Summer 2016 - Features

Supply and Demand

By May 18, 2018 No Comments
Supply and Demand by Bruce Kuerten; The supply chain is as old as business itself, but companies large and small are having to strategize in order to keep pace with our ‘want it now’ mentality.

We live in a world of overnight delivery and instant gratification, not giving too much thought about what goes between the moment we hit the Place Order button on our keyboards and when that big cardboard box arrives on our doorstep the next day—or, these days, even in a few hours. Some inside the industry call it “The Amazon Effect” as the online retail giant continues to push the supply chain envelope.

Supply chain management—how goods get from manufacturer to distributor to consumer—is one of the fastest-growing areas of business education in the country. Auburn has had one of the top supply chain management programs for years, but this year has consolidated its research by creating the Harbert College of Business’ Center for Supply Chain Innovation.

The supply chain is a network of production, storage and distribution facilities connected by transportation lines—a network that stretches from the extractors of raw materials to the consumers of finished goods. Though the edges blur in real life, when we talk about the supply chain we commonly divide it into five processes: plan, buy, make, move and service. What’s involved in planning the supply chain? Where does it source the raw material and components? Where is the product manufactured, and how does that location impact logistics and transportation? Finally, how does the product get customized, packaged and delivered to the consumer?

The answers to those questions might vary from business to business, but they all make up the complex issue of supply chain management.

Contemporary thinking says consumer demand should drive the supply chain. Demand, in effect, “pulls” the product through the chain as opposed to the firm “pushing” the product toward the consumer. Demand-driven supply chains are less prone to excesses and shortages of inventory, and more able to focus on optimizing consumer service.

But substantial planning goes into developing a demand forecast. “Forecasting is the one signal that can balance your supply chain,” says Dan Nguyen ’09, a sales and operations planning specialist.

Consumers are notoriously unpredictable, and a forecast is really an educated guess. There’s as much art and experience as there is data and software. In one of the more epic supply chain “fails,” Nike, usually a prime example of supply chain savvy, spent $40 million on demand forecasting software that supposedly would give the company a more solid grasp of customer demand. The programming missed the mark completely. Nike ordered nearly $90 million in shoes that it couldn’t sell and came up $100 million short on shoes that were in demand. All told, Nike CEO Phil Knight put the cost at nearly $400 million. The stock price dropped 20 percent, and it took the company three years to recover.

“Supply chain professionals are not often taught ‘big data’ or heavy analytics. Programmers and computer scientists are not taught supply chain management,” Nguyen warns. “I believe that a strong marriage of these two is where the industry is heading.”

“My main goal is to get in the ballpark,” says Bradley Addison ’13, a global logistics associate at Dow Corning. “The more accurate we are at forecasting downstream, the more efficient we will be upstream.”

The forecast can begin to shape the company’s planning. The trick is the coordination of the elements. Sales and operations planning, a supply chain “basic,” seeks to coordinate all the firm’s activities toward fulfilling the same forecasted goal. That coordination should be simple. In fact, S&OP, as it’s known, has been called organized common sense.

However, different parts of the firm—different parts of the supply chain—usually see the world from different perspectives. Sales, for example, is all about revenue, manufacturing about expense, logistics about capacity and speed. It can be difficult to get all the sectors to agree on a common goal—a common plan.

Key to establishing this coordination is getting a consensus on the firm’s core strategic capability. Put another way, what does the firm bring the marketplace that is unique? What does the firm do better than anyone else?

“In the future, I think there is an opportunity for companies to further break down their own internal boundaries and work together toward a shared goal set to a greater extent than we do today,” says Cliff Defee, Harbert College’s EBSCO Professor of Supply Chain Management.

Built into the plan of the supply chain should be the unimpeded flow of information across all the elements of the chain. What are the inventory levels at the retail locations? What is the transit time for products? Is production at full capacity? Do we have component and/or raw material inventory? The answers allow the firm to respond quickly to changes in the marketplace and in consumer demand.

Defee continues: “There are collaborative tools out there that let organizations work effectively with each other. Things like video conferencing are more in vogue today than they were a decade ago. Internet communications, the way it has enabled real-time communications around the globe—and most supply chains are global in nature—has changed how we work as businesses.”

