Thirty Years of Supply Chain Management

Stephen DeAngelis

June 13, 2012

Kinaxis bloggers are writing a series of posts looking back over the past thirty years of supply chain management. The series is going to continue for several months and new posts will be added on alternating Fridays. In the first post of this series, Ray Karaffa states that “it is widely agreed that the term [supply chain management] was created by Keith Oliver in 1982.” [“SCM30: What Can We Learn From Supply Chain Management Mistakes?” The 21st Century Supply Chain, 23 March 2012] In 1982, when Oliver coined the term “supply chain management,” he was a consultant with Booz Allen Hamilton. Karaffa continues:

“The following is [Oliver’s] his definition as explained by SupplyChainRecruit.com:

… ‘Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.’

“SCM as defined by Keith Oliver could be construed as Macro Supply Chain Management (Macro-SCM), since it involves the global network processes from the initial raw materials to the ultimate consumption of the finished product linking across supplier-user companies. These functions lie within and outside a company that enable the value chain to make products and provide services to a customer.”

Karaffa admits that supply chain management existed long before the term was coined. He states, “Supply chain management concepts have been in practice since the turn of the last century.” He probably misses the mark by several thousand years. Most of the great civilizations of the past became great because they mastered the art of trading. Even small countries like the Netherlands were able to punch above their weight on the world stage because they were masters of trade. I venture to say that the suppliers and merchants of past ages were no less concerned about managing supply lines than are today’s professionals. The biggest difference is probably the fact that today’s supply chains move at a pace that was unimaginable during the earliest trading days. Perhaps another difference is that today’s supply chain managers are as concerned with Micro Supply Chain Management as they are with Macro Supply Chain Management. Karaffa writes that “Micro-SCM could … be construed as the non-global activities concerned with planning and controlling the rates of purchasing, production, distribution and related capacity resources to achieve targeted customer service levels within a company. This could be a replacement for the old term of Production and Inventory Management since it is now included within the broad definition of SCM.” He continues:

“Micro-SCM would then also be involved with the body of knowledge relating to the evolutionary progression of Material Requirements Planning (MRP), Manufacturing Resource Planning (MRPII) and Enterprise Resources Planning (ERP). This body of knowledge began back in 1957 when 20 production control managers met in Cleveland, Ohio, to form the American Production and Inventory Control Society (APICS), which is currently referred to as the Association for Operations Management.”

The main focus of Karaffa’s post is examining mistakes of the past and what can be learned from them. He writes:

“Keith Oliver along with Tim Laseter, the co-author of “When Will Supply Chain Management Grow Up?” in the Fall 2003 issue of strategy + business, had a few ideas of their own regarding mistakes made in SCM and their suggested solutions. The first mistake discussed was the reliance on forecasting. Forecasts are just guesses and are usually wrong. They have a major result on inventory. The resulting inventory could be thought of as good (you are not out of stock) or bad (you have way too much inventory). In the case of the forecast being wrong, there could be good and bad consequences also: good (we sold out) and bad (lost sales due to out of stock). Forecasts, since they are merely guesses, require constant vigilance and adjustment to history in order to keep the stock-out wolf away from your door.”

To learn more about challenges associated with forecasting, read my post entitled How Important is Supply Chain Forecasting? I concluded that post this way: “Although analysts recognize that forecasting has its limitations, they also recognize that it has important uses. Lora Cecere makes us wary that forecasting will improve dramatically; but with more powerful computers and better forecasting algorithms being created we can only hope that baby steps turn into great strides.” Karaffa continues:

“Replenishment frequency was the next mistake discussed. Both Lean and the Theory of Constraints taught us that the replenishment cycles should be as short as possible. That means that one-for-one replenishment is ideal. We always ‘talk the talk’ of Lean, but seldom ‘walk the walk’ of Lean. Once you leave the Lean seminars and walk out onto the shop floor, you can talk with planners who are not following good Lean MRP principles. … All too often, planners join in the mass hysteria of ordering lots and lots of material and parts in fear of stock-out situations. They also over-inflate lead times in an effort to give suppliers and the shop floor more time to deliver on time. This artificial inflation of lead times in an MRP planning environment only releases orders earlier than needed into sometimes an already overloaded shop floor supplier base. What we need to do is build the integrity back into the MRP system by following good MRP principles and cutting lead times to the bone and ordering discretely in a lot for lot to achieve Lean manufacturing.”

