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Lessons from Supply Chain Disasters
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The market was considerably down last week as Wall Street investors took profits from the recent rebound.  Our Supply Chain and Logistics stock index saw a gain in only 1 out of 22 stocks.

In the software group, JDA lost 5.7%, while Ariba was down 5.3%.  In the hardware group, Intermec stood alone in our index with a gain of 2.3%.  Zebra fell a very slight 0.3%.  In the transportation and logistics group, Yellow Roadway plummeted another 22% last week amid bankruptcy rumors.   

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Holste's Blog:
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Top Story: Thought Leaders Discussion on Sortation Systems for Distribution

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Lessons from Supply Chain Disasters

A number of readers emailed me after we published our updated list on The Top Supply Chain Disasters of All Time a few weeks ago and asked what lessons a review of that list might hold.


So, this week I thought I would offer some thoughts on “disaster avoidance/risk management” based both on our list, as well as the dozens of other challenged projects or initiatives that I have come to know, one way or another, over my career.


When you look at the disasters on our list, it is actually astounding the range of supply chain problems that were involved. Certainly there were several major technology system failures (Foxmeyer, adidas), but we also had outsourcing snafus (Boeing), global sourcing mistakes (Isotoner, Mattel), poor forecasting (Cisco, Apple, Toys"R"Us), an engineering disaster (Denver Airport baggage handling system), supply chain network optimization challenges (Loblaws), a wild business strategy (Webvan) and several other categories.


In fact, as I noted in the original column, it is striking that all of our most recent disasters on the list had little or nothing to do with technology problems. They were all problems resulting from failures of strategy or execution. Technology meltdowns are simply much less likely today.

Gilmore Says:


"Many disasters, large and small, have been caused because of a hard deadline for a project."

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That noted, below are some thoughts on how to minimize the chance of a severely challenged supply chain project or initiative.


“Big Bang” go lives are risky business: Several of the disasters on our list were related to “big bang” technology roll-outs in which several systems (ERP, WMS, planning, for example) all went live at once. The risks of this approach are well documented, and given that, I'm amazed how often I still talked to companies that take this approach. I must admit that most of them seem to make it through with some battle scars, but generally OK in the end.


The main issue, of course, is that companies don’t want to do the integration twice, such as first integrating an old existing warehouse system with a new ERP and then later integrating a new WMS that was planned from the beginning. Still, big bang is something I would be very leery of, and if I had to do it, would make sure I had some outside help with successful experience leading a similar endeavor elsewhere.


Being a pioneer often leads to arrows in the back: This is a tough one for me, because if it wasn’t for pioneers, we wouldn’t have any progress, would we? Still, whether it’s a piece of software or a new physical system of some kind, there is no question that being a guinea pig increases the odds of failure dramatically.


Step one is first understanding whether or not you are that guinea pig, which sometimes, in software at least, isn’t always so easy. A long time software executive once told me: “Every new version of software has a “beta” customer” [the first company to implement the software]. The question is whether they know it or not.”


I think being a pioneer can be just fine in some cases, as long as everyone understands the situation and the risk that is being taken, and appropriate internal approach is adopted (plan on the thing not working at first, whatever it is), and you structure your relationship with any vendor involved appropriately (you are well compensated for the risk being incurred – and the benefits to the vendor from success).


Do not ignore early warning signs: In many, if not most, of the disasters we listed, as well as my own experience, a post mortem on disasters would usually show there were dozens of indications that there were emerging problems. However, these warnings were ignored or minimized, usually because someone doesn’t want to fess up that things are not going as promised. The message here should really be to executives: Do not create an environment in which project leaders or others are reluctant to speak frankly about issues or concerns. Often, major disaster at the end can be avoided by accepting small slippages in schedule or budget.


Avoid hard cut-offs/transitions: Many disasters, large and small, have been caused because of a hard deadline for a project, such as a new system that has to be working for the peak season or any of a number of other examples. These hard deadlines, especially if the project schedule is tight to meet them, are perhaps the largest contributor to the issue above about ignoring warning signs. That’s because the schedule comes to dominate all the thinking, and creates a sense of urgency that can push our common sense and pervert the correct focus on actual project success.


