Over the years, working for and with numerous manufacturing companies, I’ve seen many supply chain practices that cost companies money. Over the next several weeks, I’ll outline these issues and discuss some ideas around how to avoid these practices. You can find the previous posts here:
- Reason #1: Offshoring without getting the full picture
- Reason #2 Poorly executed or non-existent sales and operations planning
- Reason #3 Not having end-to-end supply chain visibility
- Reason #4 Making key decisions by modelling the supply chain in Excel
- Reason #5 Not having a supply chain risk management process
- Reason #6 Not effectively managing inventory
- Reason #7 Making decisions based on bad data (supply chain data accuracy)
- Reason #8 Keeping supply chain information in silos
Reason #9 Relentless pursuit of one supply chain metric at the expense of other metrics
Imagine that your child brings home their report card and it’s a mix of good and fair grades. You tell them that the only grade that matters is their geography mark. You tell them that you expect an A in geography – and you don’t care what happens to their Math grade. History? Don’t care. Social studies? Pshaw. Just focus on geography and forget about anything else. Sound ridiculous? It should. Yet, these are similar instructions as what is passed down to the supply chain from executives focused on a specific supply chain metric. One example that I’ve seen several times is around inventory targets. The typical example is as follows;
- A company uses complex software to model the supply chain considering a desired customer service level, lead time data, and statistical analysis of supply and demand variability.
- This software then calculates the statistically correct, time phased safety stock levels across multiple levels of the supply chain, providing the optimum inventory in the optimum location.
- If you sum this inventory across all locations, it represents the minimum inventory needed to achieve the desired service level given the current capabilities of the supply chain.
- The executive team then provides the supply chain planning team with new inventory targets that are (of course) much lower than those values calculated by the inventory optimization tools.
- The supply chain team then ramps down the inventory to the new target and responds to the inevitable stock-outs by expediting short materials and shipments.
- The result is a lower inventory level, but much higher expedited costs and reduced customer service.
Why do companies focus on reducing a specific metric? There can be multiple reasons. Some of the more likely are;
- A metric (like inventory performance) is monitored by financial analysts and therefore tied to stock valuation.
- A single metric has been performing poorly and the company wants to focus on improving that metric.
- For the Dilbert lovers - Someone on the executive team has read an article/book espousing the importance of one metric or another (it happens more often than you’d think!).
The idea of focusing on a specific goal can indeed accelerate progress towards achieving that goal. The problem is that nothing exists in a vacuum and if you are not careful, other metrics that you are not watching can degrade significantly. For example, if your goal is improved customer service, the easiest way to achieve that is to a) increase safety stocks and b) increase expediting to ensure orders are delivered on time. The next time you look at your metrics, you’ll see an improvement in on-time delivery, but you’ll also see an increase in inventory levels and operations costs due to expediting. Things can get even crazier when individual departments have conflicting goals:
- One group is rewarded for improved fulfillment rates while another group is rewarded for inventory reduction.
- One group is increasing safety stocks to improve fulfillment rates while the other is trying to reduce them to cut inventory.
Sometimes laser focus on a specific goal is necessary to turn around a particularly bad metric. However, for most a more measured approach is suggested. There are a number of techniques and tools that can help drive improvements across the company;
1) Systemic continuous improvement tools.
These are many and varied. CQI, TQM, Six-Sigma, Lean, etc. They all look at your enterprise as a whole, find waste and eliminate it. As an example, let’s look at lean and more specifically the one-less-at-a-time approach to inventory reduction. This approach reduces the inventory in a system very gradually. The idea here is that inventory is used as a buffer and acts to hide problems in the supply chain. By slowing reducing inventory, you can identify those problems and solve them. Inventory needed because of long lead time? Find ways to reduce lead time. Inventory needed due to sporadic demand? Find ways to reduce demand variability? Inventory due to large lot sizes? Find ways to reduce lot sizes through setup reduction on manufactured parts or through different contracts around purchased parts. In this way, inventory reduction can happen without impacting other metrics like on-time delivery and operations costs. In fact, by using this approach, on-time delivery and operations metrics often improve, while reducing inventory!
2) Balanced scorecards.
Balanced scorecards consider multiple metrics, often with weighting and targets. They report an overall score that considers all of these metrics. With a balanced scorecard, you can emphasize one metric over the others by giving it a higher weighting. The key difference is that you are aware of the impact you are having on the other metrics because they are shown in the same scorecard.
3) Balanced scorecards as decision support.
No, I’m not cheating by calling out balanced scorecards twice. (well…. maybe a bit). Here’s the thing. When you combine balanced scorecards with an advanced planning tool that allows you to create multiple scenarios, some real magic can happen. Imagine a balanced scorecard where you not only see what your performance has been, but you can see multiple simulation scenarios as well. Now imagine if this balanced scorecard presented an overall score for each scenario. Picking a course of action is as simple as looking at the scores for each scenario. Finally, imagine if anyone in your planning team could have access to this power for each decision they need to make. Suddenly, decisions are being made that consider the overall impact on the organization, not just against a single metric.
A company does not succeed based on a single metric. It takes a balanced approach and awareness of all aspects of your business to achieve success. When targeting a specific metric for improvement, look for ways to improve that metric without negatively impacting others. It can be done and when it is, very often you’ll find that you improve the metric you are focused on and the others at the same time. Have you see examples where a company has focused on a single metric at the costs of all others? What was the impact? Comment back and let us know!
- Inventory optimization frequently asked questions