The increasing frequency of supply chain disruptions has resulted in a number of analysts questioning whether lean principles should be followed as precisely as Karaffa suggests. To learn about that topic, read my posts entitled Supply Chains: Lean, Mean, or In Between and Supply Chain Risk Management: Tension between Lean and Resilient Principles. Those posts suggest that there is a balance that must be achieved between lean and resilient practices. Karaffa continues:

“Inventory management agility, or lack thereof, is another suggested SCM shortfall. Systems should dynamically adjust for changes in demand via supply chain visibility constantly. Our Kinaxis RapidResponse Control Tower concept would facilitate this functionality. Inventory managers should be able to respond to simple visual signals indicating the condition of the inventory. Here again, RapidResponse, with its widget capability, could supply managers with tablet inventory graphics beginning at version 11.0. Systems should be able to rapidly analyze historical data and identify sudden demand changes by simple rules. Our RapidResponse alerts functionality would solve this requirement nicely.”

I agree with Karaffa that better supply chain visibility is required to make supply chains more agile and inventory management more responsive. Karaffa continues:

“The move toward the outsourcing model in the mid-90s appears to be another major SCM mistake. Determining where to place the manufacturing base has been a constant headache for supply chain managers. The cost base often persuaded these decisions, superseding issues in relation to geography, lead times, time zones, language, market placement, logistics and distribution. Supply chain people are expert in global management of the product manufacturing movement and less inclined to factor cost. Speed is of the essence. Finance people approach from a balance sheet perspective. Distance is the main dilemma. How long will it take to move material from one end of the globe to the other, which adds to the lead time of the delivery of the product? Freight charges become a massive headache and an additional ten days can be added for freight lead time. Sea freight is slow.”

Outsourcing made a lot of companies a lot of money. It’s hard to call that a mistake. But, as Karaffa notes, outsourcing also resulted in numerous challenges that have only increased as supply chains have become more complex. A number of analysts agree with Karaffa that the time has come to simplify supply chains by locating manufacturing plants closer to the consumer base they serve. As the price of oil continues to rise, the speed of sea freight is likely to become even slower and freight charges are likely to increase. There is a window over the next few years during which companies need to decide how to position themselves for the future. Karaffa goes on to discuss some of the complexity that will continue to plague supply chains:

“Expediting costs are unmanageable and are being employed far too often, decimating product margin. Material backlogged in international hubs is awaiting paperwork and duty payments specific to the region. There are difficulties of trying to run a production line remotely, in a different time zone and off your ERP system where visibility is non-existent. In the United States, the informal system of shortage meetings and hot lists are the actual way things get shipped anywhere close to on time. A lot of companies are finding it next to impossible to run a world-wide shortage meeting to get the job done. These meetings and hot lists work somewhat better locally than halfway around the world. Inventory costs have increased exponentially through a developed hub system housing geographical locations to reduce lead times and enable faster reaction to changes in customer demand. The end result of all of this was a lower manufacturing cost base on paper, designed to increase margin but in reality the supply chain had to scramble to react to this decision.”

The final “mistake” discussed by Karaffa is continued presence of corporate silos — a subject I have discussed a lot over the years. He writes:

“Another major SCM problem appears to be a constant shift to whatever seems easier instead of focusing on the hard and prolonged work of changing processes and corporate culture. How many times have we heard of companies only implementing partial modules of an ERP solution? The reason is always that the rest of the solution ‘just doesn’t fit our business. We’re unique and we don’t want to change our processes.’ This results in disparate system silos. We have to move our companies away from departmental system silos and work to a single version of the truth. … No silos.”

I couldn’t agree more. To learn more about the problems created by silos, read my posts entitled The Curse of Silo Thinking, Silos in the Supply Chain, Breaking Down Silos, and Big Data Analytics Help Break Down Silos. Karaffa’s blog was an excellent start to what I think should be an interesting series of articles.