This Week on SCDigest:
Engineering the Supply Chain
Supply Chain Graphic of the Week and Supply Chain by the Numbers
Cartoon Caption Contest Winner Announced!
SCDigest On-Target e-Magazine
Expert Contributor: What Is A Portable Voice Picking Solution And Why Does It Matter?
This Week on "Distribution Digest"
Trivia  Feedback

Become a Sponsor
SCDigest Home Page  
  Newsletter Archives October 21, 2010 - Supply Chain Digest Newsletter

Featured Sponsor: Voxware

Performance Food Group --

Watch The Video Case Study Now!


Videocast: Agility in Consumer Goods Demand Driven Manufacturing

Improving Customer Service Despite Tight Production Constraints

Featuring Filippo Focacci, Product Manager, IBM ILOG Optimization and Analytical Decision Support Solutions

Tuesday, November 2, 2010

Register Now!


This Week's Supply Chain News Bites
  - Only from SCDigest


Supply Chain Graphic of the Week: Where the Chief Supply Chain Officer Sits in the Enterprise

This Week’s Supply Chain by the Numbers for October 21, 2010:

  • Kraft Estimates Impact from Higher Truck Weight Limits
  • Rare Earth Metals Really are a Big Deal
  • WalMart to Invest Big in Produce Supply Chain
  • 3PL DC Market Share




October 4, 2010 Contest


See This Week's Winner

New Cartoon Monday



Performance Food Group --

Watch The Video Now!

Each Week:

Global Supply Chain
Trends and Issues

Distribution/Material Handling

Weekly On-Target Newsletter
October 20, 2010 Edition

Last Chance Cartoon, Conair Blows Away Chargebacks, Ocean Pricing, and More


By Scott J. Yetter

Voxware, Inc.

What Is A Portable Voice Picking Solution And Why Does It Matter?


HolsteHolste's Blog: Many Distributors Are Experiencing Impressive Growth in Their B2C Business In-spite of a Persistently Weak Economy

Top Story: Total Landed Cost Calculation, Key to Supply Chain Optimization, Still Immature Practice, 2010 3PL Study Finds
Top Story: Review of the 2010 3PL Study
Vendor News: Voxware Inc. Announces 4.0 Of Its Voxware 3 Product Is Now Available


What is noteworthy right now about the states of Maine and Vermont when it comes to transportation?

Click to find the answer below

Engineering the Supply Chain

The first place to find the right supply chain answers is to ask the right supply chain questions.

The ability to do that in provocative ways has always been one of the hallmarks of my friend Dr. David Simchi-Levi of MIT, who is back with a new book that continues as usual to add substantially to the supply chain body of knowledge.

It's titled Operation Rules: Delivering Customer Value through Flexible Operations, and while the book covers a lot of ground, there is one overriding theme: many companies don't do a great job of matching supply chain/operations strategies with the core business strategies and their customer value proposition. Getting that right can lead to game changing market success.

Gilmore Says:

"here really are "universal laws" that apply, Simchi-Levi says, governing such things as the relationship between variability and supply chain performance, inventory and service levels, flexibility and cost, etc."

What do you say?

Send us
your Feedback here

There are some obvious examples of how this works in practice. Simchi-Levi cites WalMart's core value proposition as being Every Low Pricing, with a corresponding supply chain strategy of maximizing cost efficiency. (It's no coincidence that the substantial drop in WalMart's stock price in the middle part of the 2000s was correlated with a period where the company let inventories substantially bloat, leading to several successful strategies to reverse that inventory trend).

One of the core truths that sometimes supply chain professionals conveniently pretend isn't there is the fact that there is a fundamental trade-off between speed and cost. A company that seeks to maximize supply chain "responsiveness" will generally incur higher operating costs than a competitor that primarily looks to optimize supply chain cost over speed.

"One important challenge is that although seasoned operations and supply chain executives understand  the differences between efficiency and responsiveness, many are confused about when to apply each strategy," Simchi-Levi writes. "Worse still, senior managers typically spend a considerable amount of time and energy on customer value, but they may be ignorant about the connection between the consumer value proposition and operations strategies."

The core question becomes: "What should really drive operations and supply chain strategies, given the inevitable trade-offs that exist for different paths?"  I am not sure that many companies specifically ask or answer that question.

