How Important is 1% to Your Supply Chain?

Perhaps you’ve seen the recent mobile service ads, where the pitchman talks about a 1 percent difference in reliability. He and other characters in the commercial mock the importance of spending more for only a 1 percent difference in service. Perhaps I’m just tired of seeing this guy; he’s gone from pitching the “Can you hear me now?” provider to this new gig. Or perhaps it’s just because I know that in many situations, a 1 percent difference or variation can have vital impacts on life and business. And conversely, responding quickly based on bad assumptions (or even making decisions based on incorrect data) can lead to big problems.

For instance, let’s look at what a 1 percent difference means when navigating by compass. I spent 10 years in the United States Coast Guard, specializing in driving boats. I loved owning the journey, being responsible for getting my crew from point to point safely, and the occasional adrenaline rush of saving lives and preventing loss of property. A key part of my job was navigation: identifying my objectives, and plotting an optimal course for my journey. The majority of these journeys were driven by compass, where I would set my heading based on a specific degree. If I was heading across the bay, I could eyeball it. However, if I was taking a journey of 10 miles or more, I’d use the compass.

Now, imagine embarking on a journey over 300 miles, where instead of steering at a compass setting of 93 degrees magnetic, I steered 94. (While I realize that steering based on an error of 1 degree is not the same as a 1 percent difference, the concept is similar.) After traveling only one mile, I would be off course by almost 100 feet. If I continued at that same compass setting, about halfway there, I would be off course by about three miles. To give you a better idea of how a small error can have a huge impact, imagine a container ship navigating from China to Seattle with a compass that is off by 1 degree. At that setting, it would miss its intended port by over 100 miles – putting the container ship closer to Vancouver or Portland. You can see how a small miscalculation, based on imprecise data, can compound quickly.

Let’s apply this same concept to your supply chain. What if the assumptions that are being made about your supply chain plan and its accuracy are wrong? What if the data being used to inform your supply chain planning decisions is not precise, or worse, what if you are relying on a “good enough” approach to planning? If your plan is built on bad information, then it doesn’t matter how rapidly you respond to a potentially disruptive event. You’ll be forced to continue eyeballing your course corrections, and the potential impact could be costly.

Precision in supply chain planning is what gives your product a competitive edge.  A forecast error as small as 1 percent can lead to a parent not being able to locate and purchase that must-have toy for their child. That small demand error at the point of consumption could grow to a 20 percent error due to the bullwhip effect, as the potential negative impact becomes cumulative. This is also true for other parts of your supply chain. For instance, a 1 percent impact on lead-time variability can lead to out-of-stocks, waste, transportation issues and much more. And in any case, it’s safe to say the customer experience is significantly impacted.

While there are too many factors for any company to maintain a perfect supply chain, it is possible for companies to gain significant advantages from implementing more supply chain precision. Managing your supply chain effectively requires having accurate, optimized data. Equally important is being able to get updates on the fly, so that you can make calculated course corrections as needed. Being able to respond to external factors and digital insights – such as a material shortage impacting production, or a news article that increases interest in a specific product — is an absolute requirement in today’s customer-centric environment. Knowing what is happening, and why, with intelligent analytics providing clear guidance on what supply chain path to take is critical. You need to be able to make prescriptive, guided changes to your supply chain to ensure more precise execution.

An optimized supply chain, built around an accurate network design, enables you to navigate these planning and execution challenges with more control. When both your demand and supply planning teams rely on a shared “compass” that brings planning and execution together, your ability to deliver the right products to your customers, when and where they need it, is enhanced.

Interested in learning more about supply chain planning? View this video to learn more about some of the trends influencing manufacturing planning in the next couple of years.

  2 Comments   Comment

  1. Great perspective Doug! I’d like to focus on one small phrase from your article. “the potential negative impact becomes cumulative”. Having spent a number of years as a Manufacturing Engineer, this really resonated with me. It’s easy to forget the output of one process become the input to another. Any error get carried along and magnified. 5 sequential pieces of equipment running at 95% efficiency equals a line that is only 75% efficient. (.95x.95x.95x.95x.95). The supply chain is a series of processes (machines) that depend on the previous output at the next process input. Great article and I look forward to hear more from you in the future.

    Reply
    • From Doug Kimball…
      Thanks, Tom, for the thoughts and additional perspective – great example. Of course, we’d all love the perfect supply chain without errors, but it simply doesn’t happen. Aiming for precision is important in this case, knowing that even those small errors, as you point out, can become significantly worse.

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