Supply Chain Assumptions That Could Ruin Your Business
[Also posted on LinkedIn]
In today's fast-paced and ever-changing business environment, supply chain management has become a key competitive differentiator for firms. As international trade barriers continue to fall and businesses become more global, the principles and assumptions that govern a company's supply chain operations have become increasingly important. However, firms must be mindful of the assumptions they use in developing their supply chain strategies, as outdated or impractical assumptions can lead to significant problems for their business.
- The belief that the key to supply chain performance is efficiency. This assumption, which is rooted in the idea of a "manufacturing economy," is based on the notion that factories should run items a few at a time over extended periods to minimize changeovers and maximize efficiencies. However, this assumption is no longer relevant in today's market, where product variety and niche markets have multiplied across industries, and customers have become more demanding with the multitude of choices available. Firms now face varying demands to make available assortments of products within very short lead times.
- The idea that significant improvements in the supply chain happen at the enterprise level. In the past, large companies would optimize their internal operations to achieve needed improvements and productivity gains. However, with the complexities of product differentiation and diversity, firms now spin off sourcing, manufacturing, and logistics operations to third-party providers. Influence is now determined by how well a firm collaborates with vendors and logistics providers in today's complex business environment, requiring partnerships based on alignments of goals, strategies, and performance measures.
- The belief that increasing inventory will increase service level. Many firms build inventory to ensure service levels, but this mindset is a result of not understanding the reason inventory is needed in the first place. The key to increasing service levels is to understand demand variations and optimize supply reliability, rather than increasing inventory outright, which leads to expensive outcomes.
- The practice of awarding business based on the lowest price. While price is a significant factor in choosing which vendor or third-party provider to buy from, managers must also consider the effects of opting for lower-priced items or services. Choosing lower-priced items or services can lead to quality or reliability issues, as seen in the recall of batches of finished drug products a few years ago by US pharmaceutical firms that bought cheap raw materials from China produced in a contaminated environment.
- The belief that forecasting will solve supply chain problems. Forecasting is only a part of a bigger picture and simply reacting to forecasts is a sure route to long-term frustration as forecasts are never likely to be accurate. The key is to understand what customers are buying, what they will buy, and why, and from that understanding, derive future patterns of demand that would help determine a viable and responsive plan of supply.
In conclusion, supply chain management has become a competitive differentiator for firms, but it will continue to be more complex as new ways of serving customers through partnership and collaboration emerge. Therefore, it is essential that managers review and challenge the assumptions that form the basis of their present-day supply chain operations.
Mr. Jovy Jader is a Consultant, Regional Speaker and Author on Supply Chain Management. Mr. Jader is presently a Partner of Prosults Consulting LLP. He has directed and implemented Supply Chain Management projects, both local and international, which have resulted in company-wide improvements in inventory, total cost, response time, quality, and on-time delivery. Should you have questions or comments, please e-mail them to firstname.lastname@example.org.
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