Get some outside perspective: Any of us can become too deep into a project or strategy to have a truly objective view of where things stand or how they are going. I think most of us would agree that an outside perspective might be hugely valuable in avoiding risk and identifying focus areas.


I would highly recommend finding an outsider to use as a sounding board at the beginning and occasionally throughout a project or strategic initiative. That could be a consultant, though they will likely be angling for some work as part of the deal. You might instead consider an academic, or maybe even better, a supply chain professional in a non-competitive company. You could agree to do this on a reciprocal basis over time – and I am sure avoid a lot of mistakes as a result. 


Beware the ROI trap: Many projects have gone sour because they had trouble meeting the company’s ROI requirements. So, to make the ROI, key elements for success are whittled away. That may be the number of people devoted to the project, projections about when the benefits will really be received (leading to schedule acceleration), under investing in training and change management, etc.  The temptation to do this can be very powerful and, in my opinion, the best medicine is to vet this scenario and changes in resources or whatever in a very open and transparent fashion across the team.


Be brutally honest about your skill sets: Boeing’s plans to radically redesign the way it builds airplanes for the Dreamliner 787 through use of widespread outsourcing of major components likely was the right one. However, it seems clear now that Boeing simply lacked the experience and skills to make this work just about from scratch on a massive basis. We all understand the value of experience – why do we often forget that lesson? Boeing should have started on a smaller scale.


Limit the number of moving parts: I know from my own experience that there is real danger in having too many “moving parts” in a project or initiative. Rarely do most companies even clearly identify all those moving parts. From the outside, for example, it appears that Loblaw's execution issues with its new network design stemmed largely from too many moving parts that had to be synchronized to make it all work. Document the moving parts and variables – and if they are too many, scale or sequence the project in a new way.


I could go on, but these are the top of the list for me. I’d love your thoughts on keys to avoiding supply chain disasters large and small.


What would you add to our list of lessons for avoiding supply chain disasters? Which of the above seem most common or important to you? Do you have any interesting additions to add to the list? Let us know your thoughts at the Feedback button below.

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More feedback this week from the outstanding letters we received on our First Thoughts' piece Measuring Inventory Performance. This week, we just print a few more of the many we received, including our Feedback of the Week from Joe Witkowski of Dr Pepper Snapple Group, who says inventory quality is a key and underused measure.


You will like that letter, plus two more outstanding contributions below.

Feedback of the Week – On Measuring Inventory Performance:

We use IQR, Inventory Quality Ratio, a dynamic Pareto-analysis based, forward-looking, Best-in-Breed solution. It is, for us, a reporting-only, bolt-on, kind of like an Action or Exception Message laser that prioritizes the most costly or highest opportunity cost decisions and corrections that should be on top of the material planner's or planner-buyer's daily dashboard.  Instead of grabbing their morning cup of coffee and facing a random and disjointed list of exception messages, action messages, and potential crises looming deep in the "haystack" of typical lists of ERP exception messages, the planners make the most critical corrections/actions as early as possible with real-time reflections of our ERP supply/demand situations…and even have time to break for lunch!

All costing conversions are "slaved" to the ERP backbone (ours are SAP 4.6 instances in two businesses) so business controls over our ERP change management are extended readily to IQR.  The "Quality Ratio" metric of IQR provides a more broad-based, forward-looking metric, but at the same time incorporates the more "sneaky," slower moving inventory buckets that can plague free cash-flow significantly, while the planners are addressing the trivial many or one time events that don't belong remaining on the books in the first place.

Payback times are on the order of weeks to a few months.  Very simple, apples & apples, easily implemented and integrated… IQR is what we were looking for and trying to develop in house for a long time… and it was sitting on the toolkit shelf all along… leverage the experience of seasoned materials managers who developed it… for materials managers, by materials managers… don't reinvent the wheel when a can't miss solution is only a phone call or a web address away!

