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This Week's Supply Chain News Bites
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Supply Chain Graphic of the Week: Manufacturing Output Still Not Back to 2008 Levels
This Week’s Supply Chain by the Numbers for November 11, 2010:
Unbranded Chinese Cell Phone Growth Hurts Western Makers; Lean Cuisine's Fat Recall; UPS Ups Rates Big Time; Consumer Packaged Goods Moving On-Line Too

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The Supply Chain Rule Book

Coming out of grad school, I interviewed with three large consulting firms: McKinsey, Booz Allen, and AT Kearney. The latter two offered me a job. McKinsey, to its everlasting detriment, did not. I think I didn't manage my silverware quite right at lunch with two of the partners in the Cleveland office.

I bring that up not only for a small bit of humor, but also because something one of Booz Allen partners told me at the time: that 50% of consulting was usually reminding companies of principles and practices that they knew or lived by at some point but somehow have forgotten.


"Understanding and managing all these rules would be quite a challenge. That one person has put them all in one place is quite an accomplishment."


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A few weeks ago, I did a review of Dr. David Simchi Levi's new book Operating Rules: Delivering Customer Value through Flexible Operations. At a high level the main theme of the book is that it is really possible to "engineer" supply chain performance according to core principles and mathematical analysis. I must confess to having read at the time just the first few chapters in detail, and mostly skimming the rest - a long time book review strategy, but even more acceptable this time because I had planned to do a part 2.


So when I went through the bulk of the book in more detail, it hit me in a bigger way that not only does this book as usual with Simchi-Levi offer a wealth of provocative insight, there is also, as the book title makes clear, a large set of rules or principles that can help us effectively govern the supply chain. Some of them we may not know. Maybe even more we simply forgot. What this book does in part is put darn near all of them in one place.


More on that in a minute.  But first, our Feedback question after that first piece asked whether readers believed the supply chain really could be "engineered," as Simchi-Levi believes.


Dr. Andre Martin, inventor more than 30 years ago of the concept of Distribution Requirements Planning (see trivia question below) and now at RedPrairie's Flowcasting Group, offered the following Feedback: "Simchi-Levi is theoretically correct. This being said, you need a capability to model the complete  supply chain, test for various scenarios, dollarize the results, and then pick the  scenario that has the best trade-off."


He offered an interesting example of how one company he was working with was balancing very clear and real trade-offs between inventory and service levels, using the models and the math.


Simchi-Levi responded that "This is no theory - this is practice," asMartin supports with his example. Simchi-Levi does a lot of consulting, from which much of the data and examples in the book have been drawn.


So, back to the rules. Each chapter in the book offers a series of rules along a wide variety of topics, from procurement strategies to supply chain network design. The majority have a mathematical type component to them, though some are more in the nature of principles not necessarily grounded in models or formulas. (Simchi-Levi says in the book that all of the rules have either a mathematical basis or are supported by empirical research.


So, let's take a very simple rule, presented very early on: Rule 2.2: Functional and innovative products each typically require different supply chain strategies. Now, most of us have heard that before or intuitively know it to be true. Yet, Simchi-Levi makes the persuasive case that it is often not well applied in practice. He notes, for example, how products often change over time - today more rapidly than ever - from innovative to functional.  Do the supply chain approaches similarly evolve at the same pace?


That begets an interesting discussion on push, pull, and push-pull supply chain strategies, and observations like this: "Everything else being equal, higher demand uncertainty leads to a preference  for managing the supply chain based on realized demand: a pull strategy." However, the greater the economies of scale in manufacturing  for a product, "the greater the value of aggregating demand, and thus the greater the value of managing the supply chain based on long-term forecast: a push strategy."

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That chapter then goes into all the twists and permutations that are actually encountered in real life supply chains, including noting that the whole push, pull, push-pull decision needs to be further broken down into both manufacturing and distribution dimensions.  All that leads to Rule 3.2: The appropriate supply chain strategy  (push, pull or push-pull) is driven by the level of demand uncertainty and economies of scale, and the book then at a high level shows how that can be mathematically determined.


This leads to related rules about supply chain design and inventory positioning.  The example below shows how a large metals distributor was able to use detailed modeling and optimization capabilities to increase its inventory turns by 50% through changes in where inventory was positioned in a long supply chain.



