Supply chain · 16 July 2015

An introduction to supply chains and their unpredictability

Many take for granted all the various elements of a supply chain

Supply chains are complex, unpredictable, volatile and, as a result, difficult to manage. Businesses that do good jobs of managing their supply chains tend to be successful, have excellent reputations with customers and are profitable to boot.

So why, given this, do many businesses take this critical business function for granted? It’s generally because, from the outside supply chain is simple. The often used phrase “the right product to the right place at the right time in the right condition/quality” – makes it sound very simple. The expectation from non-supply chain colleagues is for 100 per cent on time delivery, in full (OTIF) every day. There’s no acknowledgement that such a result would be a remarkable achievement. To do such a thing for a whole month, let alone a year, would be akin to marketing quadrupling sales. And if marketing did quadruple sales, they’d be getting high fives from the board. If the supply chain department achieved the 100 per cent OTIF objective, they’d be told “that’s what you get paid for”!

Why is it difficult to achieve consistent high levels of OTIF? It’s back to my opening statement. Complexity – the number of organisations, departments and individuals that are required to perform their jobs to high standard is immense. A supply chain to deliver a product to a consumer will typically consist of several sub-contract manufacturers supplying components to the principle manufacturer.

The principle manufacturer complying with a purchase order placed by a wholesaler or retailer and having allowed sufficient contingency in their lead time to cope with machinery breakdown, weather or staff absence effects. The purchase order relies on accurate forecasting information which, if it’s a new product, will largely be guesswork with some reliance on the sales performance of similar items or historic performance.

Weather can have a knock-on effect on the supply chain

Shipping companies managing the flow of containers around the globe, and in particular through ports. Haulage firms collecting containers and delivering them to warehouses. Warehouses having sufficient storage capacity, efficient warehouse management systems, effective processes to avoid errors and appropriate levels of resource to cope with peaks and troughs in demand. Retailers to have efficient stock handling processes and accurate stock data at store to prevent overstocks and out of stocks. Or parcel delivery companies having sufficient diligent drivers, accurate address information, good quality packaging and not least an available recipient, be it a locker, a parcel drop off service or the least reliable of all, a customer at home.

So that’s complex, now for unpredictable. Even away from the madness of Black Friday and other similar spikes in consumer demand, predicting required volumes of stock is an incredibly difficult task. Typical factors affecting most supply chains include holiday patterns; “When is Easter this year?”, “When is Chinese New Year? – affecting production”. Weather, for example, a sunny spell one summer weekend will cause an increase in demand for salad and beer of over 400 per cent from normal demand. Consumer behaviour; responses to marketing campaigns, media stories, celebrity endorsements and product placement, all cause unpredictable changes in demand. Given this uncertainty and complexity, managing supply chains is tough.

But it’s also essential that supply chains perform. In 2005, a study by the University of Western Ontario into the effects of significant supply chain disruptions on 800 businesses found some startling results:

“Firms suffering from supply chain disruptions experience between 33 to 40 per cent lower stock returns relative to their benchmarks over a three year time period.”

It went out to state: “Disruptions have a significant negative effect on profitability. After adjusting for industry and economy effects, the average effect of disruptions in the year leading to the disruption announcement is: 107 per cent drop in operating income,  seven per cent lower sales growth and 11 per cent growth in cost.”

Note that those are the average effects. Frightening aren’t they? The even more frightening thing is that of those 800 firms studied, it noticed, “it does not matter who caused the disruption, what was the reason for disruption was, or what industry a firm belongs to, or when the disruption happened”. The effect was the same. Given this study was ten years ago and covering the previous ten year period, it’s worth noting how customer expectations have increased since 2005. Customers now require faster responses to orders; next day being the norm and same day becoming more and more widespread. Customers can also share their dissatisfaction more effectively than ever before through social media.

So, considering all the complexity of extended supply chains, the unpredictability of the market and the cost of getting it wrong. The supply chain teams should also be getting high fives and not just “That’s what you get paid for!”.

Image: Shutterstock

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ABOUT THE EXPERT

Simon Dixon is the managing director of supply chain and logistics advisors Hatmill. He has worked in supply chain management for the past 19 years, both in industry and in consultancy. Simon's client experience includes the top four UK supermarkets and over 50 other clients spanning sectors such as construction and ecommerce.

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