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  Nov. 2 , 2006 - Supply Chain Digest Newsletter
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Featured Report

HighJump Software, a 3M Company

New Report: Reduce Transportation Costs By Up To 30%

Download your free copy of this valuable report and discover key ways transportation management systems (TMS) automate processes and reduce costs associated with getting products to their destination on time. The report also reviews vendor selection criteria.


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First Thoughts by Dan Gilmore, Editor

Creating a "Living Supply Chain"

To succeed in today’s hypercompetitive environment, you must have a living, dynamically aligned supply chain.


So says the extremely interesting Dr. John Gattorna, of the Sydney Business School (Australia) and Cranfield School of Management (UK).


I had the pleasure of hearing and interviewing Dr. Gattorna at the recent CSCMP conference, where he spoke on supply chain collaboration (we’ll air our video interview very soon). The CSCMP presentation was largely based on Gattorna’s new book, Living Supply Chains, which I’ve just read.

This is a provocative book, with a quote about every other page that has you reaching for the highlighter. Just one example: The extreme corporate focus on getting lean supply chains and cutting costs “almost always brings on a bout of anorexia industrialosa, the excessive desire to be leaner and fitter, leading ultimately to total emaciation and death.”


Makes you chuckle, but in part because of the strong truth to the idea demonstrated by many companies.


This will have to be a two-parter, because I can’t possibly do justice to the full force of the contents here in one column. I also have some questions on areas that I think need clarification, but whether you agree wholeheartedly with the positions taken by Gattorna or not, they will certainly cause you to think about how your supply chain really works.


Why is a supply chain living? In part, because in the end, it isn’t driven by networks and assets and technology, but by people. Somehow, too many of us tend to lose sight of that. “The reality is that it is people who drive the supply chain, both inside and outside your business, not hard assets or technology,” Gattorna writes. “They are in fact living systems, propelled by humans and human behavior.”


It is the failure to understand that human element, or indeed the lack any real body of knowledge in this area of supply chain, that is a major force in why some many strategies go unrealized, and many efforts at collaboration produce little value. Harnessing that dimension is the next and only real source of competitive advantage. “If you can understand and correctly apply a more enlightened approach to managing this ‘human factor’ in the supply chain, you’ll discover a primary source of performance improvement. It’s all there for the taking.”


So when you start thinking about improving your supply chain, remember the 45-45-10 rule: success is dependent 45% on people, 45% on systems (because they should help drive human decision-making) and just 10% infrastructure, says Gattorna.


I think that last point is true, however, once you’ve done some level of “network optimization,” as I agree with those who argue that a huge preponderance of a supply chain’s costs are locked-in based on your supply chain design.


Ah, but supply chain design – now there’s the problem, according to Gattorna. The functional nature of how we organize are supply chains, and the misalignment both internally and with customer requirements is the root cause of excessive supply chain cost, supply chain complexity, and ultimately challenges in growing revenues and profitability.


Because of how we are organized, we often have literally hundreds of supply chains running through the business. The complexity of these many supply chains and “interfaces” between internal functions and external suppliers and customers in fact makes the true supply chain largely invisible even to those responsible for managing them. “Value is either created or destroyed through the management of these interfaces along the chain or network.”


In the space I have left for part 1 of this review and comment, I’ll get to the main point of the book: Our strategies for customer segmentation, and how we align our supply chains with those segments, are all wrong. It is this misalignment that leads to over-servicing many customers, and under-serving others – and we usually don’t know which is which. The only right way to segment customers is by their buying behavior, of which there are generally only three or four main types (though customers can move between types over time or for a period of time). While many SCM pundits have discussed crafting differentiated supply chain strategies, Gattorna argues most have focused too heavily on either product characteristics or channel segments (e.g. retail, wholesale, industrial, etc.).


The best way to segment customers is based on needs for service, price, consistency, uniqueness, innovation and other attributes – and to consider that holistically, from both a marketing and supply chain strategy. Unique supply chains – and supply chain teams – must be developed for each segment, and in today’s market, you probably have to serve nearly all of these segments.


 I think the customer logistics teams now deployed by most large CPG companies are actually quite close to this concept, at least from the customer interface and some execution elements, but they have generally only been deployed for a few large retailers.


When you organize like this, you have people and supply chains focused on delivering very closely to what customers want to buy, and they get very good at serving that type of customer. You align costs, service and pricing in a way that reduces dramatically under and over service. You only spend time and effort at collaboration with those customers that really want to and value collaboration. These supply chains and where customers fit must be dynamically (frequently) aligned - in other words, "living."