Full Size Image



The book covers wide ground, with a whole chapter just on rules for procurement, for example. I've known David for a long while, and never knew he really focused that much on that area.  He states that "it can be shown that carefully designed supply contracts can achieve the exact same profit as 'global optimization,'" which he defines as the state in which total profit across the supply chain is maximized, but something that can't be achieved in practice because of cross interests and reluctance to cede control.


Understanding and managing all these rules would be quite a challenge. That one person has put them all in one place is quite an accomplishment.  I wish there would perhaps have been more discussion in the book about how using many of the rules together might lead to some conflicts. But perhaps we'll have a chance to discuss that on a new Videocast series that Simchi-Levi has agreed to do with SCDigest. You can learn more and register at this link: Operating Rules Videocast.


One thing I can definitely say is that if I was a chief supply chain officer, I would have my admin type up each rule in the book in one relatively short document. I would then see which ones we perhaps should be considering that our supply chain currently does not, and maybe more importantly use it as a reminder, when it is time for a decision, of the core principles of supply chain that so often get lost in the heat of battle.


What do you think of a compendium of dozens of "supply chain rules?" Why is it so easy to forget core principles? Can we use rules and math to better engineer supply chain performance (we ask again)? Let us know your thoughts at the Feedback button below.

Dan Gilmore


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What was the catalyst for the invention of Distribution Requirements Planning (DRP)?
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We received a number of good letters on Gilmore's First Thoughts column on What is a Smarter Supply Chain?, several of which we publish below.

That includes our Feedback of the week from Arizon State University's Arnold Maltz, who offers some good complementary thoughts.

You find that and other letters, plus one reader who says that a return to onshoring is in fact very real.

Feedback of the Week - On Smarter Supply Chains:

As always, a worthwhile column, especially helpful to those of us who have not read beyond the headlines.

We are also thinking about these things in academic circles.  My own questions are:

1)  Given visibility (and data accuracy and completeness), what can a supply chain actually do to react?  Knowing there is a quality problem immediately is great, but if you have 2 weeks worth of inventory already on the water, and the problem is at a factory that is already on to its next project for someone else, what should you do?  In other words, what are the underlying structural limits of any given supply chain?

2) For all the talk about better forecasting and analytics, my sense is that what we have is not better forecasts, but shorter lead times so the forecasts can have shorter horizons.  I’d be interested in the professional forecasting people’s reaction to that statement. 

3) Put it another way, are smarter supply chains automatically closer to make-to-order?  If so, will economics including economies of scale put a practical limit on how smart a company’s supply chain can get?

As I said, a variety of academics are looking at this, as well as the consulting community and real managers.  I hope they will weigh in on this.

Arnold Maltz

Associate Professor

Supply Chain Management

Arizona State University


More on "Smarter Supply Chains":

With the emergence of real time analytical dashboards that can be viewed easily on the iPad, today’s CSCO can carry around the vital life signs of his supply chain organization. With upper and lower control limits designed in for real time alerts he or she can be on top of their game and make critical decisions, with the team much quicker.

Just like getting news alerts on your smart phone, you can now get full dashboard supply chain analytics and collaborate with suppliers and customers in real time. Today is about the Triple A supply chain and responsiveness, gone are the days of historical algorithms charting the future.

Tom Dadmun

Vice President


Good column. IBM’s vision is clearly excessively tools-centric. Nothing gets implemented unless the people-process-technology model is applied.

Most system implementation failures I’ve seen are due to errors in the “human technology” (people, process, management/leadership), not the engineered technology.

Barry Markus

Project Manager, IT Solutions Delivery

Family Dollar

On Is Onshoring Real?:

It is real, there are many companies now recognizing that they must look at total cost, not just piece price or labor rates when making outsourcing decisions.  But even with increases in labor rates in China, there is still a huge differential in labor rates.  So products with high labor content will stay off-shore for the foreseeable future.


One other factor that your article did not mention is that many non-US based companies are still investing in manufacturing in the US for this market.  Every major automobile manufacturer has at least a portion of its production here and the trend does not seem to be changing.


There is no one "right answer", companies need to do their homework.



Herb Shields
HCS Consulting
Q: What was the catalyst for the invention of Distribution Requirements Planning (DRP)?
A: When Dr. Andre Martin (then of Abbott Labs Canada, now at RedPrairie's Flowcasting Group) determined in the late 1970s that he needed something like Manufacturing Resource Planning (MRP) but applied to finished goods inventory/distribution.
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