Three (3) Questions Supply Chain Managers Always Need to Answer

When it comes right down to it, supply chain managers have three (3) questions to answer:

  1. How do we get what we need when we need it?
  2. How do we make available what whoever needs them at when they need them?
  3. How do we deliver to whomever wants them when they need them?

When supply chain managers answer these three (3) questions, their responses must be relevant to their mission, which is:  Fulfil Demand. 

And when we say Fulfil Demand, it must meet the following criteria:

  1. It must be productive, i.e., at lowest cost to maximise profit margins and at minimal capital investment;
  2. It must result in competitive advantage, that is, the enterprise should come out better than that of its rivals;
  3. It must meet expectations not only of customers (i.e. quality, complete & on-time deliveries) but also stakeholders (e.g. shipment volume targets) and the communities they work in (e.g. compliance to laws, environmental sustainability)
  4. It must result in stronger relationships with customers, vendors, stakeholders. 

When supply chain managers answer the aforementioned three (3) questions to the satisfaction of the criteria mentioned, they would be deemed on their way to success. 

About Overtimers Anonymous

The Importance of Making Available What We Promise

I ordered a box of latex gloves from a 3rd party seller on a popular e-commerce website.  The seller confirmed my order by email and after 24 hours, the order status on the website was that the box of gloves was being prepared for shipment.  One week later, the order status said it was at a “logistics facility.”  Two weeks later, the order status was the item was out of stock, the seller will be unable to ship, and my order was cancelled. 

I ordered a box of the very same brand of latex gloves from another seller and I received it within three (3) days.  I was annoyed I wasted two weeks waiting for the first one that never came.    

Shouldn’t sellers check first if they have stocks physically available on hand before they confirm a customer’s order?  Is it not common sense not to sell something one doesn’t have on hand?

Sounds like yes but in the real world, no.  Many enterprises sell items even if they don’t have them on stock.  They count on their operations teams to either produce or procure the items and have them available as promised by the time customer wants them. 

Available-to-promise (ATP) is an inherent element in supply chain management.  It is how much of an item an enterprise will have on inventory for customers to buy, adding in what supply is arriving and deducting what’s already reserved for other customers.

ATP = On Hand + Arriving Supply – Reserved for Pending Orders

Enterprise owners count on the ATP to communicate to customers as to how much and when items would be on stock for selling.  

For items that are make-to-stock, enterprises typically make sure they always have enough items on hand at any time for customers to buy.  Supply chain managers would set safety stocks to buffer for unexpected demand.

If, however, enterprises are selling expensive stuff like precious metals, are in the business of shipping thousands of items like automotive parts, or are marketing products with short shelf lives, managers would not keep too much on hand to avoid tying up capital in inventory.  Managers wouldn’t keep any safety stock and would rely on scheduled arrivals when committing ATP to customers. 

Customers expect enterprises to deliver their items on-time and complete as promised.  How well an enterprise keeps its promises is a criterion for success.     ATP is therefore important. It’s one thing both the customer and enterprise care about.  Delivering as promised ranks right up there with quality, cost, and service. 

Supply chain executives should strive for the following when it comes to planning ATP:

Never Zero, At Least Not Often

No one likes to be told an item is out of stock.  Mothers don’t like it when their favourite brand of diapers for their babies are not on the drugstore’s shelf.  They would buy another brand if they come back in a week and there’s still no stock. 

Short Lead Times

Customers will cancel their orders if a shop says the items they want won’t be ready for several days.  We humans have thresholds when it comes to patience.  We won’t wait too long.  Enterprises who can quickly churn products for customers gain competitive advantage. 

It Doesn’t Change at the Last Minute

Nothing is worse than breaking a promise.  Few things are as frustrating as when a shop tells us that there will be a delay in the item that was supposed to be delivered today.  It feels even more frustrating if we had already paid for the item.  Frustrated customers won’t be comforted with apologies or refunds.   Customer satisfaction comes when deliveries happen, not when they don’t. 

One Person in Charge

There should only be one person in charge of ATP.  Not the planner.  Not the logistics officer.  Nor the plant manager.  Not anyone else but the supply chain executive, the one who oversees all the operations for the fulfilment of customer orders. 