A typical segmentation of both the market and the supply chain might then look something like this:




I realize that was a whirlwind tour, but we’ll have more from Living Supply Chains in a few weeks.


Do we over and under service too many customers – and often not even know which is which? Why is that? Should we – and can we – develop differentiated supply chains and teams based on customer buying behaviors? And is managing the human element that missing key to supply chain success and competitive advantage?

Let us know your thoughts.

Dan Gilmore


CSCMP 2006 Conference

Video review and comment

Watch it right now

Supply Chain Videocast Series

Next Live Broadcast

Spend Management Vision at Hallmark Cards

Using procurement excellence and e-auctions to drive success

More information and to register


On-Demand Broadcasts - View it Right Now

Cutting Costs with On-Demand TMS

Learn the pros and cons of the on-demand model, and present an on-demand TMS success case study from salty snack leader Snyder's of Hanover.

More information and to view right now


Low Cost Country Sourcing Revisited

Understanding the Total Cost Impact

More information and to view it right now


Integrated Supply Chain Organization Research Project

Help SCDigest and The Logistics Institute at Georgia Tech with the important research.

Fast, easy web survey.

Summary report to all participants. Go to link above


Nov. 2, 2006

New Feature: This Week’s Supply Chain News Bites – Only from SCDigest

Microsoft to make up X-box unit losses on volume? BP execs face potential criminal charges for plant maintenance lapses; don’t get to comfortable with lower fuel prices - China’s oil thirst keeps growing; Wal-Mart’s growth takes and hit, as it plans cuts in capital spending; more news bites….

Nov. 2, 2006

Bar Code Fraud at Retail a Growing Problem, Costing Retailers Millions

Thieves go increasingly high tech; an IPOD for $4.99? OK, another good reason for RFID


Nov. 2, 2006

Annual 3PL Report Finds Interesting Contrasts, and Concern over Industry Consolidation

Companies want “strategic” 3PL partners, but buy tactically, focused on cost; require strong IT capabilities, but find many 3PL’s lacking, etc.; Do you need a more formal 3PL strategy?


Oct. 26 , 2006

Supply Chain Best Practice Tip: Building Real-Time Supply Chain Dashboards that Provide Value is Harder than You Think, says Chevron’s Mike Brooks

Forget pie charts and gauges; get rid of the clutter; find out what info really drives decision; the “business of now”

Oct. 26 , 2006

Will “TWIC” Thwack the Global Supply Chain?

Program to verify drivers’ status may be good for security at the ports, but lead to delays moving the goods; infrastructure bottlenecks may just keep moving

Oct. 10 , 2006

Supply Chain Digest Announces The Supply Chain Digest Letter, a Hardcopy Newsletter Focused on a Single Topic Each Month

Upcoming issues feature deep dives on TMS, network optimization, labor management, S&OP, sortation, warehouse management, and more; free subscriptions for qualified professionals.


Q. What is the U.S. share of total global spending on research and development?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We're still behind - be patient if your letter has not yet been published

As promised last week, we're printing several of the excellent letters we received on our piece on "simplifying versus synchronizing your supply chain." That includes our feedback of the week, from John Griese of Fritolay Canada. We publish several others on this topic as well, which we know you will enjoy. More next week.

Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the Week – on Simplifying vs Synchronizing

I am in complete alignment with your thoughts. There is no magic bullet in technology that will simplify and syncronize a supply chain.If you are lucky the system will automate some of the activites allowing less manual effort which will reduce the people required or allow them to focus on optimization. Any organization needs to focus on identifying the objectives of their supply chain strategy then prioritize implementation based on benefit. Develop the tools, processes and behaviours in support of these priorities in house. The benefits of supply chain syncronization is often achieved through trial and error until you determine where the most and simplest return is coming from.

As painful as developing the manual tools and processes internally is, the benefits in the form of orgainzational alignment, supply chain knowledge and expertise and real productivity will offset the pain.

Having done the aforementioned also allows prioritized implementation of supply chain technologies. Is the bottleneck in demand management or transportation planning ? Is the greatest return on investment in purchasing and manufacturing? Supply chain systems become too complex and very costly to implement when they attempt to optimize the entire supply chain versus approaching in modules selectively applying technology to the areas of greatest opportunity. Frankly, by the time an enterprise system is implemented 80% of the productivity should have been realized. The technology then is utilized not to do "the work" but simplify the activities that go in to "syncronizing" the supply chain.

