The importance of supply chain management

If you supply more than a handful of products, it is likely you have the opportunity to save serious money in your supply chain. Leading companies work toward a better understanding of their supply chain so inefficiencies can be rooted out, and so they can achieve fast delivery and good service at least cost. The difference between a well-run supply chain and an average one has long been reckoned at several percent of sales.

Installing information systems and speeding up existing processes is not enough. The more effective approach is to understand and design a coordinated set of policies for decision-making, production and shipping across the enterprise.

Understanding the big picture

Many decisions affect supply chain performance, and they interact:

• Consumption behaviour
• Timing of ordering, ordering logic and order size
• Service level promised, on-time percentage and lead time
• Supplier selection and allocation rules
• Make to order or make to stock
• Shipping policies
• Reliability of production and shipping
• Plant policies such as scheduling, incentives and constraints

Every one of these is a decision-making policy held by someone across the enterprise. They interact with one another and produce complex behaviour over time. The tendency is for each person to optimise their own piece, which frequently sub-optimises the whole. You can start driving toward understanding simply by documenting and mapping what you have.

Amazing but true

These are the kinds of things companies find when they look closely at their own supply chains.

Safety stock on both sides of a pipeline

A supplier and a customer each build safety stock on either side of the same pipeline, so both are insuring against the same stock-out. Often the customer has no idea of the hidden cost of the supplier's insurance.

Long lags caused by the timing of decisions

An order goes to Supplier 3 from the plant on Wednesday, but Supplier 3 plans its schedule on Tuesday, so that information sits for six days. The pattern repeats up the chain until the information Supplier 1 is working from is nearly three weeks old.

Internal policy inflating the safety stock

Safety stock turns out not to be protecting against variability in demand so much as against variability in supply from the plant, caused by a shipping policy that requires full truckloads. The company created the variability it is insuring against.

Painting a better picture

Beyond process mapping, companies use simulation models to build alternative pictures of their supply chains, so radical ideas can be tested without disturbing the real system. That third example above is the subject of a paper of ours on full truckload policy, and the run-length question behind the first is treated in another.

This page was first published by Simulation Dynamics in 2003 and has been cited in the supply chain simulation literature. It is reproduced here, lightly updated.