At DemandCaster, we have developed a concept called Supply Chain Physics. We use this concept to foster communication and accountabilities across functions and improvements within the enterprise.
So what is Supply Chain Physics? Physics is defined at www.dictionary.com “the science that deals with matter, energy, motion, and force.” If we look at the supply chain diagram, from right to left we have the movement of information in the form of orders, order processing and release, forecasting, manufacturing planning, and purchase orders. Going the other way, from left to right, we have the movement of materials and finished goods. We begin with raw and pack materials from suppliers. Owned factories or contract manufacturers then transform the materials into products which are then allocated to warehouses and distribution centers. The products are then picked, packed and shipped to customers. So, we have materials and products moving in space and time. Real objects, liquids, solids, and gases, are manipulated and moved in space and time. This sounds very much like physics.
In the physics we studied in high school and college, there are specific laws and formulas that explain the physical world. Is the same true for Supply Chain Physics? Yes and no. We have enumerated three laws but they are not clean and formulaic as:
- The speed of light is constant
- e = mc2
Law of Interdependency:
- Inventory, Service, Quality and Costs are interdependent, push on one and the other three are effected.
- In business improvement, functional improvement can only go so far. A point of diminishing returns is reached. Thereafter all further improvements require cross-functional coordination.
Law of Constraints
- There are limits to how much of any item can be produced in a finite period of time.
- There are limits to how fast and in what quantities goods can be shipped from Point A to Point B.
- This is purposely very related to the Theory of Constraints.
Law of Information
- Information moves at the speed of light. Actually, information moves at the speed of the internet which is supposed to be closer to the speed of light.
- The speed the information moves is independent of the accuracy of the information.
- Information moves much faster than the lead time to order or replenish materials or finished goods.
- Information moves much faster than production rates.
Let’s look at some examples.
Law of Interdependency: A Chief Supply Chain Officer at a Fortune 500 company once laid out the following strategic vision.
- Less Factories around the world
- Sweat the Assets
- Greater Product Assortment (set by Marketing)
- Less Inventory
- Improved Customer Service
Think about it. How can all five of these be achieved? Probably any three can be achieved at the expense of the other two. This company did exactly that. For a specific product, they reduced the number of factories globally to just one. They drove the utilization in this one factory well into the low 90% range, they also increased the assortment of products. One of the lines had to be upgraded for a new product and voila… inventory and case fill plummeted. It was a customer service disaster from which it took months to recover. Violation of this law puts you in the game of Supply Chain Whack-a-Mole.
Law of Constraints: Many companies import products long distances these days. The source of goods is often in Asia. The lead times can anywhere from one to three months depending on whether the supply chain is order from stock or make to order. Because of the long lead times, demand plans tend to be less accurate. Also, demand can change within lead time causing either excess inventory or out of stocks.
Let’s assume the product in question is a reasonably priced consumer good that makes sense to move in containers by ocean. This takes four weeks just in door to door transit time. Something happens. Demand suddenly increases; maybe it was one large order. There is not enough inventory on-hand to cover the order. Everyone is scrambling. Management is asking, “Can we get the goods in two weeks, no one is even better. And I don’t want to pay anymore!” Is this possible? Maybe once if you are real lucky. Is this possible on an routine basis? Probably not.
There is a limit to how many goods can be moved from point A to point B at a given time. This is the Law of Constraints. When we add the trade-off of time and cost i.e. using air vs. ocean, then the Law of Interdependency comes into play.
Law of Information: In this case let us consider a factory that can produce 10K units operating 24/7. We get an order 16K that will help achieve the quarterly sales goal for the company. There is only 2.5K in stock. This means 13.5K must be produced in only six days.
Information is faster and easier to manipulate and change than the flow of goods. A sales order form, on paper or pc, can take almost any number typed or written into the order quantity section: 1, 10, 100, 1,000, 10,000, 100,000. It is easy to do. At the speed of light, or the internet, the demand is coursing through the system creating chaos and havoc in the supply chain.
Clearly these Laws of Supply Chain Physics overlap. The point is to provide a context in which real world physical trade-offs and constraints can be discussed and communicated in the organization especially between functions. This will help nurture better communication and foster improvements. If sales and marketing truly understand the trade-offs, constraints, and other limits. They can make better decisions. They can craft and implement policies that can move the organization in the direction of reducing the violations that require herculean efforts and expediting that result in making the unit volumes but trading off margin, service, and quality.
This may sound like Supply Chain whining. It is not. Supply Chain professionals tend to be a gritty get the job done part of the organization. We are solid and committed business partners. We make every effort to make things happen. Yet, there is this physical reality to deal with. Not obeying the laws of Supply Chain Physics means a very real risk of not meeting all the business objectives.
Violating the Laws of Supply Chains Physics can be considered as a defect: an organizational, operational defect. If the defect rate is 30%, the organization has pretty much dedicated itself to constant, and expensive, fire fighting. This mode is the norm, the routine, of how the organization operates. If the defect is 1%, everything is more manageable, predictable, and reliable. Both tend to get the job done. The latter, all things equal, is more profitable.
More to follow, check back next week ….
If this blog interests you, please see our website for our upcoming Supply Chain Physics Webinar at https://www.demandcaster.com/Events.aspx
