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.

Pruning for Profit

C SKUs purchased only by C customers are good candidates for pruning! (click image to enlarge)

According to Webster pruning means “to reduce especially by eliminating superfluous matter, to remove as superfluous, to cut off or cut back parts of for better shape or more fruitful growth, to cut away what is unwanted or superfluous.” The purpose of pruning is to focus the resources available to the plant in the healthiest limbs and branches in order to maximize the quality of the fruit produced by the plant.

One of the best examples of the profitability of pruning comes from an unexpected source… We have a franchise of our business in Japan through a joint venture with a division of Mitsubishi. I travel there once or twice a year to teach a series of seminars, consult with clients there, and checkup on the business. During one of my trips, my Japanese partner promised to take me to one of best places to eat in Tokyo – the basement of a department store near our Tokyo office. I didn’t understand until I got to the produce section. He showed me some of the most beautiful fruit and vegetables I have ever seen. It was also the most expensive I have ever seen. A small bunch of grapes was $14.00. One cantaloupe was $120.00. A single strawberry was $5.00. Three peaches were $9.00. I asked my partner why the fruit was so expensive. He explained that when the fruit is just budding on a plant, the farmers identify the most promising 10% and prune the other 90%. The full resources of the plant are then focused on the best 10% of the fruit.

The fruit was so expensive that I didn’t buy any. I could only imagine what it tasted like until a client invited us into his home for dessert. My wife and two children were with me. We sat on the floor in his dining room and he proceeded to serve what I guess was $1000 worth of fresh fruit. It really was the best fruit I have ever eaten, so good that it was almost like I had never eaten fruit before.

What does all this have to do with supply chain strategy? We call it “pruning for profit”. What we typically find when we begin a RightChain™ project is that about 1/3 of the SKUs are profitable, about 1/3 are breaking even, and about 1/3 are losing money. Perhaps the most fruitful first step to take in developing a supply chain strategy is to remove the unprofitable SKUs. With those SKUs removed, the same amount of inventory investment is much more profitably allocated to the remaining SKUs, forecasting becomes more accurate because the same forecasting resources are focused on fewer more forecastable SKUS, and fill rate and market share increase as a result.


One of our major food industry clients recently brought to our attention that in the three years we had been working with them the most effective initiative we had put in place was the RightSKUs™ initiative. That initiative had reduced their total SKU base from 3,000 to 2,000 and over that time their gross margin return on inventory, fill rate, and market share had increased substantially. The overall EBIT increase was in the multi-millions.

Pruning is not easy. It’s painful. You probably know from your personal life when you’ve had to cut out certain activities or cut off certain relationships that are not profitable or are even harmful. It comes up in supply chain strategy when someone in marketing and/or product development has to face the fact their SKU is no longer profitable. Simplification is never easy. It goes against the grain of the status quo. At the same time, it is profitable and perhaps one of the key common denominators of successful supply chain organizations.

Many organizations have initiated SKU rationalization projects. Unfortunately, many of those projects have died on the vine or lost momentum. The only means we have found to successfully carry out a pruning project is to follow a facilitated methodology and to make the project a process. We have developed a formal methodology for SKU rationalization called RightSKUs™. Through the RightSKUs™ methodology we develop formal criteria for evaluating the value of an SKU. The project team assigns weights to each criteria and all SKUs are given a valuation ranking. That ranking is used and updated in an on-going process and series of RightChain™ meetings that institutionalize the pruning process.