The shockwaves sent reverberating through the U.S. economy by Hurricane Katrina dramatically highlighted how dependent the nation was on the timely and efficient delivery of goods and services. For a vital few weeks, all sectors of the economy held their breath to see how devastating the impact would be. Supply chain professionals everywhere in the country were quick to meet the challenge by exploring new ways to bypass the potential bottlenecks the devastation had seemed to portend for water, rail and truck traffic in the very center of the nation. However, the disaster dramatically illustrated the need to architect supply chains agile enough to meet the next major disruption, whether it be a terrorist attack, a catastrophe at a key port or another natural event. Simply, how could supply chains ensure that they could maintain the necessary velocity of goods and services not only to meet the potential of threats posed by disrupting events, but also to effectively manage the supply network in an era of Lean and super efficiency?
Understanding Supply Chain Velocity
From the very beginnings of modern production and distribution management, companies faced the fundamental problem of how to optimize the dispersion of goods and services to the marketplace. When producers and customers are in close proximity to each other, demand signals can be quickly received by suppliers, and products and services in turn promptly delivered to the customer. As the time and distance separating production and the point of consumption increase, however, companies must in turn increase the size of the supply network and the inventories within it if customer serviceability is to be maintained and enhanced. It can be said that as the supply channel expands, the importance of managing the velocity of the goods and services that flow through it correspondingly grows in importance.
The analogy most often used to describe supply chain velocity is that of a pipeline through which product flows. As a pipeline grows longer to serve an ever-widening market, the volume of goods flowing through it correspondingly expands. Several serious problems can arise in managing pipeline flows as they grow longer and longer. To begin with, as inventory expands, so does the costs of ordering, storing and moving it. As if ballooning pipeline investment and potential obsolescence were not enough, the longer the pipeline, the more it becomes subject to disruption stemming from the possibility of an expanding number of weak points as the fabric of the supply chain continuum is stretched too thin. Finally, as changes in demand or product/service variety accelerate, the longer the pipeline, the longer will be the time necessary to respond to those changes. If supply chains are to become more adaptable to manage such events, it stands to reason that one of the fundamental requirements is that they be able to increase the velocity of the end-to-end flow of their products and services.
Unfortunately in today's hyper-competitive environment, very few companies have a true working knowledge of the velocity of their supply pipelines. While a small minority of companies, such as Dell, Home Depot and Wal-Mart, base competitive advantage on knowing and managing the velocity of goods in their pipelines, most are inwardly focused and have extremely limited visibility to what is occurring in their supply chains. In addition, this lack of visibility to channel velocity has been rendered even more difficult a challenge as companies increase their dependence on outsourcing, product lifecycles continue to shrink, and declining customer loyalties and increasing service levels demand even greater supply chain flexibility.
As a result of today's fast-paced global business environment, the gap between the velocity of supply lead time and customers' order cycles is widening. Most companies address this gap by attempting to increase forecast accuracy and carrying additional inventory in the channel pipeline. Unfortunately, despite the use of the most sophisticated of techniques, forecasts will often be wrong. Even worse, as each node in the supply network builds buffer inventories to manage variability, inventories at each channel node become subject to the infamous "bullwhip" affect. As lead times cascade down the supply chain, the ability of supply chains to serve an increasingly demanding customer becomes alarmingly problematical. Surely, the solution for increasing velocities lies in another direction other than focusing on forecasting and expanding channel inventories.
Closing the Gap
Mitigating the risk of supply chain disruption while simultaneously increasing product velocities requires the creation of supply chains that are agile and nimble enough to thrive in today's global marketplace. Such an objective requires that supply chains possess the following attributes:
1. Knowledge of customer demand — The first rule in managing supply chain velocity is to fully understand customers, their needs and the intensity of the experience they expect from their suppliers. A full understanding of customers' business requires more than just establishing forecasts; it requires an intimate knowledge of the solutions and delivery values each customer wants.
2. Increased supplier flexibility — A critical driver to improving supply chain velocity is improvement of supplier relations. Suppliers that are "seamlessly" integrated into the channel system can continuously work on reducing lead times, possess knowledge of — and are capable of quickly responding to — product changes, and are committed to transparency and openness.
3. Increased internal flexibility — Driving increased velocity requires operations functions that are lean and agile. The application of what has come to be known as the toolbox of Lean techniques permits managers to attack wastes anywhere in the company or in the supply chain. The goal is the removal of non-value-added functions that simply elongate lead times and increase supply chain volatility.
