Why software is not the answer to on time in full delivery

Friday, September 15, 2017

Australian lean Consultant, txm.com/contact-us

I recently met with a supply chain manager who had major problems with stock shortages. He was bemoaning poor forecast accuracy as the cause of his problems. “Perhaps if we had a better demand management tool, we could get a more accurate forecast and ensure we had the right stock of long lead time items,” he complained.

The supply chain arena is a software salesman’s paradise. There is a huge array of tools available represented by a blinding array of TLAs (three letter acronyms). Enterprise resource planning (ERP) is the tool most commonly seen, but many companies will employ advanced planning and optimization (APO), warehouse management systems (WMS), customer relationship management (CRM), distribution resource planning (DRP) and demand management and forecasting tools. The promise of “big data analytics” as a panacea for supply chain problems has software marketers rubbing their hands together with excitement.

As impressive as these tools sound, not one of them will solve your business’s problem with on time in full delivery. The root causes of poor supply chain performance have nothing to do with software tools. In my experience the three big drivers of poor delivery performance are:

  •     Excessively long lead times
  •     Inappropriate use of forecasts
  •     Large lot sizes or orders sizes

In my workshop at the AME Conference in Boston 2017, I will explore these issues in detail through a practical and fun Lego simulation. However, I will attempt to summarize the key issues here.

The longer the lead times in your supply chain the greater the level of inventory you require and the more likely that you will face shortages. This is because the further in to the future you need to plan, the less predictable your future demand will be. Many companies try to solve this problem with ever more sophisticated forecasting tools, and some even go as far as penalizing customers for poor forecasting! In fact, the obvious answer to long lead times is to reduce them! Use value stream mapping to map your extended flow from your suppliers through your manufacturing and distribution network to your customers.

The supply chain model of scheduling manufacturing and ordering materials based on a forecast of future demand is called a “push” approach. This is the direct opposite of the lean approach, where we use a “pull” to replenish stock based on what has just been used. The problem with the forecast driven “push” approach for most businesses is that demand is too hard to predict, especially if we try to forecast weekly or daily demand for individual SKU items months in to the future. High level forecasts are useful for long range planning of capacity and resources, but for day-to-day and week-to-week replenishment, a “pull” system will give you much better results.

Given most readers will be familiar with lean, I won’t spend too much time explaining the downsides of big batches and large orders. However, in supply chain terms the biggest problem with these is that ordering more of a product less frequently increases your risk of shortages or winding up with excess. The level of stock you need of an item is directly related to the frequency at which you replenish that item. Order or make smaller quantities more often and you can dramatically reduce inventory while still increasing the safety factor to reduce the risk of shortages.

So, what about the software? Can you abandon it entirely and go back to spreadsheets? The answer is no! Unless your business is very small you will need some supply chain software to help you manage your business. This software performs many useful tasks. Some of these include:

  •     Aligning your day to day operations with your accounts to eliminate the need to transcribe inventory and production data in to your financial systems
  •     Tracking the costs of production so that you can better understand which products make money and which don’t
  •     Tracking movements of inventory in your warehouse so you can more easily find things
  •     Providing visibility for costs, inventory and capacity through your whole supply chain network
  •     Measuring overall supply chain performance so you can highlight problems and target improvement efforts

Therefore, the question is not whether you need some level of supply chain software, it is more a case of recognizing where that software can add value and ensuring that you select fit for purpose tools.

In my workshop and simulation on October 9 at the AME Conference in Boston I will explore these concepts in more detail and help you find some of the solutions to your On Time In Full Delivery problems. I hope to see you there!