Based on his insight, direct consulting experience, and supporting quantitative research, Simchi-Levi says there should be three inter-connected drivers of supply chain strategy:

  • Customer value proposition
  • Channels to market
  • Product/product lifecycle characteristics

What separates this book from much other supply chain thinking is that Simchi-Levi recognizes that it's not that simple or clean in practice, however. For example, a product's characteristics may offer mixed signals.

"Often, managers find that some product attributes push the operation strategy in one direction while other attributes pull the strategy in a different direction," Simchi-Levi writes.

And of course, in total a company may have a number of different customer value props, channels and product characteristics, which have in theory should have different types of supply chains.

"So what is a company to do? Should operations establish a single supply chain? Which one? Alternatively, if the firm is to establish multiple supply chains, is there a way to take advantage of potential synergies between the various supply chains, or should the different supply chains operate totally independently?" Simchi-Levi questions early in the book.

Again, the fact that the book is willing to take on and answer those tough questions is part of what makes it an important contribution to the profession.

Conflicting Objectives?

We've all seen various trade-off curves, and Simchi-Levi offers what he calls an "efficiency curve" to illustrate classic supply chain trade-offs, as shown below.

Most of us, I think, look at these trade-offs in a very basic way. That is, we understand that to achieve a bit of cost reduction, we may have to give up a bit of responsiveness. But Simchi-Levi said the efficiency curve and trade-offs are in fact fundamental to supply chain strategy. In other words, how close a company gets to making these trade-offs exactly right - depending on customer value prop, channel strategies, and product characteristics - will largely determine the success of a company's supply chain, and result in leading, middling, or laggard performance, depending on the degree of fit.

But, as the graphic implies, it may also be possible to actually shift a company's existing curve, making a step change in supply chain performance from the outer curve to the inner curve, getting more efficiency and responsiveness at the same time.

In turn, getting the strategy fit right "requires a shift from "best practice" to a more systematic and scientific approach  that links customer value, product characteristics, and marketing channels directly to operations strategy," SimchI-Levi says.

That is a very provocative statement - that choosing the right supply chain strategy at a given point in time can be determined scientifically.  Hence, if it isn't obvious, the title of the book: Operation Rules. It is possible, indeed essential, Simchi-Levi says, to "engineer" operations and supply chains in a different way than most of us think about such things.

Ignore these rules "and you will find yourself heading towards failure; follow them and you will steer yourself away from problems and towards and operating strategy that drives real business value," Simchi-Levi posits.

How is it possible to engineer the supply chain? There really are "universal laws" that apply, Simchi-Levi says, governing such things as the relationship between variability and supply chain performance, inventory and service levels, flexibility and cost, etc.  

Those mathematical tools can be then combined with the supply chain needs of different customer value props, channels and products, and the use of a menu of tactics that include optimizing push-pull boundaries, use of postponement strategies, investment in flexible manufacturing and more to lead to the right supply chain strategy in total.

If that sounds like a comprehensive model, it is. How does it really come together, and how can this approach really be used by companies today?

Alas, I am out of room. How is that for a tease? I will have part 2 of this review and comment in a couple of weeks. Until then, consider the book. I highly recommend it.


What is your take on the thesis of Operations Rules? Do you think our supply chain can be better "engineered?"  What are the challenges you see, or have you taken such an approach? Let us know your thoughts at the Feedback button below.



Send an Email

Web Page/Printable Version of Column


Do you use an RSS reader? Do you have a MyYahoo! or personalized Google page?

For these and more you can have SCDigest delivered right to your personal pages, all week long.

You can subscribe to our RSS feeds in two ways:

  1. Copy our RSS link into your RSS reader - it's easy!

  2. Click on a button below to quickly add it to your favorite readers.


A bit of this and a bit of that this week. That starts with a couple of good letters on our column on how to define and measure supply chain flexibility, including our feedback of the week from Blair Binney, who says that there may be another way to think about the issue.

Another reader takes us to task for how we defined Days Inventory Outstanding - and we again explain it's the source data not our calculation.

All this and more below.

Feedback of the Week - On Defining and Measuring Supply Chain Flexibility:


A couple observations...

