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Supply chain troubles won't end soon

by Howard Coleman

Part 1 of this two-part article appeared in the March/April 2022 issue of Industrial Supply magazine. Catch up with it, if you can, to get the full context.

After reviewing Part 1 and reflecting upon it, it occurred to me that some readers might think it mostly pertained to manufacturers/suppliers and a bit less directly to wholesale distributors. Of course wholesalers have been impacted by supplier shortages too, so Part 2 is more slanted toward wholesale distributors. It also leads to another frequently asked question:

“In hindsight, what could the industry have done to help avoid or limit supply chain issues?”

My answer to that question comes in the form of four key points:

1. Build more resilient supply chains. Increase your ability to quickly respond to shifting production, sourcing or distribution (what I often describe as “the nodes, the modes and the flows.”
2. Share real-time product demand data with suppliers.
3. Utilize the inventory you possess as a way to counter demand uncertainty.
4. Examine whether a new breed of “Supply Chain Manager” is needed. What should the Supply Chain Manager of the future look like? Is there a need to supplement a skills gap?

Let’s drill down . . .

1) Stress test your supplier. Objectively segment your suppliers by risk level:

• Obvious high risk – your total spend and the supplier performance impacts are high
• Low risk – low total spend and low financial impact of performance
• Hidden risk – total spend may be low, but the financial impact of disruption is high

Further, what mitigation policies, based on these supply chain vulnerabilities, should you put in place when the supply chain comes under stress?
Is single-sourcing really working for you now? Are there options? Should you be considering those options, like diversifying your sources of product?

2) Share real-time product demand data with suppliers – as well as advance orders. This gives suppliers at least a chance to plan their raw material in advance, and align their operational requirements with respect to their labor and equipment; not find out about it when an order gets plopped on someone’s desk.

I know well, from past experience, that when you talk about sharing data, it is often anathema to even mention it in any context. I’ll hear “well, that’s not for us” and, frankly, I hear that quite often. I’ve long thought, is this a matter of East vs. West culture, short-term thinking, a difficulty or a simple unwillingness to provide transparency, or maybe related to what is believed to be confidential information? I know that in some B2C or B2B arenas, wholesale distributors are amply rewarded (meaning compensated in dollars) for providing real-time demand data (point-of-sale) to their suppliers. Their industry organizations and marketing and buying groups foster this exchange of data and sometimes even facilitate the exchange.

Doesn’t that really have to do with building close relationships with our suppliers, treating them as partners, believing that their success is our success? Now, those are nice words, and yes, we may say we do, but today it is primarily focused on new products, price, order minimums, discounts and rebates. I think we’ve forgotten the potential benefits of collaborative improvement in things like data sharing, data driven transparency approaches, which under traditional regimes have often meant little or no information being shared with upstream stages in the supply chain (meaning your suppliers) that could be actionable, or at least opening a discussion about how we can encourage continuous flow of product from supplier to purchaser, through your distribution facilities, to end customer, the point of consumption.

3) Use the inventory you order and/or already possess internally more effectively to reduce demand uncertainty. In particular, if you are a multi- location wholesale distributor, where and how much you stock of an SKU is important to you and particularly during these times of product shortage. This could be a key area for thinking differently about how you allocate and replenish each stocking location most effectively. What actions can be taken to possibly re-optimize those inventories at both DCs and at your branches? Simply, think about it as a different form of inventory rebalancing.

Often, when an in-depth analysis is done, it shows high levels of buffer stock being maintained relative to the overall inventory valuation. It is often caused by the impacts of all those inventory drivers we use (safety stock, lead time, those resulting ROQ/MINs and MAXs/EOQs) all being applied the same way for all SKUs, regardless of demand variance at each location.

We all know the real role of inventory; it’s to function as a buffer. That is, to enable a smooth and continuous flow of product. It’s intended to contribute to the efficiency of procurement, inventory availability and value added.

In wholesale distribution terms, we know that production is not the assembly of product but rather the ability to get product procured, stocked and then back out the door efficiently and timely from a distribution operations cost and service perspective. That’s paramount – it’s why you are in business.

The orders you place with suppliers are traditionally based on forecasted demand. This can lead to a mismatch between what is ordered versus what is needed. You have experienced this in both good times and bad, haven’t you? Simply, it is the forecast variance that is ever present; it becomes the culprit. You call that variance a bottleneck or a constraint. Why not treat the bottleneck or the constraint? Mitigate it, rather than allow it to intensify and aggravate in-stock positions during difficult times.

So, have we done everything possible to reduce demand forecast variance? Frankly, I don’t think so. At some level, we just expect suppliers to keep high inventory levels or we use consignment agreements or vendor managed inventory, etc., often hiding the process and structural issues that still exist within.