That means the delivery of items to the customers’ doorsteps, the making of the items, the marshalling of resources to make and deliver the items, and the shipping of the items.  In short, the enterprise’s supply chain. 

Enterprises, therefore, should have a chief supply chain officer who’d be in charge of making available what is promised.  

Having two or more persons handle supply chain operations or delegating the accountability of ATP to middle managers are common mistakes that lead to items that won’t be there as committed.  Having more than one person in charge of the fulfilment of customer demand just makes no sense. 

It’s like a kitchen with two chefs:  one is in charge of buying the ingredients, the other oversees the cooking.   Both men would be fighting each other in no time.  As the saying goes, “too many chefs spoil the soup.”

Keep It Simple

The more complicated an enterprise’s operations, the harder it is to keep promises. 

Thousands of items, multiple steps, shared production lines, and conflicting policies & targets are examples in which management becomes muddled as items weave through supply chain operations to get to customers. 

The advice is to keep it simple and use common sense.  Schedule milestones operation by operation to know how much can be committed at the end of the supply chain.  Deliver with smaller trucks or send single items through couriers.  Keep few stocks but set automatic re-order points for items that don’t move as much (e.g. spare parts).  Don’t keep stock of items that are make-to-order (e.g. tailored clothes). 

Nothing Wrong with Being Conservative

There’s nothing wrong with applying an allowance to an ATP.  If the schedule says an item will be ready in four (4) weeks, commit to five (5) when the customer asks.  Adding an extra week would allow for unforeseen events such as if a supplier falls short in delivering needed materials. 

No farmer can surely know how many fruits he will pick today. A fisherman wouldn’t know exactly how many fish he will catch tomorrow.  But experience will allow either to provide safe estimates.  The same is true for ATP.  We never really know exactly how much items will be available but we’d be more confident with conservative numbers, just as long as it doesn’t lead to over-padding or over-commitment. 

Enterprises and customers put a lot of weight in what is available to promise.  Customers rely on enterprises keeping their word.  Enterprises depend on their operations to have items ready when needed.

Enterprises should avoid promising nothing to make available and when they do, shouldn’t make last-minute changes.  There should be only person in charge and he or she should be the one who oversees the operations in making ATPs realities.  Planning ATPs should be as simple as possible and can be made with some conservatism.  We should not over-commit or pad too much. 

We make promises we can keep.  People value us for how we act based on our words.  It becomes not only a mark for success but also a way forward to mutually beneficial relationships.  

About Overtimers Anonymous

What is the Right Way to Serve Customers?

A manufacturer of metal parts hires a management consultant to help stimulate sales.  The consultant at once suggests the manufacturer prioritise production of its top twenty (20) best-selling items. 

The manufacturer thus makes one month’s worth of stock of each of the twenty (20) top-selling items.  Three (3) months later, the stock is hardly selling.  Meanwhile, customers complain that they haven’t received their shipments of items that are not on the top twenty (20) best-seller list.  Pending orders is equivalent to one (1) month’s average sales and the manufacturer simply has no stock to serve the orders. 

What happened? 

The management consultant had analysed the manufacturer’s sales history and listed the manufacturer’s top selling items based on their average sales value over the previous year.  The top twenty (20) items constituted 80% of the manufacturer’s sales that year.  It therefore seemed logical to have on stock those twenty (20) items.  It was easy to see that the top twenty (20) items have a high demand history. 

The manufacturer hired a supply chain engineer (SCE) to do something about the pending orders and out-of-stock problems.  The SCE analysed the manufacturer’s operations and observed that the manufacturer produced 1,800 individual items or stock-keeping units (SKU’s) in that same period of twelve (12) months.  Most of the customer orders the manufacturer received, however, were delivered late and many others were cancelled due to out-of-stock. 

The SCE noticed that the management consultant based his recommendation to produce the top twenty (20) selling items on the following analysis:

The SCE broke down the daily histories of the top selling 20 items and saw that each item had an erratic demand behaviour, in which for one (1) item, it looked like this:

Not one of the top twenty (20) items was selling at close to the overall average quantity at any day or even any week throughout the twelve (12) months surveyed.  Each item would experience very high demand in one or few orders but hardly would any item be selling close to average every day or every week.  The variance between average demand and each day’s demand over a year was very large. 

