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Get off the Wrong Chain!

From the WrongChain to the RightChain(click to enlarge image)

Think about a typical supply chain including sales, manufacturing, sourcing, transportation, and warehousing.

First stop... sales. Let's assume that the sales force creates the forecast and works on commission. What's the worst thing that could happen to a commission sales person? Running out of product. So, guess what kind of forecast they will most likely turn in? You guessed it... an inflated forecast that will not run out of product. The result... more safety stock inventory than you know what to do with.

Second stop... manufacturing. How are most plant managers measured? The large majority of plant managers are evaluated based on the unit cost, plant yield, and/or machine utilization within the four walls of the plant. How do you go about achieving those objectives? Long production runs creating lots of inventory are the norm.

Third stop... sourcing. How are most buyers measured? The large majority of buyers are measured based on how low a price they can pay a vendor for the product. How do you get a low price? Large purchase quantities creating lots of inventory are the norm. (Is it any wonder it's called a lot size?)

Next stop... transportation. How are most transportation managers measured? Most transportation managers are evaluated based on transportation cost as a percent of sales, cost per mile, and/or vehicle utilization. How do you minimize transportation cost and maximize vehicle utilization? By making sure the outbound containers and vehicles are as full as possible, in other words by maximizing the in-transit inventory.

Last stop... warehousing. How are most warehouse managers measured? Most warehouse managers are measured on space utilization and labor cost per unit. How do you maximize space utilization? By filling up the warehouse. How do you minimize the labor cost per unit? By holding orders and releasing large batches of work to the warehouse floor. Those two objectives work together to increase four-wall inventory.

Is it any wonder there is excess inventory in nearly every supply chain?

One day I received a call from the Chief Operating Officer of a large food company. He said they were struggling with the inventory levels in their supply chain. I asked him if he minded if I guessed at what their problem was. I took him through the illogic of what I just took you through. There was an awkward silence on the line and then he burst out laughing. I asked him why he was laughing. He said it was because they had been struggling with their excess inventory levels for more than a year, had paid millions in unfruitful software licenses and consulting fees, and in less than a minute I had diagnosed their inventory ills without ever stepping foot in one of their offices or operations.

I'm not a genius. What I shared with him and just shared with you is the root cause of the large majority of inventory ills in every supply chain. The illness is the misalignment of the metrics of the elements of the supply chain. We'll work on the cure in the next post.