An introduction to supply chains and their unpredictability
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, theyd be getting high fives from the board. If the supply chain department achieved the 100 per cent OTIF objective, theyd 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.
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 chainsinclude 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 centlower sales growth and 11 per cent growth in cost.”
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.