Protean Supply Chains

Ten Dynamics of Supply and Demand Alignment

James A. Cooke

• Publisher: Wiley
• Year: 2014
• Print ISBN: 9781118759660
• eBook ISBN: 9781118759806
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Technology & Engineering Research & Skills
• Index: Technology & Engineering

Features emerging trends that are shaping supply chain operations worldwide as well as impacting the global business landscape

Beginning with the assertion that supply chains are an overlooked factor behind anemic economic growth, Protean Supply Chains: Ten Dynamics of Supply and Demand Alignment provides a comprehensive overview of the developments occurring in the field of supply chain management. A broad range of topics in facility location, inventory, strategic sourcing, and supply chain coordination are addressed in addition to coverage of major developments within the field. The author's main position is that supply chains must be more than agile or flexible; rather, they must become protean and capable of changing shape in response to a volatile global business landscape.

The author, a well-known editor and researcher in the field, presents current real-world examples combined with insights into the impact of recent trends that are expected to affect the global business landscape over the next decade. Highlighting companies with leading-edge supply chains as examples, the book discusses methods to reduce spending, increase revenues, and achieve streamlined productivity in a changing economic climate. The book utilizes further examples from the growth of online retailing and automation in distribution centers, as well as the use of protean supply chains to gain competitive advantages internationally. In addition, the book features the following ten emerging trends, which are shaping supply chain operations worldwide:

• The rise of regional theaters of supply
• Global risk management through control towers
• Customer segmentation
• Real demand realization
• Demand swing alignment with production and distribution
• Omnichannel retailing challenges
• Customer of one service
• Sustainability challenges
• Collaboration vs. competition in the new economy
• Financial dynamism

The book is an ideal reference for professionals and practitioners in operations research, business/management science, applied mathematics, and industrial engineering as well as an appropriate supplement for undergraduate and graduate-level courses in supply chain management.

CHAPTER 1
Supply Chain Synchronization

Since the Great Recession, the United States remains stuck in a jobless recovery. The same holds true for many other parts of the world. The U.S. economy is witnessing a profit recovery. Stocks have soared on Wall Street due to strong corporate profits, while unemployment in the United States has stayed stubbornly high above traditional norms. Although U.S. unemployment had dropped from its peak of 10% in October 2009, the Bureau of Labor Statistics still had the unemployment rate around 7% in late 2013. And it is not just the United States that is wrestling with joblessness. Unemployment remains high in other parts of the world as well. The 17-member Eurozone had unemployment rates above 12% in 2013.

This condition has been dubbed “the New Normal economy,” a term coined by William Gross, the founder of the global investment firm Pacific Investment Management (PIMCO), back in 2009. Gross used the term to describe a lackluster economy he predicted would occur for a decade, an economy that would witness high unemployment and a reduced standard of living for Americans as well as most other citizens around the globe.

One of the reasons behind the continued high employment rate, ignored by both economists and the media pundits, is the impact of supply chains on business efficiency that has resulted in strong corporate earnings. Companies have moved closer to achieving supply chain synchronization, although it should be noted they still have a long way to go before reaching perfection. But even a modest movement in that direction is having a strong economic effect. In theory, synchronization means that companies would make only the exact amount of goods necessary to meet actual consumer demand. Synchronization means that there is no excess inventory throughout a supply chain spanning continents. Synchronization of supply with demand leads to increased output without the need for additional labor.

Aligning production with consumption has been a business goal for decades. Manufacturers, wholesalers, and retailers have tried setting their inventory levels using forecasts based on historical data of past years' sales. But what has changed since the onslaught of the Great Recession is that business enterprises have worked very hard at making their supply chains more efficient in a drive to align inventory with consumer demand. As a result of that early, albeit modest success, there are fewer spikes in production.

Supply chain synchronization does not show up in macroeconomic discussions because it is a relatively new phenomenon. Swings in output are a normal part of the business cycle in classic economic theory. As consumption falls, manufacturers find themselves stuck with large quantities of unsold product. They then curb factory production, laying off workers. They mark down prices to goad consumers into buying products already made. After the excess stock gets depleted, manufacturers then resume production, hiring back workers, to meet customer demand.

