Innovation in your supply chains.

You cannot cut your business to glory. There comes a time when being smarter is the better option. After some seven years of hearing and reading about re-organisation and retrenchment as a solution to business challenges, is it the right time to invest in smarter supply chains?

This thought was triggered by a recent report titled Supply Chain Innovation – Making the impossible possible, written by Deloitte Consulting for MHI. Here the authors considered technologies and techniques for supply chains and logistics that can be considered as potential ‘breakthroughs’. Of the eight discussed, six are based on logistics hardware e.g. sensors and automatic identification and IT ‘cloud’ data storage solutions.

But innovation is not just technology ‘things’; it can also be new concepts and ways of approaching challenges. In the report, the authors identify two for supply chains – inventory and network optimisation tools and predictive analysis; both are considered to be in the top four technologies expected to “have the greatest competitive or disruptive impact”. On their own, these techniques are classed as innovative, but is this sufficient for them to be implemented in your business?

But first, what are these techniques? Optimisation techniques try to achieve the best outcomes from within complex relationships. Within inventory, the aim is that for a specified service level, inventories will be optimised, even as factors change. The factors for each inventory item (purchased, WIP and finished goods SKU) in each location across the supply network, consist of at least the following:

• needs of each customer segment
• transport and handling costs
• capacities
• time to market
• time to replenish and
• variability/risk e.g. supplier delivery performance, postponement capability and forecast error

Using inventory optimisation means that static inventory policies, such as ‘weeks of cover’, will not be applicable.

Predictive Analysis is the application of statistical analysis to structured and unstructured data. The analysis is designed to identify patterns and therefore assist in providing predictions of future events or outcomes. The technique will become more common due to the improved sophistication of software and increased desktop computing power.

However, Predictive Analysis is not a new technique. In 2000 I viewed a situation at a company in California predicting the potential patterns of truck arrivals from the eastern states (and therefore daily demand on the unloading docks at the warehouse), based on different product ordering criteria. About the same time, I worked with a company in Australia that supplied air conditioners to be installed in imported vehicles, plus replacing damaged units. The number of vehicles to be imported was known, but not the number of replacement units required. To address the challenge, the approximate mean time between failure (MTBF) rate of air conditioners for each vehicle type was calculated from vehicle accident analysis undertaken by a research organisation. This provided a more accurate basis for calculating the inventory of imported parts and assembled replacement units.

Given the availability of techniques could you implement them?

The first question to be answered is whether senior management would even consider buying the applications when the case that supports a ‘return on investment’ criteria would not be definitive – it will not be the same approach as justifying a new high speed machine or truck!

Only enterprises that are ‘innovation-active’ are likely to support and approve such investments, but surveys have found these types of business to be in the minority. Even within an innovation-active business, management need to view their supply network as a strategic part of the business – why invest if it is not strategic? To be considered strategic requires that the supply chain and logistics group are able to identify, at the minimum, two outcomes for each action or proposal:

1. how will it affect the customers (and consumers if a consumer products business) and
2. how will it affect shareholder value (if a public company)?

That is, the group must be able to address broader business issues, in addition to operational factors and undertaking quantitative analysis.

Assuming your supply network is a strategic part of the business, then what techniques should already be in place and treated as an integral part of the business? My number one is Sales and Operations Planning (S&OP); a structured planning process with the objective to improve the balance between market demands, company resources and the supply markets for materials and services. The process must be owned by the senior manager of the enterprise – the CEO, general manager, division manager or country manager. S&OP is the link between strategic aims and operational reality and if senior management does not embrace the process, the supply network cannot be considered a strategic part of your business.

My equal number one is risk analysis. If the supply network is a critical a part of your business, reducing risks is a strategic objective. To do this , the business must:

• define the supply chain and logistics risks
• analyse scenarios that may reduce the risks
• be able to implement approved changes and
• measure the outcomes

This will require three approaches:

1. a common vocabulary, so that all groups in the business understand the various risks
2. an acceptance by all that your supply network is a complex system, therefore relating with many unknowns and
3. a ‘one-plan’ approach to performance measurement, so that improvement programs are linked to strategic requirements

Understand and use the numbers

Using S&OP and risk analysis require supply chain analysts who ‘understand the numbers’. These are the same analysts that will drive the implementation of new and innovative techniques. However, a challenge that currently exists in many countries is that supply chain and logistics education programs do not emphasise student learning in quantitative analysis for the discipline, nor potential concepts and techniques. So, before embarking on supply chain innovation, make sure your have, or can hire, the skilled people and that the role they will play is clearly defined.

To summarise: using innovative techniques to better understand your supply chains is a ‘good thing’, But for them to be accepted and implemented in your business, they must be part of the strategic role of supply chains and logistics. If the way to glory is only seen as cutting costs and eliminating waste, then innovation is not for you!