The Ford Motor Co. was incorporated in 1903. By 1913, the company made and sold nearly half the cars in the United States. To feed its voracious assembly line and buffer it from economic vagaries, Ford owned its own rubber plantations, coal and iron ore mines, acres of timberland, a fleet of ships, and a railroad—all the resources necessary to make and sell a car, from the mine to the showroom. The company controlled all the elements of the supply chain.

Ford’s vertical integration made sense at the time. The company was protecting its core capability—that assembly line. Fast forward a century. Transportation costs have dropped, cheap manufacturing labor can be leveraged from far-flung corners of the world and information technologies allow instantaneous global communication. The modern supply chain has emerged. Today, companies don’t compete; supply chains do.

Typically, companies categorize purchases by supply risk and profit impact. If you’re building cars, transmissions are probably more important than pencils. Supply risk is high when the product or service is scarce, when there are few suppliers or when the flow could be easily disrupted.

“You have to categorize what you are buying to see where your leveraged opportunities lie,” recommends Gary Page, Harbert College of Business executive-in-residence and former director of TDS Corporate Services at ITT. “And remember, all suppliers are not created equal. You have to categorize groups of suppliers as well.”

Obviously, one of the key considerations in procurement decisions is cost. “The procurement guys will tend to jump on that low bid,” says Vic Chance ’72, former vice president at Johnson & Johnson’s external operations and supply chain chief procurement office. “They get fixated on low price. Low price may not be the lowest-cost choice. If you have bad suppliers, there is hardly any way to get around that inexpensively.”

As we incorporate the management of risk and look at the total cost of ownership, we begin to view procurement from a holistic supply chain perspective. Has the supplier inventoried bottleneck items? Does the supplier deliver in a timely, consistent manner?

“Predictability leads to less risk. Less risk leads to less need for inventory and more timely deliveries,” says Page. “Supply chains are not just measured on the cost to run them, but also their velocity. But you have to have buffers. You always have to have a ‘Plan B.’ Is there somebody else we can put into business if we have to? With duplication, we can manage the risk.”

Production is at the heart of the supply chain. No product or service—no money.

The design of the manufacturing process begins with a production strategy. Over time, technology has had a big impact on that strategy. Since the mid-80s, most advanced manufacturing processes are organized along the lines of the Toyota Production System. The design of the actual process, the line, the machines themselves, and even the workers’ relationship to the line are all carefully and continuously monitored to “lean” the process—to eliminate waste in every form and improve efficiency and speed.

“Over the last 35 years, our progress has increased significantly,” says Mark Clark, a visiting assistant professor in the Harbert College of Business and a management scientist with the Auburn Technical Assistance Center. “We have made great strides in terms of increasing efficiency, reducing waste and improving quality.” The elimination of waste means the finished product can be produced at a lower cost. Efficiency and speed not only contribute to cost savings, but enable flexibility and some degree of customization in the manufacturing process.

Some companies have pursued a flexible manufacturing strategy. This strategy emerged in response to persistent challenges—product line growth, shorter life cycles, faster competitors and more sophisticated customers. The idea is to build flexibility so the system can react to rapidly-changing market conditions.

Adaptive Manufacturing

Adaptive manufacturing is the latest production strategy. It forgoes the traditional reliance on standard lead times and long-range forecasts in favor of a continuously monitored demand-driven approach. The supply side is tasked with quickly sensing and responding to customer demand. The result is increased production flexibility and demand fulfillment velocity: production begins when the customer places an order, which in turn pulls product through the system.

 

“It all starts with understanding customer demand and demand patterns as reflected in forecasts, and how orders are firming up,” says Abiola Oladapo ’04, materials leader for Cummins Emissions Solutions. “Is demand normal? Is it rising? Is it dropping? Is the mix changing? Technology continues to help make things faster and easier to process and track.” That smooth flow of information allows the manufacturing process to be more responsive to customer demand.

The supply chain moves continuously. The gears are always turning. Materials move to suppliers, component parts go from suppliers to manufacturers, and finished goods and services flow to consumers. Information goes back and forth along the chain, coordinating all the pieces and parts. All of these movements are called “logistics.”

Logistics strategy involves the planning of inventory placement and movement to meet customer demand at the lowest cost. Implementing a strategy requires expertise in inventory management, warehousing, fulfillment and transportation.

Though the military has focused on logistics since the first armies met on the battlefield, logistics in industry is a relatively recent phenomenon. Only within the past two decades have companies integrated logistics to support the supply chain from end to end.

