make a discrete number in its production run. The supply chain doesn’t operate on “about n units is what we think we’ll be needing.”

       

      Because butterflies will always be affecting our supply chain—because we can never know all the factors that affect demand or how to quantify precisely the factors we do know—it is wiser to focus our efforts on supply chain agility, reducing the length of our replenishment cycles, making our production and transfer batch sizes smaller, and providing more end-to-end visibility of actual demand all across the supply chain.

       

      The most successful and profitable supply chains buffer against demand variability with capacity, not inventory, and work to balance the flow across the supply chain, not balance stocks on-hand.

       


       

      We would like to hear what you have to say on this matter. Please feel free to leave your comments here, or to contact us directly.