We appear to confuse "cost of flexibility" with "cost to achieve flexibility".  As an example, products which do not share sourcing (e.g., AVL, common parts), will incur reduced flexibility in the overall supply chain (demand, supply). There may be a cost to initially to develop and engineer products which pool risk across demand and supply initially, however the final cost of this portfolio will be reduced and flexibility increased. At this level, flexibility may be achieved in optimizing iterations where appropriate to manage risk (e.g., alternate sources for common parts, up-sell).

It may be observed the theme here is risk pooling to manage flexibility which depends on understanding common shared component elements which includes not only the materiel and services in the products themselves, but the processes which support the supply chain.

The article speaks well to what is flexibility, but circles the question of when and how to measure it. The "when" addresses whether flexibility should be performed as a supply chain design-stage step where risk/operational conditions are evaluated analytically as risk scenarios, or/and whether the goal is to identify and extract events from actual operational performance to measure the time dependent sense/respond cycle. The latter leads naturally to a management system that shortens the cycle time from risk events identification (or ideally prediction) to executed resolution minimizing an adverse consequence (e.g., missed customer deliveries, increased expedite and spot buy costs).

Likely the set of steady state supply chain KPI's can be suggested which can be then compared either to scenario-based outcomes, or operationally measured outcomes associated with actual risk events.


Blair Binney


More On Supply Chain Flexibility:


A look at OEE (Overall Equipment Effectiveness) might be helpful as part of a supply chain flexibility discussion. OEE combines three individual measurement KPIs (availability, performance and quality) into one overall metric.

Bob Nardone in your column said he believes that "supply chain flexibility is about quicker response to changes in demand while achieving your cost, service, inventory and return on assets (ROA) objectives."

That's an important issue: can you respond rapidly without breaking the bank?

He adds that "I don't think flexibility can be determined by one measure, but by a composite of metrics that many companies currently measure."

If the supply chain flexibility discussion focuses on those measures and gaining agreement on the keys to achieving flexible response, it could then turn to trying to reach agreement on how to weight each metric and develop a composite measure.

John Shogen

Cardinal IG Company

On Supply Chain Measuring Inventory Performance:

I have been an active follower of your publication for quite a while now. In general, I feel like you do a very nice job covering the current trends and issues in the supply chain.

So I was a bit disappointed to see that in your "Inventory performance in 2009" article, you defined DIO as "Inventory/[Revenues/365)". Forget the typographical issues, the real calculation uses COGS, not revenues-a big difference. And it should be average inventory in the coverage period, not inventory, which usually means ending inventory.


Please correct this statement for your readers.

Sam Israelit


Editor's Note:

Thanks for writing - we go through this every year. We are reporting on what the CFO/REL study reports. They use Revenue, not COGS. I usually put a little note about that, but did not this year. So, as they use revenue, we are simply reporting how their calculation is done.

They are using public financial statements for the analysis, which to the best of my knowledge rarely if ever provides average inventory for a period. Yes, this leads to some potentially faulty results and/or is impacted by end of period gamesmanship, but again, what can you do? You can make this calculation internally, knowing average inventory, but not in the balance sheet numbers that are available.

We are looking at doing something like this ourselves, and may do so, and are thinking we would use quarterly data and average, to get a somewhat better picture of the average, but don't see any real way at it from using SEC filings.

Hope that clarifies.

Dan Gilmore

On Supplier Financial Analysis:


I have been working with corporations around Supply Chain Finance Confirmed Payable programs. My analysis has seen:

1.  Sales Cycles for SCF Confirmed Payable or Reverse Factoring programs are running at 16 to 20 months, and then some subset pilot is started and it takes a long time to start building critical mass.  These programs then get a negative label rather than a positive one.  This is unfortunate.

2.  Procurement is driving the RFPs in these programs more and more (since they directly touch their supplier base)

3.  A keen interest by the market is understanding how corporations view the liquidity management of these programs (single bank, multi-provider funding model, agnostic model) and the granular details within.  For example, under a multi funding model, funding providers will have different KYC standards, pricing thresholds based on their capital models, etc.

Procurement, working in conjunction with Finance & Treasury, needs to get actively involved in these programs to help suppliers, particularly in emerging markets where financing rates are double digits.

David Gustin

Global Business Intelligence



What is noteworthy right now about the states of Maine and Vermont when it comes to transportation?


Both are currently involved in year-long federal pilots, ending in December, testing the safety and effectiveness of allowing 97,000-pound truckloads (versus the current maximum of 80,000) on interstate highways, using six-axle trailers.