Transportation accounts for more than 60 percent of all logistics costs. Dave Pollard ’85 is managing director at FedEx Services. “Day to day, companies know where business is,” he says, “but they are always looking for where business is going to be.”

Information technologies allow firms to look ahead and anticipate this movement. New tools, for example, track the environmental conditions inside a package, including temperature, humidity and barometric pressure. Real-time GPS and traffic data plot the best routes. Analytics allow logistics firms to gain efficiencies by diversifying and strategically deploying transportation fleets.

The most visible part of logistics is transportation, but “there’s a lot more that goes into it than somebody driving from point A to point B,” says Fenn Church ’88, president of Church Transportation and Logistics. If the object is to get the product to the consumer in the cheapest, fastest way possible, logistics must encompass all of the supply chain functions from the instant the product is finished at the factory to the moment it arrives on the customer’s doorstep. Careful coordination of these activities has a significant impact on the bottom line.

As much as the art and science of logistics has pushed cost and waste out of the supply chain, there is a new game afoot. It used to be that a customer could get a product through one or two channels: a retail store, and maybe that store’s mail-order catalog. But now e-commerce has become big business, surpassing $300 billion in 2014, and “omnichannel distribution” is the new buzzword.

 

Omnichannel retail allows the consumer to access the shopping experience through all available channels: websites, physical stores, kiosks, direct mail and catalogs, call centers, social media, mobile devices, gaming consoles, televisions and even networked appliances. A firm’s mobile app, for example, should offer the same level of responsiveness as its website and incorporate the same color schemes as in-store displays. Omnichannel retailers track customers across each of those gateways. Walmart, Target and Costco have each deployed omnichannel strategies, and most retailers cite omnichannel strategies as a priority—a higher percentage than for any other business initiative.

 

Omnichannel Distribution

According to Brian Gibson, Wilson Family Professor of Supply Chain Management, companies will have to invest to create a supply chain flexible enough to handle whatever flow-through the customer wants. In an era scholars refer to as “Retail 3.0,” the power has shifted from the suppliers and retailers to the consumers.

“We are entering a period of rapid disruption in the supply chain and logistics space, and it’s an exciting time,” says Dave Clark ’96, Amazon’s senior vice president of worldwide operations. “Focus on the things that will never change. Customers will always want a vast selection, low prices and fast delivery.”

We tend to think of the sale of a product as the end of the supply chain, but it isn’t—not if we’re interested in serving the customer and creating a repeat customer. Many companies, however, don’t know how or simply don’t care to provide post-sales support. In a modern business environment that is increasingly devoted to “service,” that ignorance and indifference may be costly. The social media fallout alone can be disastrous.

After-sales support involves information and help, an easy return policy, product repair services, parts, and even field maintenance.

The two most common problems with new purchases are consumer misunderstanding about installation/use and outright product failure. Misunderstandings can usually be resolved by following the installation and operating instructions, but rather than read, the impatient customer will often call for help. If a call center does its job properly, it will solve the problem without adding to the customer’s frustration and avoid the expense of dispatching a sales technician.

In the case of outright failure, the product will most likely be returned. Now the supply chain must function in reverse, and the company must make the return process as easy on the customer as possible. If the product has failed, for whatever reason, the return procedures should not add to the customer’s frustrations.

Once the product leaves the customer’s hands, it moves back up the chain to a returns center (a distribution center in reverse), where a decision will be made to dispose, recycle, cannibalize, repair or rebuild it. And just like call centers and help desks, these services may be handled in-house or outsourced.

Help lines, call centers, repairs and easy returns may enhance the firm’s relationship with its customers, but these activities do little to contribute to the bottom line. Providing parts and maintenance is another matter.

“Americans spend about one trillion dollars every year maintaining the assets they already own. That translates to 8 percent of the U.S. gross domestic product,” says Gibson. “Those after-sales services not only ensure customer loyalty—they are a very high-margin business.

“But it’s a complex effort to manage,” he adds. “There’s a forward flow of replacement materials and a reverse flow of damaged or worn-out components, not to mention the delivery of maintenance and repair services.”

Those services, unlike manufactured products, cannot be made and inventoried. It’s complex, and the stakes are high. Get things wrong and the firm’s relationship with the customer may be irrevocably damaged.

Like most things in business: get it right and there’s money to be made.

Joe McAdory ’92, communications editor for the Harbert College of Business, and Brian Gibson, Wilson Family Professor of Supply Chain Management in the Harbert College of Business, contributed to this article.