Joe Witkowski, CPIM CSCP
Business Process Development
Dr Pepper Snapple Group

More On Measuring Inventory Performance:


Inventory management is always a huge focus when trying to take cash out of the business. To be effective in getting results quickly, you have to get the right tools in the hands of the people who are actually making the daily decisions on inventory purchases. Instructions from the top down to slash inventory without a proper methodology or rationale for decision making can be a dangerous approach. Most Financial executives drive metrics for inventory turns or days inventory outstanding. IQR is a better metric of inventory performance than either turns or DIO because it is based on future demand, provides a performance measure for each segment of the inventory, and shows you where you can actually take action to reduce excess inventories, free-up working capital, etc.


As Senior Principal of Supply Chain for a Private Equity firm, we have taken a very aggressive approach to mining dollars out of our inventory. To do that, we have engaged IQR at several of our portfolio companies. The results have been phenomenal with payback happening sometimes in the first day. IQR has allowed us to focus on our immediate opportunities to defer purchases and free up cash which is greatly needed, especially in today’s economic environment. It shows us exactly where the potential is and takes the guess work out of decisions.

With the diverse industries in our portfolio and complexity of product offerings, we needed a solution that was quick to implement, easy to use, flexible and, most of all, effective. Using our standard MRP/ERP systems simply wasn’t enough. IQR has been an excellent tool to help our companies navigate through this difficult economy and free up cash to fund the business. It has opened our eyes to better ways of managing one of our largest balance sheet items – Inventory.

Jennifer Vaughn
Senior Principal of Operations
American Capital, Ltd.

As always, you raise thought-provoking topics.  Allow me to comment on three areas that you address in your article.  For reference, I have addressed a couple of these in my website,  


1) Supply Chain Management


I would agree that the role of supply chain management is clearly about the efficient and effective movement of inventory, but that it is also about the efficient and effective movement of information.  If you can visualize the inventory moving from suppliers to customers along the supply chain, you can also visualize information flowing from customers along the supply chain in the opposite direction to suppliers.  The more effective the management of the information flow, the greater the opportunity to effectively manage the inventory flow as well.  I've always believed that to be world class in supply chain requires that you be world class in information management.


2) Measuring Inventory Performance


I do not have an issue using inventory turnover as a performance measure, but I use others as well, including the Cash-to-Cash (cash conversion) Cycle and GMROI (Gross Margin Return on Inventory Investment).  Each of these can be easily calculated from company financial reports.  How these performance measurements balance out in an organization is a function of the business model, the strategy and the execution. 


The Cash-to-Cash Cycle measures how well cash is used in an organization for Receivables, Payables and Inventory. Generally, the lower, the better.


GMROI is a concept of inventory profitability that measures the gross profit an organization earns for each dollar carried in inventory and uses both the gross profit and inventory turnover.  Generally, the higher the better.


For example, on the webpage,, Tracking Financials, I look at inventory turnover, cash-to-cash cycle and GMROI for three companies in the same industry over a five year period.  One is better at turnover and GMROI, another is better for cash, and the third is better for gross margin.


In my estimation, all of the metrics are important, but which one carries the greatest weight depends on the organization, its plan and its values.


3)  Complications


The complications mentioned in the article include calculation of average inventory along with use of cost-of-goods sold versus sales revenue to calculate turnover.  The reality is that there is not a single defined standard method for either of these, so one must be carful in reviewing data to try to understand exactly what is being calculated and how.


That being said, my experience is that many companies actually have multiple ways of calculating turnover.  The internal ERP systems can calculate a more accurate average inventory value, which can be the used for the calculation of the internal turnover number, certainly down to weekly or daily levels if so desired. But for the financial reporting, in most cases, average inventories are usually based on the average of quarter end numbers. The result, as noted in the article is that purging inventories at the end of the quarter can reduce the average inventory, thereby showing a higher financial turnover.  


If should be noted that when inventory is reduced at period end, either by accelerating shipments or by pushing out receipts, the work disruption and impact on the organization can be substantial and flies in the face of lean concepts.



David Armstrong

Principal, Inventory Curve 

Q. What innovation are Gene Gagnon and Eric Baum (separately) generally credited with bringing to warehouse and distribution center operations in the 1970s?
A. Engineered labor standards, the basis of today's Labor Management Systems (LMS)