So, why not develop a process that looks at the actual inventory condition, based on rules, and then orders inventory to be replenished when needed? “We already do that,” you may say, and then quickly add, “We’ve already spent thousands to improve our inventory replenishment systems.”

So, I ask you to bear with me on this. What’s probably missing is something called a pull signal; a simple binary signal that says “I’m ready for more – or I’m not” but it’s closer to its demand origination (the customer buy signal) and then puts responsibility for final ordering in the hands of your operations team members who best know their particular product line situation.

Again, you might respond, “Wait, that sounds pretty much like what we’re already doing.” Except I suggest you’re probably not. In all likelihood, you are more likely to be pushing inventory, responding to those ROPs or MINs that, along with their associated ROQs/EOQs and MAX parameters (those inventory drivers!), are based on demand forecast and therefore subject to that evil forecast variance.

We all know that there always will be demand variability, a factor that we’ve all encountered, and surely in more recent times. So, I suggest we not be solution-constrained, particularly when, frankly, many of those solutions we currently use literally come from 1990s thinking.

Is there a better way to maintain variable SKU buffers at DCs and branch locations that are “action promoting” and protect against uncertainty, rather than just some across-the-board dictate to increase safety stock? And what’s the role of target inventories? Could they be useful?

I suggest there’s a lot to relearn here and that our thinking should be different. We have to relearn this topic even though it challenges the conventional wisdom about safety stock/buffer stock calculation and all those inventory drivers we’ve mentioned.

I understand it may sound a bit self-serving here, but our white paper “The Business Intelligence & Supply Chain Management Challenge: Create Profit, Service Level & Working Capital Improvement,” covers a lot of what I’ve alluded to here, although, I admit, upon your first reading, it may seem somewhat counterintuitive to you. It’s available on our website at: www.mcaassociates.com. It doesn’t involve new software!

In fact, the concepts employed are featured, in even a more granular and illustrative fashion, in Episode 6 of our ‘MCA Talk’ Podcast Series – “Distribution on the Cusp of Metamorphosis.” Listen in conjunction with the white paper; it provides a full tutorial.

4) A new breed of Supply Chain Manager – what should the Supply Chain Manager of the future look like? Although some people may say that we actually need data scientists, the key attributes that I believe are required are:

• The ability to develop the necessary data requirements, data flows, the data visualization and the utilization format to support supply chain decision making at every level of demand echelon (manufacturing or other supplier source) and at the distribution network echelon level. That sounds like a Data Architect to me.
• Skills in supply chain management risk, resilience and supply chain relationship management.

The term Data Scientist is really more of a key attribute for demand planners. They must be able to follow the money for daily inventory planning decisions with objective analysis that supports a high-quality planning basis. Particularly during these times, very critical analysis is required for product shortage and allocation decision making.

So, this new breed of Supply Chain Manager must be able to lead and align what should be a data-rich environment, providing greater insight capability. In other words, yes, they become the data architects.

Finally
You know, even our old friend Nostradamus would have found making a prediction rather difficult when it comes to current supply chain woes.

Let’s not pretend that the current supply chain crisis means throwing new and/or different practices out the window or is seemingly impossible to mitigate. And it doesn’t always mean needing new or significant investments in software. It may simply require thinking differently. It may need a new way of thinking about the continuous design of your supply chains that outsmarts the disruption at least most of the time!

Let’s prioritize the adoption of capabilities that eliminate functional and data silos, which are barriers to continuous supply chain design. Create an environment for learning, planning and execution with the entire community of your supply chain decisions makers, both internally and externally.

If you believe as I do that there is a clear connection between performance and the competitive value of the data – the information – that resides in your company, then the use of business intelligence and its associated analytics can differentiate your company from the competition. Why leave the numbers and information you possess to interpretation, or to your own beliefs, or maybe even letting it languish because of an uncertainty about how to act on it?

There is good reason to believe that with some creative thinking our future supply chains can be more balanced, both efficient and resilient at the same time, while becoming more collaborative rather than just transactional.

The current gridlock probably means facing additional pain for a while, but there is a pathway ahead.

Howard W. Coleman, principal at MCA Associates, a management consulting firm, works with wholesale distribution and manufacturing companies seeking and committed to operational excellence, implementing continuous improvement solutions and much more. Howard is also the creator of the “MCA Talk” Podcast Series: Distribution on the Cusp of Metamorphosis. Contact him at (203) 906-7268 or by email at hcoleman@mcaassociates.com.

This article originally appeared in the May/June 2022 issue of Industrial Supply magazine. Copyright 2022, Direct Business Media.

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