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 The Business Realist

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The different functions in the supply chain are measured on meeting conflicting objectives. Many companies try to manage all these measures, first focusing on one then another. Trying to manage all these conflicting objectives can only result in mediocrity.

The Supply Chain Tug-of-War

Posted  on 6/13/09
Tug of war between four business people

Managing dynamic tension or managing to mediocrity?

The way many companies manage performance measures ensures mediocre performance

Previous pages discussed the problems with having conflicting objectives across departments or functions. This issue is apparent to anyone who has worked on improving a company's supply chain. The following table shows the typical goals and measures of the different supply chain functions.


Department Performance Measure Consequence
Procurement Cost of materials Suppliers are squeezed to provide lowest cost possible for raw materials, potentially impacting quality and reliability
Customer Service Perfect order measure Orders are held in customer service to be verified before processing, adding time to the order lead time
Manufacturing Uptime, capacity, cost per unit Plants maximize volume of throughput regardless of the actual demand. Disruptions to schedule are highly discouraged.
Inventory Mgmt Inventory turns, stock outs The push to sell excess inventory created by maximized throughput results in sales promotions (that create spikes in demand) and  lower profit margins
Distribution Freight cost Shipments are bundled to maximize freight-on-board adding to the order lead time
Total  Supply Chain Delivery-to-promise, order lead time,  customer satisfaction Long lead times and inflexibility due to metrics of individual departments. Longer lead times require more inventory on-hand to prevent stock-outs 

Now, most supply chain managers are aware of the conflicts across these goals and managing these conflicts is considered to be managing a dynamic tension. Managing dynamic tension is a balancing act between:

  • Maximizing plant efficiency, reducing inventory levels and reducing lead times
  • Lowering freight costs and reducing lead times and improving customer satisfaction
  • Reducing raw material costs and ensuring quality and reliability for lower lead times
  • Reducing inventory levels and improving order fill rates and lowering lead times

My experience with this management approach is that everyone spends their time and effort managing their measures between certain tolerances, and none of the departments end up performing particularly well. This approach ensures mediocrity across the board. Another approach is to choose which measures or goals to succeed at and then  focus on those at the expense of the others. This may seem obvious to some, but I've seen very few companies take this approach. Most are organized and measured by functional area, aka silo,  and very few functional areas desire to be the designated poor performer.

 The effectiveness of this approach over trying to manage the tension across all the measures became apparent to me by accident. Early in my career, I was working on a project to improve the supply chain of large chemical manufacturer that needed to increase its profitability. This company had typical supply chain problems – excessive inventory, long lead times, delayed orders, shortages of some items, and lots of angry customers. Our job was to re-engineer all the supply chain processes. Before this project even got off the ground, the flagship plant, their most modern and efficient facility, burned to the ground. Instead of kicking off the project, our job became crisis management. During the weeks that ensued, we established a process of contacting all the customers, negotiating orders and due dates between them and the plants, working with contract suppliers, and ignoring shipping costs.

 As a result, the surplus inventory was eliminated, lead times decreased, orders arrived as planned, customers paid earlier, and both customer satisfaction and profitability improved.  Although the sales volume was down, the margins on those sales improved, and, helped by the decreased costs of carrying inventory and accounts receivables, the bottom line improved.  These results blew me away. All the improvements we wanted without the process reengineering. What happened? The entire supply chain focused on one goal, filling orders on a timely basis, at the expense of some departmental goals, namely manufacturing and distribution costs.  Although these costs increased,  they were offset by the improvement in inventory and AR and the customers willingness to pay more to get their deliveries on time.


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