I recently came across an article entitled “Visibility Is Key when Driving Supply Chain Performance” at Supply & Demand Chain Executive. If you are a regular reader, you know that I am a real hound for “supply chain visibility.” So, I was anxious to read what the article had to say.
Sorry to say, I was greatly disappointed by the opening salvo in the article. It reads: “At its heart, supply chain management requires a balancing of operational efficiency, customer satisfaction and quality. Managing the true cost to serve for each and every order is the aspiration to… value creation across the supply chain.”
Wow! What a disappointment.
I really thought we were starting to get beyond making our supply chain managers and executives “jugglers” in some great circus of enterprise.
So, how do those conversations go?
I’m always curious to know how, in some organizations, the supply chain executives and managers have those conversations about “balancing” between these three factors.
I somehow imagine the CFO saying to the COO: “Look, George, our operational efficiencies have been falling off too much this quarter. The shareholders aren’t going to be happy with the results. So, for the next six weeks or so, let’s allow customer satisfaction to fall off. We’ll let you choose which customers you want to leave dissatisfied—and, frankly, we don’t care if you dissatisfy them with lower quality, late shipments on some products, or increased back-orders. As long as we can get our efficiency numbers up for the quarterly reports, we really don’t care how it gets done.”
No, of course, not
Even though supply chain managers and executives make talk a good game about “balancing” operational efficiencies, customer satisfaction, and quality, the actual decisions about these factors are almost never made—in the final analysis—in the board room or at a rational meeting. Instead, the exchanges about so-called “balancing” are more likely to made in the heat of the moment.
The exchanges are more likely to sound like these:
- “Listen, Fred, you know as well as I do that ABC Company is one of our best customers. You’re going to get that shipment out the door by tonight! And, I don’t care what your efficiency report looks like at the end of the month!”
- “Yes, Sam, I know that the quality of those parts we received in the last shipment from XYZ isn’t up to our usual standard, but we can’t afford to wait any longer and disappoint the 30 customers we’ve got waiting for those widgets. We’re just going to have to expect higher return rates than usual. Otherwise, we’re likely to lose some of those customers entirely.”
- “Frank, if you want me to break my set-up just to get a later order out to your favorite customer, you’re going to have to get approval from the CFO, because my bonus is riding on keeping my efficiencies up to the target.”
What’s wrong with this picture?
What’s wrong with this picture is actually buried in the second sentence of the article (quoted above). The reason these supply chain managers and executives feel compelled to “balance” and make trade-offs is because they believe that cost is the driver of business profitability.
I’m here to say, probably too bluntly, that cost is not the driver of business profitability!
I can prove it one brief thought experiment. If the goal of business is to drive costs down, then the ultimate is to drive costs to zero. How much profit will your supply chain be producing when costs are equal to zero?
That’s right: zero!
Now, what if we change the central them of our managing?
If we put FLOW at the center of our thinking as supply chain managers and executives, look what happens!
When quality increases, FLOW automatically increases. Fewer materials and resources are wasted on rework and scrap. Furthermore, efforts to improve FLOW, will automatically lead to improvements in QUALITY, because it will readily be seen that poor quality is the enemy of FLOW.
When FLOW improves, customer satisfaction also improves—all else being equal. This is especially true when FLOW is defined—as it should be—as the FLOW of relevant materials and relevant information. Things manufactured, purchased, or moved from place to place that are not connected to actual demand are likely not relevant materials. Similarly, forecasts that are wrong—and they always are—may be close enough to drive capacity planning, but they are not relevant information for driving the production and movement of materials.
Finding ways to improve the FLOW of relevant information and, as a result, relevant materials, and customer satisfaction will automatically rise.
When FLOW is improved, operational efficiencies automatically improve when measured at the system level. Measure on a work center-by-work center basis, they may not appear to be better. But, it is the efficiency of the entire system—the entire supply chain—that produces profit by the FLOW of relevant materials and relevant information. Producing and moving about products for which there is no demand is—as Toyota properly identified—waste and inefficiency.
The whole team pulling in one direction
When FLOW becomes the central theme of supply chain design and management, the whole team can all pull in one direction. This is what it means to become demand-driven (but that does not mean make-to-order).
This requires a change in thinking. Chances are new “thoughtware” will need to be installed in your organization. But it can be done.
Stop your “balancing” act! Focus on FLOW and discover harmony in your supply chain once again.
Let us hear from you. What are your thoughts regarding COST versus FLOW? Are you confused between demand-driven and make-to-order? They are not the same. Contact us with your questions.