MRO Today - Questioning supply chains

Questioning supply chains

by R.T. "Chris" Christensen

Some people are beginning to question the theory of supply chain management — and rightly so.

As we moved into a soft economy in March 2001, problems in the theory of supply chain surfaced. Basically, this theory states that a relationship is established between supplier and customer, and their customer, and their customer — a “chain” if you will — that creates a working partnership between all the parties involved to efficiently bring products to market.

This is done with the intent of accomplishing two things:

1) Reduce the time to market or the leadtime required to get material from the raw material producer to the ultimate customer.

2) Minimize the amount of materials in this process flow and the associated cost of maintaining that inventory. Minimal inventory also improves the time it takes for materials to flow through the various processes. That improves time to market and meets objective No. 1.

In some cases, I’ve seen chains that are so long that they run from the customer in the United States to the raw material supplier in Europe or the Pacific Rim. Some involve seven, eight, nine or more corporations in processing components that lead to the finished goods. Some have up to nine months of leadtime for materials to flow through the chain. Long chains can still be efficient because there is minimal inventory and smooth flows through the product chain.

So then, what is the problem? It lies in the supply chain’s basic premise. Supply chains are based on the fundamental principal of demand. And for the supply chain to work, three demand principles must be known, understood and managed.

These three important principles are:
1) DEMAND IS STABLE
2) DEMAND IS FORECASTABLE
3) DEMAND IS GROWING

If you break any of these principles, you break one of the principles of demand and, quite frankly, you break the chain.

This really is no different from a chain letter. If you don’t send the letter on, you break the chain and it stops and fails. The entire downstream chain mail will never exist.

You also can call it the domino theory. Start a line of dominos tumbling. Then, remove a domino upstream before it is tipped over. The tumbling action will stop at that removal point. Momentum is halted.

I believe the same scenario can occur in a supply chain.

Here is how the chain letter or the domino theory works in the supply chain. Imagine that you are the second-to-last link in the nine-month-long supply chain and the last customer cancels the order and the relationship without any warning. This occurs in the middle of what you thought was a long-term contractual relationship. (Hey, this can and does happen.)

Immediately, you now have nine months of product coming at you and no customer.

You have three choices. You can:
• find another customer, real fast;
• try to cancel all the orders upstream in the supply chain and leave everyone else in the chain scrambling to get rid of the inventory of half-finished products;
• or, go bankrupt by owning the entire inventory and having no customers to sell those products.

I’ve seen all three scenarios happen. What can you do to protect yourself? You need to see the other side, or the down side, of supply chain management so that you can avoid the pitfalls of supply chain in a down economy.

Supply chain is like a tug-of-war. With all of your team members pulling in the same direction and with the same force, it works. If the team is disjointed, the chain is weak and you lose.

The bottom line of my lesson today is this: If one link in the supply chain fails to meet their requirements, the chain will collapse.

I believe this is a key to what happened in our current business downturn. As customers quit buying and/or reduced their orders, the decrease into the system became the weak link and the supply chain began to fail. When chain links began to cut inventories and increase the time length of the chain, the entire chain failed.

Remember, the overall strength is determined by its weakest link.

Do you want to trust your company’s business health to the weakest link? Find your weak link in the chain and put strategies in place to protect yourself in the event of failure.

R.T. "Chris" Christensen is the director of the University of Wisconsin School of Business' operations management program. If you have an inventory management question, contact Coach Christensen by phone at 608-441-7326 or e-mail cchristensen@execed.bus.wisc.edu.