Supply Chain & Logistics Best Practices - are You Keeping Up?

We are told that the constant increase in computerlevels (availability) for the system. Such an analysis
processing power (one version of Moore’s Lawcan tell you the first, best spare component to buy
states that computing power/dollar doubles every 2(and where to put it in a network) to improve the
years) is changing the way the world, and supply'native' system availability, and then the second, and
chains, operate. This article looks at some of thethird spare, until the spares budget is exhausted.
ways the Internet and other computer enabledThe traditional item by item analytical approach,
technologies have created 'best practices'.where only the failure rate, repair time and gut feel
The question for you is whether or not you areare considered, delivers an unrepeatable, biased,
keeping up!sub-optimal spares package for a given budget.
1. Forecasting and Demand ManagementIf you operate capital intensive equipment and do not
Many companies need to forecast customer demanduse system based, marginal spares analysis, you are
because their lead-time to supply is longer than theirnot keeping up.
customers will typically wait for products. The most5. Supply Chain Financing
common method is to forecast at some aggregateMany companies have optimised their supply chain
level (product family or geography) and then figurenetworks and inventory deployments, adopted lean
out what to send to each store or regionalmanufacturing and streamlined their product
warehouse by essentially making another forecast;development cycles. The final frontier for these
such as demand this year will be in the sameleading companies is supply chain financial engineering.
proportions as last year. This is done because it is,Buyers and suppliers are traditionally in conflict as
'impossible', to generate and review a forecast foreach seeks to optimise their payment terms –
potentially millions of item/location combinations.buyers try to extend terms and suppliers trying to
Best practice is to let a machine make a statisticalreduce the time between invoice and payment to
forecast for each item in each location and thenmatch their inventory turn.
aggregate this demand for management review andBest practice lies in a lender, usually with a relationship
adjustment (by product family or geography). Thewith the buyer, to leverage the arbitrage between
forecast adjustment can be applied automatically tothe cost of debt to the buying firm and the cost of
each item / location in the proportions based on thedebt to (typically) the smaller supplier.
original forecasts. This practice can be enhanced byPayables financing removes the conflict by allowing
so called 'tournament' forecasting where thethe supplier to extend terms (say 90 days instead of
computer program tries out a whole range of60), with the buyer company’s lender funding
possible forecast models and picks the best model onthe invoice as early as the day of issue.
the basis of the lowest, unbiased forecast error. TheIn common with traditional factoring or invoice
tournament is re-run every time the underlyingdiscounting arrangements, the supplier receives a
demand data is updated (typically weekly orpercentage of the due payment up front. However,
monthly).with a supplier finance approach, the process is
If you are not using item/location tournamentinitiated by the buyer through its own bank and,
forecasting, you are not keeping up.thanks to the buyer's stronger credit rating, the
2. Inventory Optimizationterms are likely to be more favourable than the
A very common method of managing inventories isterms on offer to the supplier through a local bank.
to apply a policy or rule, typically based on someThis can be structured as non-recourse funds by
segmentation analysis (e.g. ABC), to hold a certainbanks that are experienced in these reverse
number of weeks of historical average demand –factoring solutions.
for example, 4 weeks of cycle stock and 2 weeksThe lender’s exposure is to the buying company,
of safety stock. Unfortunately, rules-basedeven though the seller receives the advance
approaches tend to be ‘one size fits’ all. Thispayment. The lender can achieve a margin which is
means, by definition, that the rule will deliver the righthigher than its normal return achieved on money
amount of inventory for some items, too muchloaned to the buyer, but below the cost of funds to
inventory for other items and too little inventory tothe seller, since it is lending against the credit profile
meet service levels for other items. As a result, weof the buyer. The seller benefits from a shorter cash
get inventory imbalances that result it excessiveto cash cycle and may be able to pass some of this
inventory costs, impeded cash flow and poor and/orbenefit on to the buyer as a lower price. The buyer
inconsistent service levels all at the same time. Inbenefits from the positive cash flow effect and the
addition, rules-based approaches are only sensitive topotentially lower price – improving profitability,
changes in demand. So what, you ask? Well, thiskey ratios and growth opportunities. The lender
means they’re relatively static and not linked toincreases its volume of business, improves the margin
other important factors, such as service level andobtainable on the buyer risk and strengthens the
forecast accuracy. For example, if you want torelationship with the buyer.
increase your service levels, you have to estimateThe key to making such a system viable is process
(i.e. best guess) what change in your inventory rulesautomation and real-time visibility of invoice data
will deliver this. If you invest in a forecasting systemenabling all parties to track each invoice, its advance
and improve your forecast accuracy, a ‘weekspayment and final settlement – reducing risk and
supply’ approach won’t reward you withcost for the three participants.
reduced safety stocks. Here again, you have toIf you are a large buyer of goods or services, and
figure out what the impact is and change the ruleare not using automated supply chain financing, you
yourself. This gets particularly difficult when you haveare not keeping up.
