Real-time data can prevent distortions in product demand forecasts. But as Network Services' CIO learned, it isn't something that can happen all at once.
My company, Network Services, is getting ready to start working on its next four-year strategic plan. The "real-time" or "agile" enterprise is sure to come up as a topic of conversation. This has been an ongoing discussion in the company since our last strategic planning exercise, when we were urged by consultants to implement a real-time supply chain and order management system. It was a tempting scenario, and let me explain why.
Network Services is a distributor. It provides products and supply chain services to companies that need food service disposables, janitorial and sanitary supplies, and printing paper. We serve customers such as Baskin-Robbins, Premier Health Care and Starbucks. We sell products from manufacturers such as Georgia-Pacific, Rubbermaid, SC Johnson and Solo Cup. As distributors, we are the humble middlemen who serve both ends of the supply chain.
Twenty years ago, we called what we did "sellin', warehousin' and truck drivin'." Now we get to call what we do "supply chain management". I am ever so grateful to have such a fine phrase to use when people at a party ask me what my company does. But even though the name has changed, the realities of what we do have not changed that much. Change takes time. We learned this lesson very clearly in our last strategic planning exercise. It was the northern autumn of 1999, and we had Arthur Andersen working with us to facilitate and guide our strategy sessions.
Under Arthur Andersen's tutelage, we discussed what it would be like to detect changes in customer demand more quickly and react faster than our competition. We enthused over the possibilities inherent in tracking business processes as they happen. We saw how we could fine-tune our operations, maximise our efficiencies, lower our costs and increase inventory turns.
In the supply chain world that we distributors live in, the key to success is to find ways to counteract the distortion in the supply chain known as the "bullwhip effect". It occurs when small fluctuations in product demand by the customers at the front end of the supply chain get distorted as the information is transmitted back up the supply chain. The result is larger and larger swings in product demand.
All members of the supply chain feel the costs of the bullwhip effect. Manufacturers add extra production capacity to satisfy an order stream that is much more volatile than actual demand. Distributors carry extra inventory to cover the variability in order levels. Transportation and labour resources increase because extra capacity is needed to handle the periods of high demand and then sit idle during periods of low demand.
A synchronised supply chain that could dampen down or eliminate the bullwhip effect is based on a constant flow of accurate sales information from the companies at the front of the chain to all other companies in the supply chain. This information sets the rhythm that the other companies should move to.
However, it is one thing to provide customers and manufacturers with summary reports three months after the end of the last quarter. It is another thing entirely to provide people with daily data that is both highly specific and very accurate. This is sensitive stuff. As our CEO says: "It's only a matter of time before some company turns it against you."
The second thing we discovered is that using real-time data and being truly agile requires a high degree of internal coordination between departments. Different areas of the company often have conflicting goals. Inventory managers are motivated to reduce inventory. Salespeople are motivated to sell everything they can to the customers. Credit people are motivated to prevent sales that could result in hard-to-collect or impossible-to-collect customer invoices. Senior management has to create complementary incentive plans for all these groups, and then each group needs to understand the perspectives of the others in order to coordinate effectively. That's a tall order.
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