That was what occurred in the twentieth century. But in the past few years, the world has changed, calling into question classic economic theory. In the last decade, many big companies have taken advantage of advances in supply chain management practices using special software to manage production and inventory. They have employed inventory optimization software to determine how much stock to keep on hand. They have employed multiechelon inventory software to determine where best to hold that inventory in the supply chain. They have employed network-modeling software to figure where to place the inventory to minimize the amount of buffer stock and still take care of the buyer. And most important of all, they have started to calculate inventory holdings closer to actual demand rather than on the basis of historical forecasts.

As a result, companies have moved closer to matching manufacturing output to true demand, flattening the boom-and-bust cycle of production that took place throughout the twentieth century. With no spikes in manufacturing, a company does not have to hire a drove of workers for extra shifts to run more equipment.

This flattening of the business cycle reduces the need for workers at a time when more and more companies are already relying on software to manage their labor resources and to keep down the employee headcount. Companies use labor management software to measure individual worker activity against preset benchmarks. By boosting workplace productivity, they eliminate the need for additional hiring. Companies use workforce management software to schedule workers for factory, warehouse, and retail store jobs, ensuring that they have just the right amount of workers on hand for the tasks to be done that day.

Along with sophisticated software for improved labor management, businesses continue to pour investment into automation for factories, warehouses, and transportation services to reduce headcount. Increased automation plays a factor in the continuing high rate of joblessness. In fact, a study from the Oxford Martin School in October 2013 said that nearly half of U.S. jobs are in danger of being eradicated in the next two decades due to the computerization and automation. In particular, that study found that jobs in logistics, transportation, as well as in office and administrative support faced a high risk of elimination from automation. In the future, according to that study, the only jobs available to low-skilled workers will be those requiring social skills and creativity that are not susceptible to computerization.

In combination with automation, the improved synchronization of the supply chain will wipe out jobs in factories and warehouses. Synchronization is a trend that's here to stay as supply chain chiefs become more adept at supply and demand alignment. If companies can reduce the lag time in bringing a product from the factory to the market, that means that factories don't have to hire a large number of workers to produce stock that's simply a cushion for a spike in demand. Companies can be run as lean and mean enterprises.

What Western nations in the world are witnessing is structural unemployment caused by a third industrial revolution that enables supply chain synchronization. It's a classic case of what economist Joseph Schumpeter called “creative destruction.” A large group of workers lack the skills and knowledge to secure gainful employment; they're stuck in low-paying jobs at fast-food restaurants and in retail stores. Although it's tempting to take a bleak view of the future, with no jobs for the masses in a mechanized society, it should be noted that the United States and other industrial nations went through this kind of economic transformation more than a century ago. The current economic downturn resembles the Long Depression of the 1880s, when the U.S. economy switched from farming to manufacturing. Back then, farmhands who lost their jobs due to the mechanization of agriculture had trouble finding new work. Likewise, during this current transition period, many low-skilled workers will be hard-pressed to find jobs. As many educators realize, the third industrial revolution requires workers with advanced knowledge in the areas of computer science and engineering.

Surprisingly, few if any economists see the role of supply chain synchronization in the economic transformation taking place in front of their eyes. In my view, that's probably attributable to the fact that they don't look for it. But the evidence is out there. In fact, research on the U.S. economy sponsored by the Council of Supply Chain Management Professionals (CSCMP) provides some evidence that supply chains are becoming more ruthlessly efficient. CSCMP sponsors research that attempts to quantify the impact of logistics on the U.S. economy. The research was started back in the 1980s by the late Robert Delaney as a way to demonstrate the positive impact of transportation deregulation in lowering logistics costs in the United States. Today, economist Rosalyn Wilson continues Delaney's research and updates the study each year.

The 2013 Annual State of Logistics Report offered some data that shows that some supply chain chiefs are mastering supply chain synchronization. Despite a rise in business inventories in 2012 in the United States, the inventory-to-sales ratio stayed stable in the U.S. economy. That ratio is a measure of a company's on-hand inventory relative to its net sales.

A look back at the inventory-to-sales ratio data shows that in the 1992, that proportion stood at 1.56. Over the course of the next decades, it fell drip by drip, nudging down a fraction of percentage until it reached 1.25 in 2006, just before the nation's economic upheaval. During the nadir of the Great Recession, it shot back up, reaching 1.49 in 2009. Since then the ratio has fallen back, hovering between 1.25 and 1.29.

What that means is that American businesses have become more skillful at determining the right amount of inventory. In particular, retailers have become particularly astute about using inventory management to curtail stock levels, which frees up working capital or cash for the corporate balance sheet. The liberation of working capital boosts business profits. And stocks soar.

