SCM World 2014 Chief Supply Chain Officer Report: A Conversation with Kevin O’Marah – Part III

In September, SCM World released its annual Chief Supply Chain Officer Report based on its survey of over 1,000 supply chain executives across all industries and geographies. Supply Chain Nation sat down with Kevin O’Marah, Chief Content Officer for SCM World, to discuss four key findings of the study. In Parts I and II O’Marah explained how companies must embrace uncertainty in today’s volatile world and  how companies should approach Big Data analytics. In this excerpt he will cover the seeming cross purposes of cost versus service objectives in supply chain.

SCN:      Companies continue to list cost reduction as supply chain’s biggest value, but agility and speed in customer service is right behind in this year’s report. Aren’t these two at cross purposes? How can companies do both?

O’Marah:  That’s a great question—they are at cross purposes. That is kind of the existential challenge of supply chain. That has never been anything but our number one mission. The issue is that on-time, low cost delivery is getting to be a lot more complicated in terms of what the customer expects from the supply chain. The agility to speed that you saw in the CSCO report points to the demand by business upon the supply chain function to be able to say ‘yes’ to more requests from the customer.

Certain industries, and retail in particular, are under unbelievable pressure to say yes to everything every customer can think of—buy online – ship to home; buy online – ship to store; return to store when bought online. Any number of configurations the consumer can think of, the retailer feels compelled to do because the competition coming from pure-play ecommerce especially is so intense. But the agility that’s implicit in being able to say yes to that customer is only beneficial if it is going to carry the responsibility to keep costs under control alongside it.

The real crux of the issue is that companies actually have to do both and, as with the second part of your question, they are at cross purposes because perfect service availability on one hand can be addressed with loads of inventory and just putting a shipment in a helicopter and drop them off at the customer’s drop location on demand, but that is ridiculously expensive. No one does that, except for oil field services or mining situations. But in the real world of supply chain, you don’t do that. You can’t carry inventory just for the sake of on-hand availability; you can’t expedite every single shipment just because the customer wants it. What we need to try to do is, in fact, do both. Getting at that, and therefore enabling agility with profitability, is really all about what the theme of the report is, which is embracing uncertainty and value.

Let’s talk about what that really means. It means estimating the expected demand for your product with the variability. It goes back to what I discussed in the first blog in this series around how do you adjust to a forecasting process that has to embrace uncertainty. You know things are going to change. You know the customer will be affected by other forces before the order is filled. Build that uncertainty into your forecast. Design the supply chain to accept that uncertainty as a fact of life, which is where postponement and late-stage differentiation comes in. This is where something like a digital supply chain can be a really powerful strategic weapon looking into the future for many industries. If the customer’s unique requirement is something mechanical or electronically enabled in product that they buy and bring home—it could be a car or a consumer electronics device—if it is possible to give them the final configuration as a post-sale shipment of a software code key, then yes it is possible.

Step back a link further, is it possible to give a retail customer unique artwork on packaging that appears on its shelf, but comes out of the factory meeting the needs of ten different retailers? Yes, that is also possible. Print-on-demand is effectively a digital supply chain application that puts artwork onto the product at the latest possible stage. Technically it’s possible. Its value is being able to say yes to that retail customer who wants a special or exclusive piece of artwork on their packaging, and at the same time, not carry loads of inventory of card stock or labels around the packaging machinery.

You can continue to go backwards up the supply chain. An example is the apparel sector where everybody is increasingly attempting to postpone final product differentiation. All the way up the supply chain there are opportunities to build variability into supply that accommodates the variability of demand.

At the end of the day, the mission to give the customer what they want when they want it will never go away. But if the supply chain can do so cost effectively and knows its cost to serve, and how that differs from premium requests—something unique, something rare, something special—and can appropriately price that compared to something very standard, something off the full run, and can appropriately price that, that is the capability that supply chain has to have. Cost to serve is the number one ingredient to try to combine an agile supply chain and the never-ending mandate to keep costs under control. So yes, they are at cross-purposes fundamentally, and that is the essence of supply chain—designing a system that allows you to do both as well as possible.

SCN:      Thanks for that interesting perspective, Kevin. In our final post in this series, launching November 20, O’Marah will discuss how the current trend toward vertical integration will impact out-sourcing.

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