The Customer Cannot Forecast Accurately
Poor performance in business often stems from excuses rather than valid reasons The adage "the customer is always right" emphasizes that customers have the power to choose their suppliers If your company fails to meet a customer's unexpected needs, they may seek alternatives This raises an important question: can your business truly cater to this customer? If retaining this customer is a priority, any inability to satisfy their demands should be viewed as your responsibility, not theirs.
In the realm of forecasting, it’s crucial to recognize that if a customer cannot provide a reliable forecast, businesses must adapt by discovering alternative methods to fulfill their needs without depending on that forecast.
There may be very good reasons why the customer cannot provide a forecast Perhaps they simply cannot anticipate and forecast future demand
The demand for ice cream is heavily influenced by weather conditions, illustrating how external factors can affect consumer behavior Similarly, in the construction materials industry, builders frequently face challenges that lead to customer complaints Their work is often unpredictable due to delays caused by other tradespeople, late deliveries of materials, unforeseen issues on job sites, or adverse weather conditions that can halt progress entirely.
Internal forecasting challenges can arise from last-minute promotions triggered by flagging sales, depleting stock to meet typical demand Inadequate product development planning may create significant supply-demand imbalances for new items while leaving outdated products unsold Additionally, making overly ambitious commitments to customers without assessing the business's delivery capabilities can exacerbate these issues.
Managing internal problems is generally less challenging than addressing issues arising from customers or market conditions Chapter 4 will explore sales and operations planning, which facilitates regular communication among business functions regarding demand and supply capabilities Prior to that, Chapter 3 will critically examine the advantages and disadvantages of forecasting.
Long Lead Times
A value stream map helps calculate lead time in a process or supply chain, which is the duration it takes for raw materials to move from the receiving dock to shipping In a broader supply chain context, lead time encompasses the entire journey from when a supplier receives an order, through their processes, your factory or warehouse, and distribution network, to the final customer This cumulative lead time can often exceed six months, meaning materials ordered today may not reach customers as finished goods for half a year Consequently, accurately predicting the specific products and quantities needed by customers in six months is challenging, leading to potential discrepancies between estimates and actual demand Getting this wrong can result in expedited material needs and excess stock of unwanted products.
Lead time poses significant challenges throughout the supply chain, making it essential to minimize non-value-added time A key principle of the Lean approach is its unwavering commitment to reducing lead time In Chapter 2, we will explore value stream mapping as a method to enhance efficiency and decrease lead time in your operations and supply chain.
Big Batch Sizes and Big Shipment Quantities
It is easy to rationalize why big batches or large shipments are “ efficient.” Fewer setups, less downtime, and more stable processes mean that big
A value stream map is a unique process mapping tool utilized in Lean Thinking to visualize the flow of a product alongside the information that governs this flow It serves to identify and eliminate waste within the process, enhancing efficiency and productivity.
Large batch sizes and shipments may seem efficient due to cost savings on freight and potential supplier discounts, but they actually exacerbate supply chain issues by extending lead times For example, if a manufacturer produces 30 different products and runs one batch per day, each product is only made once every 30 days, resulting in customer wait times of up to 30 days for their orders This delay adds no value, increases supply chain risk, and requires customers to hold more inventory Additionally, infrequent replenishment due to large shipment quantities heightens the risk of shortages if demand unexpectedly rises before the next delivery.
Big batches and large shipment sizes also compound what is called the
The "bullwhip effect," also known as the Forrester effect, describes how demand variations for a product are amplified as they move up the supply chain This occurs because production batches or minimum order sizes often exceed typical customer purchase quantities, leading to upstream demand not being triggered until entire batches are consumed Consequently, this batching process creates an artificial demand pattern that is reflected in forecasts, exacerbating demand fluctuations As a result, while consumer demand for products like laundry powder or toilet paper remains stable throughout the year, suppliers further up the supply chain, such as packaging providers, experience significant demand variability on a weekly and monthly basis.
When batch sizes match customer order sizes, such as an order for 10 units triggering a batch of 10 units, demand remains stable and is not amplified However, increasing batch sizes or order quantities to stabilize production often leads to greater volatility in the supply chain, exacerbating shortages and extending their duration This approach also results in higher inventory levels, as larger batches and less frequent replenishment contribute to an overall increase in average inventory.
Material Shortages
Material shortages significantly contribute to production delays and late deliveries, especially for complex products like machine tools and heavy vehicles While many companies attribute these shortages to poor supplier performance, a closer examination reveals that the root causes often lie within the business itself rather than with suppliers.
A leading manufacturer of a complex high-tech product faced over 100 material shortages daily, which significantly contributed to production delays and late deliveries An analysis of thousands of shortages over the year revealed that less than 10% were due to supplier issues, while the remaining 90% stemmed from inefficiencies in the customer's business processes and the operation of their enterprise resource planning (ERP) system.
Material shortages can arise from several factors, including inaccurate inventory records, miscalculated target inventory levels, irregular and unorganized ordering processes that extend lead times, excessive bulk ordering, neglecting to adapt to shifting usage trends, and unrealistic assumptions regarding lead times.
A high-technology product manufacturer faced consistent stock-outs due to late deliveries from a wiring harness supplier Despite a standard lead time of eight days for all products, the specific harness assembly included a motor sourced from a sole supplier in Germany, which had a lead time of several weeks The harness supplier was instructed not to hold stock of these motors, making it impossible to meet the eight-day requirement To address this issue, the inventory of harnesses was increased, and the lead time in the customer’s ERP system was adjusted to better align with the actual supply chain realities.
