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SCDigest Expert Insight: Supply Chain by Design

About the Author

Dr. Michael Watson, one of the industry’s foremost experts on supply chain network design and advanced analytics, is a columnist and subject matter expert (SME) for Supply Chain Digest.

Dr. Watson, of Northwestern University, was the lead author of the just released book Supply Chain Network Design, co-authored with Sara Lewis, Peter Cacioppi, and Jay Jayaraman, all of IBM. (See Supply Chain Network Design – the Book.)

Prior to his current role at Northwestern, Watson was a key manager in IBM's network optimization group. In addition to his roles at IBM and now at Northwestern, Watson is director of The Optimization and Analytics Group.

By Dr. Michael Watson

February 2, 2016



Four Things Nick Saban Can Teach us About Inventory Planning

Nick Saban's Process for Running Alabama's Football Program has led to Great Results and His Insights are Transferable to Supply Chain Planning Processes


Dr. Watson Says:

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...The idea is that if you follow this process, the score will take care of itself...
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I heard a great story on how Nick Saban’s Alabama football team wins so many games. 

The story goes like this:  They never focused on the outcome of the game or looked at the scoreboard.  Instead, they focused all efforts on executing the very next play. Every play was treated like it was a game and everyone needed to focus on putting everything into that play.  As soon that play was over, it was forgotten, and the energy and effort went into winning the next play. 

The idea was that if you follow this process, the score will take care of itself.  (Of course, this is all part of a bigger process that Saban has for running the program.  You can find more information on this here.)

What struck me was how much this story applied to tactical inventory planning.  That is, how you can apply these lessons to the monthly grind of setting your safety stock targets.  

(Picture Source: Fox Sports)  


Here’s how the lessons apply
:

 1.

Focus on every single play—Focus on every SKU.  In tactical inventory planning, you need to set the right safety stock target for every SKU.  This means that you need processes for cleaning the data so that you have the right forecast, forecast error, minimum order size, order frequency, seasonal factors, lead time, lead-time variability, and desired fill rate for each SKU.  A tactical inventory project requires a lot more attention to detail and a sophisticated data management process.  

Running rules of thumb based inventory policies (which many businesses are guilty of) is like having an offensive playbook with half a dozen plays, running the same plays every time and hoping for success.

Previous Columns by Dr. Watson

Four Supply Chain Lessons from the Amazon book The Everything Store

Supply Chain by Design: What Toyota, Schneider National, PayPal, and Palantir Got Right

Supply Chain by Design: Service Level Measures in the Supply Chain, Part 2

Supply Chain by Design: Service Level Measures in the Supply Chain

Supply Chain by Design: Nike's Phil Knight on the Importance of Supply Chain

More

 2.

Focus on every single play Part II.  Taking this a step further, if you don’t like the amount of inventory you have for a given SKU, you need to work to change how the SKU is managed and what projects you start to improve it—you can make it more frequently, you can reduce the lead-time, you can forecast it better, etc. 

3. Forget the last play—Don’t worry about stock-outs.  I’ve seen a lot of cases where a single instance of a stock-out event causes the organization to throw out solid scientific ways to set safety stock targets.  Instead, they will bring in excess inventory to prevent this SKU from stocking out again.  Sometimes, they bring in so much of the SKU that it never comes close to running out. The company eventually has to liquidate inventory because the item is now obsolete.  If your fill rate is 99%, you should stock out 1% of the time.  If you stock out you shouldn’t revert back to bad habits.  One caveat, if you are stocking out more than you’d like, go back to step #1 and make sure you have the details right.

4.

Don’t look at the scoreboard—Follow the above three points and let your inventory decrease naturally and service levels improve.   The only sustainable way to reduce inventory and improve service levels is by following the above two points.  It is easy to just lower the inventory, but soon fill rates will tank and you’ll be under pressure to increase inventory to where it was before.  Or, it is easy to bring in excess inventory for better service, but soon you will find yourself with too much cash tied up in working capital and lots of obsolete items.  Put the process in place and let the inventory and service take care of itself.  If you don’t like the results, go back to #1 in this list.

Final Thoughts

If you build a robust tactical inventory planning solution, it allows you to build upon successes.  For example, when you reduce lead times, the new lead time data will flow into the system and the safety stock targets will be adjusted automatically.  Without such a system, it is not clear how you actually get to lower safety stocks when you do manage to reduce lead times.



Let me know your thoughts at the Feedback section below.
 

Recent Feedback

Good clear direction for the coach (inventory manager).

Unfortunately, the owners and the fans DO look at the scoreboard and in many cases want short term results and push forcefully and loudly for short term reactions to item level events.

It takes a strong inventory manager with some degree of legitimacy and authority to be able to push back and affirm that we have the right game plan that will see us through to simultaneous improvements in inventory performance and service.



David Armstrong
Principal
Inventory Curve LLC
Feb, 18 2016

It was a very interesting analogy.

I would like to purpose a topic to be discussed in your posts. Demand Driven MRP is getting more attention for companies to manage their inventories. Demand Driven MRP forgets about forecasting and have a look to the real consumption. Demand Driven MRP supporters tell to forget about forecasting, it is most of the times wrong, guide your decision on real consumption. 

What are your thoughts about it?







 


Juan Calle
Mr
TDM Transportes
Feb, 18 2016

Editor Note: This Feedback specifically related to a video discussion between Mike Watson and SCDigest editor Dan Gilmore on a broadcast of our weekly supply chain video news, which can be found here:

http://www.scdigest.com/newsviews/16-03-14-2.php

 

I really enjoyed your interview with Michael Watson on SCTV and his inventory analogies with Nick Saban’s football strategies. 

 

One point made was “to focus on the individual item”.  This approach, which of course is right, has dramatic implications on the ubiquitous “ABC Class” approach used by so many to manage their inventories.  In that approach thousands of items are grouped into a hand full of Classes.  So you are left with hundreds of items, all different, yet all managed in the same way.

 

Moreover these Class systems are constructed arbitrarily.  Many will say “the A’s are the top 70% of sales, the B’s are the next 15%” and so on.  The 70% and the 10% are long standing “folklore” with little rational basis.  Managing items based on their actual individual characteristics (forecast, variability, cost and so on) is the only way an inventory system can be optimized.

 

Great point made by Michael and you.



Terry Harris
Managing Partner
Chicago Consulting
Mar, 14 2016
 
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