The one catch with this approach is that it makes it more difficult to justify an enterprise solution as the majority of the productivity has already been realized.

John Griese
Director - Supply Chain
Fritolay Canada


More on simplifying vs synchronizing:

It is possible to synchronize “future inventory” / S&OP plans which greatly simplifies the communication of future inventory to meet demand generating more cashflow with less risk.   In S&OP we believe simplifying is not possible without synchronizing.    For other functions in the supply chain (e.g. transport management, order management, warehouse operations, information support) we work to greatly simplify the permutations and combinations of solutions and partners through assembling the right balance of in-house vs. outsourced capabilities and a supervisory information layer to allow measurement and management.

The classic complexity theory example of American Airlines vs. Southwest Airlines is a decent metaphor for your reader.   AA through the use of over zealous optimization technology and a wide variety of assets and hub and spoke networks has built in inherent complexity in their model.   Southwest with airplane asset type (737) and simple point to point routes is a quite simple operation and much less probablamatic to plan and operate.   However, both need to synchronize plans for routes, capacity, pricing, freight etc. or their whole service model (customer experience) breaks down. The conclusion is to simplify the interface to the internal and external operation. 

However, simplification will likely require very well thought out “synchronization” techniques and technologies behind the operating veneer to consistently make money and generate cash.   Obviously, Southwest has proven that simpler is smart because as markets / capacity changes the system is easier and faster to adapt and thus more profitable.   However, I doubt neither Southwest or AA one would throw away their version of aircraft scheduling, routing and pricing systems for a #2 lead pencil and Big Chief Tablet in the name of “simplicity”.   Which airline model is  better or is more profitable is one for the individual reader to decide - but whatever operating model you choose the one that presents the “simpler” most repeatable interface to humans through constantly changing conditions will likely be the best business decision.

Jon Kirkegaard




I firmly believe that it is possible to synchronize and simplify the supply chain. The way supply chains for consumer products run today, there’s an extraordinary amount of guessing going on. Retailers must guess buying behaviour in each store. And to replenish the retail DCs, they must also guess what the stores will be ordering which is a guess built on top of the first guess about consumer demand, and so on.

The fact is, if we had a long term (say, 52 week) forecast of consumer demand for every product at every store, we would then have the means to eliminate all other guessing in the consumer goods supply chain. A “chain reaction of demand” could be set up that would model and cascade the effects of the consumer forecast right back to the factory - all within 24 hours.

Far less guessing = simplified

A discretely modeled chain reaction of demand = synchronized

I have co-authored a book called “Flowcasting the Retail Supply Chain” that describes how to do exactly what’s described above, in simple and concrete terms. This may sound like a shameless book plug, but if you visit www.flowcastingbook.com, you can download the first 5 chapters for free without any obligations and no forms of any kind to fill out.

Thank you for provoking thought in this area, Dan. It’s long overdue.


Jeff Harrop


Demand Clarity Inc.


Your column could well have been called “Keeping It Simple Is Stupid", "KISIS.” 

Here is an example of the cost of keeping it simple. To “keep it simple,” a manufacturer closed its 100,000 sq. ft. on-site warehouse and space down the road and moved all product to a 600,000 sq. ft.  warehouse 25 miles away.  Clearly keeping inventory in one site would make it simple and easy to manage.  What they did not take into consideration was the high cost of this simplicity. 

The numbers showed that more than 35% of the product could come from the in-plant space without bringing any product back from the outside.  Back-hauling (using the empty trucks returning to the plant for their next load from production) product would increase that 35% substantially.  Keeping it simple cost the company $200+/load on 35% of their volume which represents hundreds of thousands of dollars annually. 

Procter & Gamble, one of the world’s best logistics operations, realized the value in proactive planning to manage complexity when they adopted a synchronizing system (AutoScheduler) to coordinate activities at their larger sites.  The payback has been significant.  Procter revealed at a conference that one operation has been saving $3 million annually.  So “operating with less dependency on precision” can be expensive – and managing complexity can be very rewarding.

Thomas A. Moore

Warehouse Optimization, LLC



Q. What is the U.S. share of total global spending on research and development?

A. It’s estimated to be 31.9% in 2007, down just less than 1% since 2005.

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