October 22nd, 2015
Have you noticed the manufacturing and supply chain landscape is increasing in complexity, volatility and that higher degrees of variability are the new norm? If you have then, what are you doing about it, or if this is new to you what are you going to do about it? Hum…simple but tough question!
Specifically, what does this “New Norm” look like…
- Global value chain (supply and demand)
- Shorter lead time
- Increase complexity and customisation
- Pressure to reduce inventory
- More product variety
- Supplier long lead time and capacity
- Increasing inaccurate forecast
Globalisation has contributed its own complexity to the landscape. Martin Christopher wrote “It seems that no matter how sophisticated the forecasting techniques employed, the volatility of markets ensures that the forecast will be wrong!” (Logistics and Supply Chain Management). Forecast error is on the rise, volatility in the supply and demand are increasing and legacy planning tactics and the system cannot cope.
Figure 1: A typical Demand and Supply Value Chain
To be competitive you have to find ways to reduce both raw materials and finish good lead time. Yes, I can see you are saying to yourself, to do this would mean increase inventory. Right?
Well not exactly! Here is the thing, there are several different manufacturing sites, distribution centres, warehouse and processes and are today managed in isolation. These must be coordinated and synchronised effectively to bring finished goods into the distribution pipeline and at the same time reduce the overall inventory in the whole value chain. In some cases, the feedback of information almost never exists or is very inaccurate because it is based on assumptions rather than actual demand. All benefits will be directly related to the speed of FLOW of Material and Information.
Figure 2: The flow of material and Information
Point is, this landscape is changing very fast and if your operation is not geared to deal with the change in market demand then you would be falling behind in your competitive advantage to be productive, efficient, cost effective and provide better customer experience.
Figure 3: Which to strive for Effective vs. Ineffective, Insufficient vs. Excessive?
Many companies have implemented sophisticated planning system for answers, but the underlying engine is still the traditional MRP, reorder point, min/max, Kanban, you name it, conventional inventory management principles. The supply order signals that move down through our supply chains have become more and more out of alignment with actual demand using these conventional methods. The shortcomings, inherent in all these systems of this type, manifest themselves in a number of unsatisfactory performance characteristics, chief among them being an unnecessarily high overall inventory level, inventory imbalance, and stock-outs or shortages and the worst case is that manufacturing making something that is not in demand. However, it is not the purpose of this article to argue these shortcomings.
The question is, without discrediting of these conventional inventory management principles, are they dynamic to deal with demand change and in parallel help you reduce cost or inventory in the pipeline while maintaining excellent customer service? The answer is no!The answer is to have a Demand Driven System that is driven by dynamic buffer adjustment of the inventory profile located at a strategic position in the value chain. Dr Eli Goldratt introduced this thinking a decade ago with the Theory of Constraint (TOC) distribution model. Lately, this concept is being combined with Lean, MRP and label as a Demand Driven Operating Model and is being introduced in new software packages.The underlying concept is an adaptive management system that uses a constant feedback loop that connects business strategy to the setting and performance of the operating model. It focuses on the protection and promotion of the flow of demand information and materials as they occur in the pipeline for effective decision making in order to optimise inventory level in accordance with actual demand as they occur, at both the strategic and tactical level. In summary, to have a productive, efficient, cost effective work flow and provide a better customer experience requires a dynamic system to manage the complete manufacturing and supply chain landscape from end-to-end. Implementing the Demand Driven System using the TOC concept has led to changing the planning paradigm from forecast and inventory precision to establishing appropriate buffer ranges and trusting the system. Only when you have achieved this you would have the competitive edge to deal with today’s demand and supply chain increasingly volatile landscape.
To discuss this in detail contact Mark Shaw at firstname.lastname@example.org or phone Mark on +447407022264