I can almost guarantee that, if you are managing a supply chain today, you are doing your very best trying to avoid stock-outs on the one hand and over-stocks on the other. And, I will with almost the same certainty, venture a guess that you frequently feel like you’re fighting a losing battle.
You (and I) live in a VUCA world
You, I, and your supply chain live in a VUCA (volatile, uncertain, complex and ambiguous) world today.
All too often, however, we find that supply chain managers and executives are trying to achieve better performance and improved profits by leveraging tools that are no longer really effective in this environment. They are not well-suited for managing against VUCA events in their companies and supply chains.
Let’s take the consumer goods industry and uncertainty. We need to forecast the sales of a certain product in a certain place in a certain time. Based on this we would know how much to produce. One would expect that, over time, our ability to make an accurate forecast would improve, with more information on recorded consumption and more sophisticated IT tools; but reality shows us it’s exactly the opposite—it’s getting worse. We have more and more surpluses and shortages. This is because there are three dynamics in consumer behaviour that makes it almost impossible to predict accurately. The first is that consumers are becoming more sensitive to get the products they want, and this puts pressure on retailers to work with wider assortments, else they will lose sales. The wider the assortment, the harder it is to have a good forecast of what you will sell, because you’ll stock more units and managing the depth of this inventory becomes difficult. The second is consumer tolerance. Consumers are willing to wait less and less for the product to become available, which means that retailers need to have it in the stores, not in the warehouse. Finally, product life is becoming shorter, with new products constantly being introduced and retailers needing to offer discounts to sell the older version. This puts a lot of pressure on brands. Unless the new launch is a star product like the iPhone, there will be a clash between your old and new offerings. All this makes our ability to forecast and have the right inventory impossible.* [Emphases added.]
FOCUS and FLOW have become everything
George W. Plossl postulated:
All benefits will be directly related to the speed of FLOW of materials and information.
Chad Smith and Carol Ptak have added an elegant and important caveat to Plossl’s law:
All benefits will be directly related to the speed of FLOW of relevant materials and relevant information.
When everyone in your supply chain is guessing—read: attempting to forecast demand—then there will be a lot of irrelevant information (read: incorrect forecasts) driving the flow of irrelevant materials. When the information and materials flowing in your company or across your supply chain is largely irrelevant (i.e., wrong), it makes little difference how fast it might be flowing.
In the same interview quoted above, Rami Goldratt reminds us of the importance of FOCUS. He says, “There are always many areas that can be improved; however, not everything that can be improved should be improved. FOCUS starts with what not to do.”
One of the things most companies and supply chain managers should not be doing is trying to improve forecasting.
Most of the last decade has shown supply chain managers and executives that the pursuit of more and more costly and complex forecasting mechanisms has been a futile pursuit. For every margin gain in the algorithms that might improve forecasts, new levels of VUCA have reduced the net gains to zero (or below). Irrelevant information still clogs our manufacturing and distribution resources with irrelevant materials—products for which there is no actual demand.
Goldratt reminds us that, “the only way for companies to survive is to reduce the reaction time to market [changes].” We “need to capture signals from reality of what is selling [actual demand] and react to it as fast as possible. Companies [and supply chains] that can’t dramatically improve response times will not exist in the future,” warns Goldratt.
New methods improve FOCUS and FLOW
New methods promoted by the Demand Driven Institute have proven themselves effective at dramatically improving FOCUS and FLOW. These new and innovative methods create a high-visibility collaborative supply chain where the FLOW of relevant information stimulates the constant flow of relevant materials. This allows companies and supply chains to rapid achieve much higher rates of ROA (return on assets) for their investments in inventory and other resources.
These are the methods we no bring to our small to midsized clients struggling with improving their supply chains and profits.
Let us hear from you. Are succeeding or struggling at improving profits in a VUCA world? Leave your comment below, or feel free to contact us directly, if you prefer.
* From an interview with Rami Goldratt, CEO, Goldratt Consulting by Priyanka Sangani (TimesGroup.com - India) published 27 Feb 2015