Chain Reaction

Managing a supply chain is becoming a bit like rocket science.

If you think supply-chain management is a boring topic, listen to one of Hau Lee’s talks. Within minutes, the professor of engineering and management science at Silicon Valley’s Stanford University has the audience roaring with laughter. When it comes to anecdotes illustrating the pitfalls of today’s supply chains, he has the delivery of a stand-up comedian.

One story he tells is about Volvo. In the mid-1990s, the Swedish car manufacturer found itself with excessive stocks of green cars. To move them along, the sales and marketing departments began offering attractive special deals, so green cars started to sell. But nobody had told the manufacturing department about the promotions. It noted the increase in sales, read it as a sign that consumers had started to like green, and ramped up production.

Another classic in Mr Lee’s repertoire is the “bullwhip effect”, named after the way the amplitude of a whip increases down its length—just as variations in orders tend to get amplified along the supply chain. Why is it, for instance, that Procter & Gamble has to deal with widely fluctuating orders for its nappies, when babies’ consumption is generally quite steady? The reason is that each retailer bases his orders on his own, slightly exaggerated, forecast, thus increasingly distorting the information about real consumer demand. This is one of the most important causes of inefficiency in a supply chain.

Yet Mr Lee is not just some academic out to poke fun at clumsy companies and economic peculiarities. He and his colleagues at the Stanford Global Supply Chain Management Forum are in business to help firms run their supply chains more efficiently and effectively. This is becoming increasingly difficult. Customers are getting more and more demanding, looking for a customised solution delivered within days, and no longer willing to accept a commodity product in weeks. At the same time, most firms’ manufacturing processes are becoming increasingly dispersed and global.

Few of them have even begun implementing the technology necessary to reduce the “bullwhip effect”, such as software to speed up the information exchange with their partners and collaborate on planning. But Mr Lee and his colleagues are already concentrating on the ultimate prize of supply-chain integration: ways of constantly monitoring and improving the whole system by using all the available data.

The start-ups spawned by this kind of research are anything but typical dotcoms, says Bruce Richardson, an analyst with AMR Research, an IT consultancy. By supplying algorithms to balance all the variables of a supply chain, such as product prices, stock levels and customer demand, they are following in the footsteps of i2, the market leader in supply-chain management. Other models include firms that developed automated trading programs once real-time data became available on Wall Street.

Rapt, another start-up, is perhaps the best example to show that optimising a supply chain can be as challenging as managing a financial portfolio. The firm has 20 PhDs on its staff and boasts a long list of patented algorithms. It needed every one of them to build its hugely complex software. Based on, among other things, historical data and forecasts, it answers pressing questions for many manufacturers. What is the most appropriate stock level for each component of a product? And would it be better to buy a part on the spot market or get a supplier to guarantee a certain quantity?

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