4. Technology-enabled — Gaining visibility through technology tools into orders, inventory and shipments across the extended supply chain is critical to effectively manage supply chain velocity. The goal is to deploy technology to improve everything from on-time delivery and self-service order configuration to delivery synchronization and status visibility. Technology tools can be separated into those that improve operational efficiency and channel visibility (enterprise resource planning, electronic data interchange, Web and radio frequency identification); those that provide connectivity, information sharing, event tracking, exception management and dynamic optimization to reduce lead times and wastes, and increase supply chain agility (collaborative planning, forecasting and replenishment; advanced planning and scheduling; and sales and operations planning); and those that focus on customer experience enhancement, customer order and service management solutions, shipment tracking, channel disruption management, supply chain improvements, and regulatory functions.
How do these four attributes increase supply chain velocity? To begin with, lean, collaborative and adaptive supply chains are capable of increasing supply chain productivity and profitability by ruthlessly reducing wastes found anywhere in the channel network. Lean supply chains seek to create customer-winning value at the lowest cost through the real-time synchronization of product/service needs with the optimum supplier. Achieving such objectives requires supply chains to be both responsive (capable of meeting changes in customer needs for requirements such as alternative delivery quantities and transport modes) as well as flexible (adapting assets, pursuing outsourcing, and deploying dynamic pricing and promotions). Finally, lean supply chains are dedicated to the continuous improvement of people and processes throughout the extended supply chain.
Competencies of the High-velocity Supply Chain
While the above four attributes provide the foundations for lean, high-velocity supply chains, deeper investigation reveals that they can be better understood when deconstructed into six competencies.
1. Application of Process Kaizen Tools — "Lean" is about the reduction of waste found anywhere in the supply chain. Wastes can occur not only in inventory and processes, but also in time and motion, and even in digital waste. Understanding "waste" enables the pursuit of that which adds value. Supply chains can add value by removing redundancies, reducing lead times, optimizing the value stream, producing to customer demand and activating continuous improvement. The toolbox of Lean methods includes the"5S" system of improvement, single minute exchange of dies (SMED)/quick changeover, process flow analysis, total productive maintenance (TPM), and Six Sigma and statistical methods.
2. Process Standardization — Lean, high-velocity supply chains seek to identify opportunities for the application of process kaizens to ensure the continuous elimination of waste and the removal of all barriers to the smooth flow of goods and information. Process standardization should be applied to every repeatable process, including productive processes, product/service delivery and inventory management. Standardization enables companies to effectively apply kaizen methods to any process and track, measure and demonstrate the effects of the kaizen initiative. Standardization also enables identification of all inhibitors of flow, such as batch and queue processing, unnecessary transportation, and product storage.
3. Channel Partnership — The effective use of channel suppliers stands at the core of the lean, high-velocity supply chain. The role of suppliers is to fill company productivity gaps by providing non-core strategic and operational competencies that reduce manufacturing, distribution and service costs, improve flexibility, keep companies focused on core competencies, provide access to global networks and superior technology, improve quality and service, reduce capital investment and increase cash flow.
4. Demand Management — Twenty-first century supply chains have found that "push" systems are incapable of operating in an era of high-velocity response. Lean supply chains are responding to this challenge by designing "demand pull" systems that trigger supply commencing at the point of sale, and then pulling the requirement from upstream delivery nodes point-by-point all the way back to the producer. The goal is to provide advanced warning of demand and the channel's collective ability to respond effectively. Effective demand management increases velocity by reducing channel uncertainty, variability in fulfillment processes and supply lead time, and by linking channel partners together into networks capable of responding to the emerging marketplace demands.
5. Lean Implementation — Extending Lean to the entire supply chain requires a concise implementation plan. A carefully designed plan begins with value stream mapping and proceeds through core competency definition and plan composition. Detailed planning will ensure effective execution of supplier management, channel value stream mapping and the use of process kaizen improvement events. Finally, even after successes are scored, implementers should enable what will be a perpetual step — continuous Lean value chain improvement.
6. Strong Communication — The lean supply chain requires all channel constituents to work together as a "virtual enterprise" to ensure the highest value to the customer. Perhaps the most important driver of the lean supply chain is the ability of the channel's kaizen leaders to integrate into a single vision the different network partners' perceptions of what constitutes the value stream. Unification of purpose and Lean mechanics rests on two elements: the creation of an effective Lean supply chain management team and agreement on toolsets.
Today's best supply chains relentlessly pursue the above six Lean competencies. Effective execution enables companies to realize three essential success factors. To begin with, application of kaizen tools and process/industry standardization enable lean companies to effectively pursue waste reduction at all supply chain levels. Closely integrated supply chain partnerships and the development of technology tools providing real-time information keep all supply network nodes focused squarely on how to continuously build and sustain a high-velocity stream of value to the customer. And finally, well-designed lean supply chain implementation projects and the capability to broaden and enrich cross-channel communications concerning quality, change management, collaboration opportunities and joint metrics will enable supply chains to maintain a focus on continuous improvement as they drive toward network competitiveness and profitability.