Companies constantly seek ways to improve their performance and enhance their competitiveness. One of the most powerful areas for achieving that is supply chain performance, because:
- It is relatively simple to gain meaningful improvement in performance
- Any performance improvement immediately improves cash, cost, investment and sales
- Supply chain performance answers a highly important need of the consumer goods producer customers (retailers and distributors).
Supply chain management has the target of ensuring that the right product is at the right place, at the right time, at the right quantity. The performance measures that indicate how effective the supply chain is in delivering to its target are – Availability – measured by shortages at the consumption points, and Inventory. A process of ongoing improvement in supply chain performance needs to be constantly reducing shortages while at the same time reducing inventories.
Unfortunately, it seems that in most cases the improvement initiative companies adopt in this area are not meaningfully improving the situation in comparison to what it was before, inventories tend to grow and availability is not improving as expected with the higher inventories. IT solutions and forecast improvement represent much of the effort invested for improving supply chain performance. I would like to suggest this direction is erroneous. Not only because of the fact, that it should be clear that forecast by definition can never be accurate, but primarily because the accuracy of forecast will increase infinitely if it is not used at all.
Yes, it is possible not to use forecast at all. Taichi Ohno, who is regarded as the one that invented and developed the Toyota production system, wrote in his famous book – “All that we do is look at the time that passes from the minute a customer places and order to the time we collect the payment for this order, and work to reduce it”. The target is zero lead-time. What is the ultimate effect of zero lead-time? It is 100% availability, with zero inventory and zero supply chain cost. The important thing to realize here is that as long as you continue reducing your lead time even if zero will never be realized (which makes sense) still you will continue enjoying improved availability, reduced inventory and lower supply chain cost. Ah, and yes, the shorter the lead-time is, the less you need any forecast.
The good news is that dramatically reducing supply chain lead-time is attainable through applying some common sense flow management rules in place. Through implementing these rules, the supply chain can rapidly gain a quick drop in lead-time coupled with sharp decrease in inventories and breakthrough availability. This immediately reduced the consumer goods producer investment, improves cost and increases sales, through the improved availability. Please note, that 1% shortages is not equal to 1% lost sales, this is because of two factors; the first is that mostly the products missing are your high runners, and second 1% missing one day is a very different number in comparison to 1% missing 5 days. In our experience, most consumer goods manufacturers loose anything between 15% to 45% sales opportunities due to shortages.
Lastly, when you improve your availability to be almost 100%, your service levels to your customers improves dramatically as well, meaningfully enhancing your competitiveness. This is because; the effect of shortages and excess inventories on retailers and distributors is by far larger than for the producer. Ad retailers and distributors moneymaking resource is their shelf space, improved availability with lower inventories have immense effect on sales and profitability for them. The gain is enormous and thus the competitive power of producers that can deliver such performance becomes a powerful differentiator.
Companies constantly seek ways to improve their performance and enhance their competitiveness. The most powerful areas for achieving that is supply chain performance. As John D. Rockefeller said – “The secret to success is to do the common things uncommonly well”