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 / Spring 2010 / Issue 58(originally published by Booz & Company)


Virtuous Connections

A fine-tuned supply chain is more than the sum of its parts. Ideally, each link improves the next.

When Roy West (not his real name) was offered the job of European supply chain manager of the lacquer division of a major multinational chemical company (call it Chem One Lacquers), he was hesitant to accept the position. As a veteran manager in that company, he knew well that the division’s supply chain, taken as a whole, was far from desirable. In fact, there were three separate supply chains, each serving a distinct business line, feeding more than 30,000 products to 10,000 customers. These included massive automotive plants in Germany’s Ruhr region at one end of the scale and family-run consumer outlets at the other. There were two main manufacturing plants, both in northern Europe, and at least half a dozen smaller facilities scattered throughout the continent. As many as 70 warehouses or points of distribution were on line, employing 700 people.

With such a complex and unwieldy system, it was little surprise that Chem One’s supply chain costs had risen 12 percent annually between 2005 and 2007. During that same period, inventory days had climbed by more than 50 percent and the company had consistently failed to meet delivery deadlines. Customers regularly complained of poor service, and industry benchmarks indicated that they were right.

Certainly, there had been well-intentioned attempts to fix the supply chain. Some had even delivered a modicum of improvement. For example, one patch had standardized the dimensions of pallets throughout the company’s European operations, making it possible to load trucks fully and relatively efficiently, and minimizing freight rates per ton. But this initiative, like a few others put into practice, was so focused on a narrow aspect of the supply chain that it failed to alter overall performance.

Another potential solution had been broader in scope. Around 2005, Chem One had installed a system-wide network to track supply chain activities. But management had miscalculated the number and range of the company’s manufacturing and logistics channels, and the network proved incapable of coping with the volume of incoming orders. Consequently, inventory built up, trucks regularly formed in long queues, and customers often wondered when they would receive their product. To take pressure off the system, the company decided to outsource warehousing to a third party — but the network’s software could not communicate with the programs in the warehouses. The result: in one case, shipments of single containers of lacquer, each shrink-wrapped to a full-size pallet.

Examining the minimal impact of these past efforts on overall supply chain performance, West came to a radical realization, something that he had never considered fully before. Every supply chain is composed of a set of virtuous or vicious circles; deficiencies in one area cause or reinforce weaknesses in other parts of the chain. This notion, that a supply chain will fail to demonstrate significant and sustainable system-wide improvements from staggered initiatives, offered a new way of looking at a supply chain — as an integrated whole, not as a set of individualized and independent processes. To put it another way, a supply chain is deftly calibrated only to the extent that each part of the chain triggers a virtuous circle in the next.

West began to implement this unorthodox concept by tackling Chem One’s customer segmentation problem. At that time, the company didn’t prioritize its customers. Good customers, bad customers — large, small, loyal, or intermittent — all were equally important. If any of them asked for a product with rush delivery, Chem One’s service representatives would simply agree to it, without first considering the cost or the value to their own company. These rush orders upset the planning schedule and required manufacturing to shorten its production runs. The orders that had been delayed as a result of these sudden changes then became “rush” orders themselves, perpetuating planning instability and suboptimal manufacturing. Service levels declined, and costs increased.

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