Supply Chain

Perils of Pursuing Perfection in your Supply Chain

Over the last five years I have been fortunate to have a front row seat in a cutting-edge supply chain environment for one of the world’s largest retailers. The relentless pursuit of optimization led to tremendous innovation and impressive performance, but the last year clearly exposed the perils found in pursuing perfection.

Picture this: an inventory management team driven to achieve near perfect availability, a transportation group cubing trucks within inches of overflow, distribution operations processing freight without any excess labor or building capacity, and merchandising decisions aligned to only a few key partners to leverage cost through volume. What I have described I will refer to as singular focus optimization (SFO), an ideal trajectory when operating within a world of perfect predictability where product shortages, trucking constraints, natural disasters, late shipments, etc. do not occur. To our dismay, that is not the world we operate within, so let me offer another approach.

The alternate approach is simple to articulate, but difficult to execute since it involves a significant review of how current goals and values are aligned, coupled with organization change management. I argue that adopting a Portfolio Based Optimization (PBO) strategy is the most effective means of balancing volatility and risk while still driving the efficiency that delivers value to the organization. For this, we need to incorporate the principle of opportunity cost into our Supply Chain assessments and goal setting among functional groups.

Step 1: In a PBO strategy, begin to determine priorities by evaluating previous year performance based on year-over-year cost reduction, and the cost of those improvements in terms of company profitability.

An example would be reviewing execution of an event such as Black Friday. Planning is completed far in advance of such a program and the anticipated volumes are fixed in time for adequate labor planning and truck capacity bidding. True to SFO principals, the teams planned for little excess capacity during this time since volumes were understood. However, a key supplier for the event shipped product two weeks late due to raw material delays, and now the wave plan is in jeopardy since additional volume is needed above the plan. Late arrival would erase cost-out value by suppressing sales. The excess inventory would then be a drag on financial performance and limit future aggressive action to capture new sales, further compounding the opportunity cost.

Simply expressed in the Retail Cost Structure chart, don’t forfeit $24 of profit due to chasing a few cents of cost.

Step 2: Leverage new insights about historical performance to set performance targets.

Utilizing my proposed method of PBO assessment, the actual historical costs lead to better future decision making. Supply Chain leaders armed with these insights can decide whether inventory should aim at lower in-stocks to speed turns, or transportation should spend more on excess capacity for flexibility, or distribution operations should plan to have excess storage space to enable nimble and aggressive market expansion.

Step 3: Develop reporting insights that communicate performance through the wholistic lens of value creation and incentivize leaders accordingly.

Data driven decision making is only possible with real-time insights created through leveraging currently siloed information. Predictive analytics enables risk assessment that moves teams away from a singular focus that produces unintended consequences.

At Thought Logic, we are prepared to partner with you on assessing how current Supply Chain goals support overall value, realign those for an optimized portfolio, and then deliver actionable data insights that you can carry forward into the future.