Keeping your supply chain on the rails

Good at empire building, not so good at supply chain management

Management principles according to some historic figure - this is the latest rage in business books. Luminaries as diverse as Abraham Lincoln, Attila the Hun and William Shakespeare have been tapped for their (presumed) take on how to play the corporate game. Yet there is one that so far has been missed. Its title: 'How supply-chain failure can destroy your empire', by Napoleon Bonaparte.

The former French emperor taught a master class in how not to overstretch lines of provision, when in June of 1812 he and his half-million-man army invaded Russia. Trying to do too much, too soon, with too little support, all it took was modest opposition from the Russians to break down his machine. By September perhaps two-thirds of the hungry, exhausted French forces had died or deserted. By October they began to retreat, and the rest, as they say, is history.

The moral of the story? If one of the greatest administrative minds on record can get his supply chain fatally wrong, so, too, can you.

Napoleonic coda

Less illustrious examples from the business world are legion. More than 800 significant supply-chain disruptions occurred during 1989-2000, report researchers Vinod Singhal of Georgia Tech and Kevin Hendricks of Western Ontario University. ¹ And these are, admittedly, just the tip of the iceberg: they were only in public companies and only those reported in the Wall Street Journal or the Dow Jones News Service.

Typical examples include: periodic shortages of Sony Playstations, delays in delivering new Boeing and Airbus jetliners, plus Apple's and Motorola's inability to meet demand due to component stock-outs. Often the seeds of failure start out looking rather innocuous. "For instance, all the parts may arrive on time at the manufacturing plant, but then they don't fit together," Singhal explains. "This happens more often than you might think."

Three major failures

That mistake would come under the first of Singhal's three main reasons for supply chain failure: lack of integration. "We tend to do things on our own and not share enough information," he notes. "Maybe I plan a sales promotion, but I forget to tell my supplier about it."

Build in some redundancy, says Singhal

Next in line is an over-emphasis on efficiency. The past 15 years have seen a brutal focus on cost-cutting that, at times, removes muscle instead of fat. Then, when a problem arises, the supply chain turns into a line of tumbling dominoes, one problem automatically setting off the next.

And then there is excessive complexity. A vendor of MP3 players might be designing in Taiwan, manufacturing elsewhere in Asia, selling in Europe and managing from the US. "With this kind of complexity, there is so much that can go wrong," Singhal observes. "Once in a while, something actually does."

The problem of having problems

Stock markets hate this. They show no mercy for supply chain error, regardless of the reason, typically inflicting a 10 percent price drop (see figure) within one day of such glitches being announced.

Failures also bring on deeper, longer-term damage. Even a one-off mishap can tip a vulnerable supply chain into what two other academics call a 'spiral of risk'. Martin Christopher of Cranfield University and Hau Lee of Stanford contend that suppliers and customers start losing confidence in each other's promises, they keep to themselves ever more plans and decisions and they sneakily hedge their bets. ²

Average next-day stock price reaction to supply-chain failure, by type³

Sales people start over-ordering and production is planned on inflated lead times, write Christopher and Lee. Ironically, true to the maxim (known as Parkinson's Law) that 'work expands to fill the time available', inflated lead times soon become real. Meanwhile, as a means of protection, people all along the line start to do precisely what supply-chain management was invented to eliminate: they hoard material.

Flying to the rescue

Responses in the automobile industry can be far more dramatic, explains Serge Niederkorn, a supply-chain expert at consultants PricewaterhouseCoopers. "I've seen critical parts being flown in by helicopter to an assembly plant," he recalls. Once, when a critical supplier's output was halted by a flooded factory, the automobile customer airlifted all its machine operators to another plant that it had effectively commandeered from another supplier, where they immediately set to work. "Extreme measures become understandable when you need to make thousands of cars per day," says Niederkorn, "but they cost a lot."

Another drastic approach is simply to eliminate the supply chain. US clothing manufacturer American Apparel, for instance, has bucked the offshoring wave, keeping its production close to home in Los Angeles. Although the move has been hailed as socially conscious of US garment workers (who have lost jobs to Asia in droves), the company says its decision is purely economic. By keeping production local, management can control operations more closely and respond most quickly to trends among notoriously fickle fashionista customers.

For the mass of companies where this is not an option, supply chain experts recommend three measures:

• Expand communications - key indicators such as capacity, demand, forecasts, inventory, production and yields should be accessible to key members of the supply chain, say Christopher and Lee. If any of these appears to be "going nuclear", an early warning should be circulated at once.
• Build in redundancy - Not everywhere, of course, Singhal notes, but for critical items - say, tailor-made components - that cannot readily be sourced elsewhere.
• Put in an extra layer of monitoring - as more manufacturing is outsourced to the four corners of the world, even smaller companies can engage specialist verifiers such as SGS or Det Norske Veritas to control quality remotely. "If you find out after the shipment arrives in Europe that the parts from China are defective, that is too late," says Niederkorn. "Better to know, and react, while they are still in China."

Test for possible breakdowns

Finally, all of this should be run through a formal (or even informal) failure mode and effects analysis (FMEA), which is a fancy way of saying that the system should be modelled and tested for possible breakdowns. "What happens if there is an earthquake under the factory of our major supplier?" asks Niederkorn. "These kinds of questions can be thought through before they ever happen in reality."

All of this costs more than the leanest-of-lean supply chains, but experts argue that the net financial effect is positive. Going without these sorts of safeguards invites an all-too-likely historic replay, minus the period costumes. Keeping your supply chain too lean could end up in your own personal version of Waterloo.

Source:

1) Putting a price on supply chain problems, December 2000, Georgia Tech Research News
www.gtresearchnews.gatech.edu

2) Mitigating supply chain risk through improved confidence, International Journal of Physical Distribution and Logistics Management, Vol. 34, No. 5, 2004
www.martin-christopher.info

3) Vinod Singhal, Georgia Institute of Technology, Putting a price on supply chain problems, December 2000
www.gtresearchnews.gatech.edu