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Part 2: Achieving Lower Cost and Reducing Risk through Supply Chain Flexibility - Here are the Rules!

Featuring David Simchi-Levi, Professor of Engineering Systems at MIT

Wednesday, February 2, 2011


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By Scott J. Yetter

Voxware, Inc.

Voice Technology:

Ignore The Basics At Your Peril


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Seegrid Corporation

Industrial Trucks...Driving my Distribution Center, What?



Weekly On-Target Newsletter
January 26, 2010 Edition

Last Chance Cartoon, Auto Case Picking Survey,
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Please match the EDI transaction type to the EDI transaction code: Advance Ship Notice, Carrier Shipment Status, Invoice, Planning Schedule; Purchase Order, Response to Load Tender versus EDI 214, 810, 830, 850, 856, 990 transactions.

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Time for more Dynamic Supply Chains?

One thing I have long thought about the great books or articles on supply chain or most any other topic is that they are multi-layered. What I mean by that is that you read them once, and come away with a lot. Read them a second time, ideally with a bit of a break in between, and you find another set of insights, down in another layer, that you missed on the first read.

That's how I feel about my friend Dr. John Gattorna's most recent book, Dynamic Supply Chains. When A copy showed up last fall, I didn't even at first connect that this was actually a revised edition of 2006's Living Supply Chains, an excellent work that I commented on at the time. This new book, updated with five new chapters and including the effects/ramifications of the financial crisis, reads much in fact like a truly new work, with even the original portions taking on new meaning today versus 2006 because of the "new normal" we are operating in.

We did a number of things over the last 12 months on supply chain flexibility - how to define it, can it be measured, what executives think about it - and this book, as with Dr. David Simchi-Levi's book Operations Rules, provides some outstanding and differentiated thinking on this topic, plus a whole lot more.



" What is more importance for supply chain success (and agility): the trucks and the software, or the people who design and run them?"


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Are there others out there who have this sense that there are some new supply chain paradigms starting to coalesce out there, that after two decades of optimizing and integrating and Leaning that maybe it is time for some "new supply chain blood," if you will?

Most of us supply chainers believe that SCM has taken on new importance in the executive suite and the corporate boardroom, as indeed in many companies it surely has. Yet Gattorna in the introduction to the book says he recently attended a CEO meeting in his native Australia, where the predominant theme when it came to supply chain was still all about using it as a lever (hammer?) to reduce costs.

While as always cost reduction is important, the real opportunity in supply chain is to get it better aligned with trading partners to meet real customer needs and thus increase market share and revenues, while probably also reducing costs along the way, Gattorna says.

With globalization, outsourcing, etc., what a supply chain even is any more for a given company is hard to get your arms around. Now and certainly as we move forwards, it is better to think about a "network of networks," Gattorna says, and I think this is exactly right.

Gattorna himself thinks we should change the term supply chain to "value networks" to better describe what the real concept is now, and he is probably right, though the term supply chain is so embedded in our consciousness that I doubt such a change will occur anytime soon. "Value Network Digest?" Just doesn't have quite the right the same ring, does it? But who knows. We just grabbed the URL just in case - that's how this world works., alas, was taken.

Gattorna, in fact, says that most current approaches to supply chain design are "fundamentally flawed," but that we have been working on the traditional models and principles for so long that "we have convinced ourselves we are on the right track." Instead, companies need to "set about developing a new business model for enterprise chains and networks of those chains."

That's a pretty provocative set of statements. Can Dr. Gattorna back them up? I think largely so, though it may take me a second column to get all the way there.

There's more along those lines - no high-level, vague stuff here, which is how I like it. You may or may not agree, but there's no doubt where Gattorna stands.

The core problems? A number are identified, starting with the fact that companies "have been working from the inside out, largely ignoring particular customers' special needs and wants, and feeding them a diet that meets [the company's] own special interests."

Back again to the subject of obsessive focus on cost reduction, you have to love this line: Companies obsessed with reducing supply chain costs, Gattorna says, often find "it brings on a bout of anorexia industrialosa, the excessive desire to be leaner and fitter, leading to total emaciation and death."

So what is this new, dynamic supply chain model? Certainly, most everyone pays a lot more attention to the people component of their supply chains today than they did a decade ago, but still not maybe nearly enough, and that is one key element in better agility.

Gattorna related the story of an elite gathering of business executives sponsored by the Harvard Business Review a few years ago, where one CEO made this statement: "Despite years of process breakthroughs and elegant technology solutions, an agile, adaptive supply chain remains an elusive goal. Maybe it's the people who are getting in the way."

Geez, you think?

What is more importance for supply chain success (and agility): the trucks and the software, or the people who design and run them?

To ask the question is to answer it, of course, but it is amazing how easy it is to lose sight of that. "Supply chains may seem like uncontrollable, inanimate beasts, but they are in fact living systems propelled by humans and their behavior," Gattorna says.

We can probably agree that the "people, process and technology" model makes sense, but to say it seems to imply about a 33% share for each, doesn't it? Is that right?

This isn't obviously an exact parallel, since it leaves out "process," but Gattorna says we should start thinking about a "45/45/10" mix of human behavior, systems/technology, and lastly hard assets and infrastructure when it comes to determining supply chain performance.

I now realize I am not going to get close to covering all the key points in this one article, so we will have to plan on a part 2 soon. But here is the essence of what Gattorna means by a dynamic supply chain.