a significant number of items and stocking locations.6. Optimal Supply Chain Network Design
Fancy doing this for 10,000 products every week!When one company takes over another, everyone
But there is a solution.talks about 'synergy benefits' and 'economies of
Best Practice is to have a service level goal forscale', which may be true in terms of market share
demand satisfaction off the shelf and then calculateand product portfolios, but they can be slow and
the necessary inventory parameters (i.e. orderdifficult to achieve in the supply chains. The integrator
quantities and safety stocks), taking into account allusually starts with at least two of everything –
the relevant variables:warehouse networks, transport and supply contracts,
Now, if we increase our service levels, our inventoryinformation systems and organisational cultures. The
parameters for all items adjust automatically becauseusual approach is to attempt to 'cherry pick'
there is a direct link – and our customers arewhatever appears best (or cheapest) at the time
happy because we’re servicing them consistentlywithout necessarily understanding the impact on
to target. If we improve our forecast accuracy, oursupply chain risks, inventory levels or customer
investment in safety stock will be adjustedservice. Even without a merger situation,
accordingly, and we’re rewarded with betterunderstanding what the growth path should be, at a
inventory turns and case flow. The result is the rightstrategic level for manufacturing and distribution
mix of inventory for each and every time in everycapacity at home and abroad is often painfully
location, and the benefits are achieving ‘best inreactive. Roughly 80% of the cost of a supply chain
class’ inventory turn rates and customer serviceis fixed at the design stage – the rest are just
levels at the same time.rate negotiations.
If you are using rules based approaches to manageBest Practice is to use integrated graphical and
inventory, you are not keeping up.mathematical models to design the supply chain at
3. Optimisation - Schedules/ rosters / workthe strategic level. The graphical network maps,
assignmentsusually linked to geographic data (such as road
The spreadsheet is the most common tool applied tonetwork time/distance matrices), allow the
the problem of resource scheduling, be it school classnon-mathematically inclined to visualise the existing or
rooms, warehouse order picking, operating theatres,proposed network. The optimisation solvers attached
factories, television studios, airports or deliveryto the model allow billions of combinations of facility
trucks. The planner in all these businesses is trying tolocations, transport links, capacities, inventories and
find an optimal solution, but will generally settle forcustomer allocations to tested and a cost or profit
the first 'satisficing' solution they encounter based onoptimal solution defined.
some internal heuristic of what constitutes a goodIf you are not using mathematical optimisation for
roster, schedule, route or assignment.strategic network design, you are not keeping up.
Best Practice is to apply computer algorithms to7. Sales and Operations Planning
solving the problem and generate an optimal or nearSome businesses behave as if the 'good old days' are
optimal solution. Recent advances in both computingstill with us. They either have plenty of idle capacity
power and applied mathematics have madethat they can flex to meet any customer demand or
extremely large problems amenable to directare comfortable holding plenty of inventory
computation as well as lowering the threshold wheresomewhere in the supply chain – and their
such methods become economically viable for smallershareholders are probably unhappy. These businesses
organisations. Computer algorithms can often throwoften pay a bonus to a salesman who can sell above
up options a human planner would never consider andbudget, but cane an operations manager who cannot
produce solutions that fair, unbiased, more profitablekeep the pipeline full.
and quicker to produce.To these businesses the budget is a once a year
If you employ more than one dedicated planner, whoguess at the future (last year plus 5%) and tracking
is doing it all 'by hand' in a spreadsheet, you are notis based on hindsight – what happened last
keeping up.month and where we are year to date. Sales has
4. Spare Parts for Capital Intensive Industriesthree sets of numbers – budget, actual and what
Keeping capital intensive equipment operating is keymight have been if Operations had delivered.
to delivering profitability in industries such as mining,Operations has the budget and what was planned, as
power generation, electronic networks andwell as what needed to be pushed into the schedule
commercial airlines. Various maintenance philosophiesto accommodate 'urgent' orders, expedited raw
can be applied to keep the down-time to a minimummaterials and the new customer that just popped up.
involving scheduled pre-emptive replacement,Accounting has the budget, variances to budget and
condition monitoring or waiting for a breakdown andstraight line revenue forecasts.
then responding rapidly.Best Practice is to run the business using Sales and
Determining the spare parts to be held to support aOperations Planning, on one set of numbers, driven
rapid return to service (assuming an on condition orfrom a forecast for every item sold. On a monthly
on break-down methodology where componentcycle, forecasts of future demand are run for the
removal events are randomly distributed) is a 'blackcoming 18 months, adjusted with market intelligence
art' in most industries, and often left to the plantand new product forecasts and locked as the official
maintenance engineer and advice from the equipmentDemand Plan for all purposes. This Demand drives the
supplier, who may have an interest in selling spares.Operations plan – sourcing, capacity planning,
Best practice, as often seen in military aviation orlabour and materials planning, stock levels and
NASA, is data intensive since records must be keptdeployment at a rough cut level. The approved
of each component failure or removal to provide theSupply Plan then feeds a forward view of costs and
basis of a sparing analysis. This kind of recordrevenues that is approved by the CEO and measured
keeping is mandatory in civil aviation but is increasinglyagainst the budget. The budget is effectively the
found in modern computer based maintenanceS&OP Plan at the start of the financial year. Top
management systems applied to production plants ordown adjustments imposed by 'head office' need to
data networks. Other factors, such as Essentialitybe reflected in the real plans with real actions
(related to redundancy and failure modes in theattached.
machine design), item cost, cost of down-time, failureSales is measured and rewarded on the accuracy of
rates (often expressed as the mean time betweenthe Demand Plan. Operations is held accountable for
failures) and total repair cycle time (if the componentexecuting the agreed Supply Plan. The business has
can be repaired and returned to the serviceablean agreed basis for long-term and near term planning
spares pool) can be combined in a marginal analysis ofand unit costs go down since operations gets a
each incremental spare part/location combination.forward view to optimise capacity.
The resulting cumulative inventory investment curveIf you’re not running your business on one set
represents an 'efficient frontier' - a line of optimalof numbers, not using integrated Sales and
spare part inventories that deliver maximum serviceOperations Planning, you are not keeping up.