The manufacturer sold more than 1,800 unique items over a one (1) year period and most of each item’s sales were limited to one or two orders sometime during that same period.  Some items did have frequent daily sales but they were in small quantities.  The management consultant’s list of top twenty (20) did sell up to 80% of annual revenue but the manufacturer was losing potential sales from unserved orders of other items.   

The management consultant thought that producing and having stock of the top twenty (20) best-selling items would bring higher sales as based on historical numbers.  The consultant, however, didn’t see that customers didn’t need the said items every day.  A few customers with big projects bought large quantities of the top twenty (20) items in one or few orders. Other smaller scale customers ordered much fewer pieces of metal products at any one time and for certain items, more frequently.  The consultant didn’t realize that the manufacturer’s items were not needed every day, or even every year. Customers only bought for projects or for maintenance needs; items were only needed periodically.

Further studies by the SCE showed that some customers ordered each of the top twenty (20) items only once.  It would be a different customer ordering for a large quantity.  There was no uniform demand pattern.   Customers buying plenty of an item were probably buying for one-time projects.  Customers buying smaller quantities were buying for fewer requirements. 

And because they were for projects, customers would have unique specifications for the items they needed.  A customer’s order of an item was often different from that of another.  Some customers would want better finish on an item; other customers would deem the item’s finish as is as all right.  Even if basic specifications were consistent, it was commonplace for the manufacturer to do additional work on an item as per a customer’s request. 

The manufacturer therefore was really customising items more than making the same items over and over.  Sales orders very often had instructions for how products would be finished, cut, and packed.  Some customers required very tight specs, others did not.  Some customers wanted their items cut to certain sizes.  Some customers wanted more stringent packaging; some were satisfied without any packaging at all. 

The manufacturer’s order fulfilment system did not take into account these frequent instructions.  The information system had on file more than 10,000 items and it was found that many of the items were similar to each other.  In other words, every time a customer order was received, it asked for an item that was made before but with slightly different specifications.  The accounting and IT groups were constantly entering “new” items into the information system. 

The SCE therefore suggested that the manufacturer re-develop its customer service strategy.  The SCE suggested the manufacturer refocus the order fulfilment system from one that sells based on a fixed inventory of items to one that is based on customisation.  Instead of having a system like a grocery store, the system should be like a machine shop—i.e., only make an item when there’s an order.  The SCE also recommended that the manufacturer only keep stock of needed raw materials, not finished items. 

A large metal manufacturer a few kilometres away was actually doing that kind of thing.  His inventories of finished goods were limited to stocks that are about to be shipped.  He only kept at most a month’s worth of raw materials (he thought that already was too much) and he had no backlog of pending orders.  Every item that was made had its own unique identity unless it was a repeat order to the same customer. 

The SCE proposed a system in which the manufacturer’s sales representative would prepare quotations for customer inquiries.  When a customer is interested in an item, the sales representative would quote not only price and quantity but also confirm specifications and schedule of deliveries.  The sales representative would coordinate with a joint sales and supply chain support team that would translate customer inquiries into a quoted proposal for the customer.  The quoted proposal becomes a sales order upon negotiation and agreement between customer and sales rep. 

The supply chain team would keep stock of raw materials which happen to only number to less than twenty-five (25) items or stock-keeping units (SKU’s).  The stocking strategy would be independent of actual demand but would take into account large spikes as in when a customer conveys interest for a very large order.  Again, the sales and supply chain support team would ask the sales representative to negotiate delivery schedules to take into account the manufacturer’s capabilities to buy raw materials and produce the needed item. 

How demand is fulfilled varies from industry to industry, enterprise to enterprise.  One should study demand based on customer behaviour, not on overall totals or averages. 

One should also tailor the supply and fulfilment of demand to the needs of customers.  At the same time, one should always be aware of the system’s capabilities.  Customers may be always right but the enterprise is not one with unlimited power.  There has to be communication and collaboration via negotiation and mutually beneficial agreements that would address price, terms, and supply. 

There has to be a right way to serve an order.  Not for management, not for consultants.  But for customers. 

About Overtimers Anonymous