It starts with the fact that customers/markets must be segmented not by product characteristics, as is most often done, but rather by the supply chain needs of customers. More on this in part 2, but, for example, some need very predictable but cost efficient flow of goods based on largely stable demand. Others require rapid response to very unpredictable demand, etc.

Gattorna has broken this down into four main segments. It is different because it looks from the customer back, not the company and its products out, and because it recognizes a given customer will almost always have different needs both generally across the different products it is buying from us, and even for a given set of products across different periods of time.

He makes this absolutely compelling point: What looks like supply chain complexity to us is often really a manifestation of the fact a company has highly tuned its supply chain to focus on a particular model, while in reality it is trying to serve multiple models. The company is not aligned with its customers' buying needs generally and on a particular day.

A lot more here, obviously, which we will cover in the next 2 or 3 weeks. But I will end with this. If you read Dynamic Supply Chains and Simchi-Levi's Operations Rules, you will get two highly complementary views of supply chain strategy and flexibility, but from two very different perspective. There are many similarities, at the core, but Gattorna takes a more people and organizational perspective, while Simchi-Levi focuses on the science about how to determine the right strategy for different products and markets.

Both sit at a prominent place on my book shelf.

Is it time to start rethinking traditional supply chain paradigms a bit? What is your reaction to Gattorna's thoughts about the people element of the supply chain, the root cause of complexity, segmenting customers - dynamically - based on supply chain needs? Let us know your thoughts at the Feedback button below.

Dan Gilmore


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We had quite a few letters on our piece summarizing Donald Trump's views on offshoring and our relationship with China.

Most were short and agreed with Trump, but we had a number of views, including some we couldn't print either because they were a bit over the top, or readers as theat they not be printed because they worked for companies offshoring production.

Here is a sample below, including our Feedback of the Week from Max Tenk. They are all below.

Feedback of the Week - on Trump on China:


Imposing an import duty would eventually force US consumers to purchase locally manufactured products which "should" result in increased manufacturing jobs. But is 25% enough to make it for more expensive? Ccorporations are still outsourcing jobs to China/Vietnam/India for greater profit margins with total disregard to its social responsibility (i.e employing some locals), because the end product is no cheaper to the consumer than when it was being manufactured in the US. 

Consumers need to start boycotting "imported" products, this will eventually drive corporations to return. (No Sale / No Profit).  If consumers boycott there is nothing the Government or the Chinese can do (and no trade war....) we manufacture and consume everything internally and I have a feeling most countries will do the same as its not only the US with this problem.  

Government can help by forcing manufactures to "show" what / where / how each product is made and let the consumer decide. If one large corporation is boycotted, it will drive prices down and force them for the interim, to reduce profit and return home, the others will follow the minute we start buying American as their profits begin to evaporate.

Max  Tenk


More on Trump on China:


Did the Donald think about the US Bond Debt to China? Wonder why the politicians are walking a wide circle around China in terms of momentary rates and trade imbalance? Guess what none of these things happened recently, it’s been building for years (and including the Clinton administration). In short, greed was the culprit now the US is facing some hugh issues that aren’t in favor of hard negotiation skills. Maybe he needs to start practicing his Mandarin!

Jerry E. Durant
Chairman Emeritus
The International Institute for Outsource Management


This article reminds me that there are only 3 ways for a country to produce wealth - farming, mining, and manufacturing. Everything else is just moving money from one pant pocket to another. Companies talk about "strategic sourcing" too as if they've discovered something new, but it isn't strategic if everybody else is doing it.


I totally agree with Mr. Trump. Tariff, why not? Why do US politicians act so surprised when asking why did our jobs go over-sea? US Business leaders make more money shipping jobs outside the US. It’s up to our American Elected Politicians stand up and say let’s take away the incentive to sends jobs over seas and outsourcing; let’s tariff. What’s the alternative, do nothing? Who would complain about our tariffs, other countries that benefit from our loss? To be respected in the world, we should take care of our family, the US, then we would have the strength to help the everyone else.

If Mr. Trump is sincere in his believes, I hope he does run for office. His sound business ideas would resonate and perpetuate for the good of our country. Trump, why not?


Eric Lahoda


I like this article so much that I would like to extend an invitation to Donald Trump to highlight this article on KTALK Radio AM630 - The Voice of Utah with The Maxon Show.



Josh Hipple



The US is not so much being run by stupid people who don't know what they are doing but by stupid people who have to do what they are told by the people who have lent them so much money that the US will never be able to repay. Therefore they are puppets on strings of the ones who control them and control world finance.

Ross Naddei
Megapulse Australia


An America Lost in Squanderville.


The United States’ trade gap is the proverbial “leak-in the-dike” with its de-simulative effect on our recovery. In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Media coverage that China has kept it currency undervalued is a gross understatement, it has actually been keeping the U.S. dollar over-valued; which adversely affects all U.S. trade with all U.S. trading partners, not just trade with China. Until action is taken on Buffett’s or a similar balanced trade model, by the powers that be, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery


HJ Campbell


Q: Please match the EDI transaction type to the EDI transaction code: Advance Ship Notice, Carrier Shipment Status, Invoice, Planning Schedule; Purchase Order, Response to Load Tender versus EDI 214, 810, 830, 850, 856, 990 transactions.
A: ASN = 856, Carrier Status = 214; Invoice = 810; Planning Schedule = 830; Purchase Order = 850; Response to Tender = 990.
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