What's making this possible, as alluded to earlier, is the wider adoption of the discipline of supply chain management in combination with sophisticated software. The term “supply chain management” first surfaced in the 1980s. The person often credited with the first use of that term is Keith Oliver, who used the phrase in a 1982 article with the Financial Times. At that time, Oliver was a consultant with the firm Booz Allen Hamilton Inc. He believed that companies should manage inventory as a single chain of supply across all parts of the entire organization. A Booz Allen Hamilton white paper published in 2003 described supply chain management as “embedded, cross-functional capability designed to unify and rationalize otherwise incongruent parts of a dispersed organization.”

Supply chain management was an idea with power. Companies carried too much inventory across all their departments, plants, and warehouses. To reduce inventory, they needed to take a broader view of operations to become more efficient with inventory in serving customers. The problem was that organizations were divided into silos on the basis of functions: procurement, manufacturing, distribution, marketing, and customer service. Silos hinder efficiency. Therefore silos between manufacturing, logistics and distribution had to be torn down so the company could manage the flow from sourcing through production through distribution.

Supply chain management when first proposed represented a new way of business thinking that forced companies to pay attention to the interconnectedness of their operations. It took awhile for chief executives and chief financial officers to understand even modest amounts of inventory create a drag on stock performance. Companies could influence stock prices simply by improving operational performance.

Well-run supply chains also keep their delivery commitments and provide high levels of service, and that drives up repeat customer business and revenue. Companies that embraced and applied supply chain management principles obtained a competitive advantage in the marketplace. Companies that got it got an edge. Still, in the decade following Oliver's first utterance of the term supply chain management, most companies viewed supply chains as simply a cost of doing business. “It was pretty clear that even though [supply chain management] was having a big impact on an organization's service, on its costs, and on the whole idea of response to the customer, it was viewed as a cost center,” said Ann Drake, chairman and chief executive officer of DSC Logistics in Des Plaines, Illinois, on the Voices of the Pioneers video series chronicling the history of the supply chain management discipline. “I think the evolution from cost center to comparative advantage probably started in the late ’80s, but it took well into the end of the ’90s before anyone really believed it….”

As more companies understood the value of supply chain management, they began creating new executive positions to focus on supply chain synchronicity. The positions usually had supply chain in the title. On the organizational ladder supply chain, chiefs stood a rung above executives in manufacturing, procurement, and logistics. By 2005, the practice of supply chain management had become so mainstream that the professional organization Council of Logistics Management Professionals (CLM) (founded originally as the National Council of Physical Distribution Management) changed its name to reflect the recognition of the concept in business circles. CLM became the CSCMP.

When supply chain management was first proposed, its focus was on streamlining the internal flow within an organization. But in a global economy, supply chains are really extended enterprises. They involve multiple partners working together to bring a product from start to finish to market. The scope of supply chain management expanded to encompass a group of companies.

As academicians began publishing studies on the critical role of supply chains in creating business efficiency and business management consultants developed proven methods to implement strategies, evidence started to appear that showed synchronization of supply chains could improve shareholder value. Well-run supply chains save costs and boost revenues. Improvements to the bottom line and the growth on the topline maximize business profits. A 1995 study of 225 companies done by the consulting firm PRTM in Weston, Massachusetts, found that manufacturers with best-in-class supply chains had cost reductions of up to 7% of revenue in comparison to the average operation. (PRTM has since been acquired by PwC.)

Even though chief executives and boardrooms began embracing the idea of supply chain management in the 1990s, it took a decade or more to completely turn that concept into full-fledged action. Because corporations are generally large enterprises with thousands of employees, it takes considerable time to change organizational behavior. It takes time to introduce a new tactic...

Table of contents

• Cover
• Table of Contents
• Title page
• Copyright page
• Dedication
• Preface
• Acknowledgments
• CHAPTER 1: Supply Chain Synchronization
• CHAPTER 2: Driven by Real Demand
• CHAPTER 3: Regional Theaters of Supply
• CHAPTER 4: Dynamic Living Models
• CHAPTER 5: Splintering the Supply Chain
• CHAPTER 6: The Omnichannel Challenge
• CHAPTER 7: Control Towers
• CHAPTER 8: Fast Data
• CHAPTER 9: Shared Supply Chains
• CHAPTER 10: A Customer of One
• CHAPTER 11: The Sustainability Petard
• CHAPTER 12: Financial Dynamism
• Index
• End User License Agreement