Conventional Wisdom's Not Always Wise
By Dan Markham
on Sep 5, 2016
Executives in supply chains of all types typically operate under a set of commonly understood principles. That may be their first mistake. “Deep truths,” said industry expert Carol Ptak, “are something that everybody believes, but may be unequivocally false.”
Ptak is the founder of the Demand Driven Institute, an organization built on a new principle of supply chain management for the manufacturing sector. She delivered a keynote address at this summer’s 2016 Supply Chain Technology Conference in Chicago.
Ptak pointed to various ways that supply chain executives are sucked in by flawed truths, such as the idea that improvements in forecasting will result in better outcomes. “Forecasts are one of two things: they’re either lucky or they’re lousy. When we use that to feed our planning system, why are we surprised when we have massive shortages and massive overages?”
Another common belief that should be reconsidered is the idea that reductions in costs will improve returns on investment. Such an attitude is mistaken for a number of reasons, most notably because plant operators invariably begin focusing on meeting the targets being used to measure the cost improvements. “If you want to see how I behave, see how I’m measured,” she said.
Putting all the attention on unit cost can result in several counterproductive outcomes, such as larger-batch ordering for more efficient production numbers or the production of lower-cost but overstocked items at the expense of higher-cost but understocked material. These behaviors can cause unnecessary bottlenecks, which lead to a host of new service problems, such as expediting orders that increase costs or fall short in terms of quality.
Once those quality or service issues surface, the organization’s goals change. “We don’t optimize, we oscillate. We go from one side to the other, often accompanied by a change in the management team.” Such oscillation is incredibly damaging for companies, she said, in part because it puts employees in conflict with one another.
Another deep truth that often proves shallow is the idea of the supply chain as a chain, Ptak said. It is not a linear model, where each action has a direct and proportional effect on the next link. Supply chains are actually complex adaptive systems. They are systems of many interconnected pods. There is a reaction to every action, but it’s not proportional. Small inputs can have large impacts, and vice versa, she noted.
Managing in such a system requires not just a willingness to adapt to inevitable change, but embracing those changes as a means of differentiation from competitors. Three steps are vital to developing an organization that can flourish in the ever-changing supply chain model, she explained.
First, “use thoughtware, not software,” which she described as thinking, communicating and behaving systematically. Second, institute a demand-driven production schedule, a system based on the idea of improving the flow of information and material through an organization. The challenge is to overcome the variables that can impede the proper flow. The solution is to focus on the relevant information to give it the best possible visibility.
“When information is irrelevant, variability is exacerbated, flow breaks down and ROI is adversely impacted. Thus, the starting point for any company to transform into a flow-based model is comprehending and gaining visibility to relevant information.” That’s not easy, she acknowledged. “We’re drowning in data and starved for information.”
Third, she said, companies must employ smart metrics rather than existing ones that measure one element of performance and may produce unintended negative consequences. A case in point, she said, is the company that focused on reducing year-end inventory levels. Frantic to meet the goal, its warehouse operators hired a truck to store material until two weeks after the New Year. “Smart metrics don’t put people in conflict with each other or in conflict with the organization,” she said.