In Chapters 7 through 9, we will discuss how you can design an inbound supply chain that prevents shortages and work with your suppliers to improve supply chain performance.
It Should Be So Simple— Why We Fail to Deliver ◾ 7
Poor Factory Performance
With 16 years of experience as a manufacturing and supply chain manager, I've engaged with numerous factory managers and observed that many businesses mistakenly attribute poor delivery performance solely to factory inefficiencies Unfortunately, when goods are unavailable, factory managers often bear the brunt of the blame, despite the fact that the underlying issues may not stem from their teams.
The factory manager faces significant challenges, including frequent machinery breakdowns, labor shortages, and industrial disputes, all of which complicate the ability to meet delivery dates These issues are often exacerbated by material shortages and constant schedule changes driven by demand volatility.
On Monday, we initiate a new production plan by starting Job 1, but encounter issues when our previously functioning press breaks down Maintenance informs us that a part needs to be ordered, resulting in a day of downtime for production.
With five operators idling, we swiftly initiated Job 2 from the production schedule on an alternate press Everything ran smoothly for about an hour until an operator entered the office with an update.
Due to a delay in the delivery of part 1234, initially scheduled for tomorrow, production of Job 2 was moved up to today After notifying purchasing, a courier was arranged to deliver the missing parts after lunch In the meantime, the team began setting up Job 3, which requires two components, but the stock of part 5678 for the right-hand piece was depleted during Job 2 The team started production on the left-hand parts while purchasing was instructed to expedite the order for part 5678 After lunch, part 1234 arrived, allowing Job 2 to be completed, and later in the afternoon, part 5678 also arrived With Job 3 now marked as urgent by the customer, only two team members volunteered for overtime due to a major football game that evening Consequently, a smaller crew was assembled to finish the right-hand parts, with plans to deliver half of the order to the customer the following morning.
After one day, the schedule has been changed three times: One order (Job
"Roadrunner production" describes a chaotic manufacturing process characterized by frequent delays and urgent orders, leading to a cycle of inefficiency As jobs are completed out of schedule—like a third order finished early while others are late—production becomes increasingly disorganized This results in more batches being delayed, unscheduled jobs being prioritized, and resources being misallocated Consequently, managers find themselves constantly expediting to address immediate issues rather than implementing solutions that could enhance overall performance and stability.
Poor Warehouse and Logistics Practices
Ineffective warehouse practices can significantly hinder delivery outcomes after goods leave the factory Inaccurate stock recording often leads to customer orders being taken without the actual availability of items, resulting in missed promises Even when stock is present, poor inventory management can leave businesses unable to meet customer demand due to low levels Additionally, long lead times for stock replenishment exacerbate these issues Inefficient workload management may cause delays in order picking and shipping, while inadequate picking processes and suboptimal warehouse layouts can lead to errors in shipments Furthermore, poor communication with freight providers can result in late deliveries or missed pickups In a distribution network, subpar decision-making regarding inventory locations and replenishment processes can cause stock shortages where and when they are most needed.
The six outlined reasons contribute significantly to the chaos observed in supply chains, which ultimately leads to failures in delivering products to customers on time and in full Navigating through this chaos presents considerable challenges for businesses.
Delivering consistent results in your business may seem daunting, but the solution is actually simple and well-established This book guides you through the essential steps needed to tackle common challenges and create a reliable supply chain that ensures timely and complete deliveries for your customers every day.
A poorly performing supply chain is marked by frequent inventory shortages, inadequate on-time and in-full deliveries, and excessive inventory levels leading to obsolescence This inefficiency can be attributed to six primary factors.
1 The customer is unable to provide an accurate forecast because they do not know what will happen in the future.
2 Long lead times mean that supply chain decisions have to be made many months in advance.
3 Big batch sizes and large shipment quantities compound long lead times and amplify demand variation through the bullwhip effect.
4 Raw material shortages, usually caused by poor supply chain design rather than the supplier, mean that production is delayed.
5 Instability caused by poor factory performance, shortages, breakdowns, people problems, and so forth, leads to more instability, as the produc- tion plan changes frequently.
6 Poor warehouse and logistics practices, such as inaccurate inventory, inadequate inventory levels, poor picking organization and productivity, and poor picking accuracy, further delay and disrupt supply.
What You Will Learn in This Chapter
This chapter introduces key supply chain concepts, including
◾ The definition of a supply chain
◾ The importance of lead time and the different types of lead time
◾ Takt time as a yardstick for process performance
◾ The difference between push, pull, and flow in a supply chain
◾ Using a value stream map to understand your supply chain
Understanding these concepts is crucial as they directly influence your business's capacity to deliver products to customers accurately and promptly.
In Chapter 1, we explored how various external factors can impact your organization's ability to deliver products to customers promptly and completely To enhance performance, it's crucial to understand these external influences alongside the internal dynamics of your organization This requires a comprehensive understanding of your supply chain and its operational mechanisms.
The term "supply chain" is often used ambiguously, leading to misunderstandings about its true meaning It encompasses a wide range of activities, including planning, purchasing, manufacturing, procurement, freight, and warehousing In essence, a supply chain includes all individuals, processes, and organizations involved in meeting customer demand for a product, from sourcing raw materials to delivering the final product to the end user For example, a single strand within an automotive supply chain illustrates this complexity.
The supply chain for front fenders in automotive manufacturing is highly complex, but improvements can often be made without needing to address the entire chain Your influence on supply chain participants beyond one or two steps away from your organization is limited It's important to recognize that the functioning of your supply chain and its constraints may be shaped by factors that are several steps removed from your immediate operations.
Natural gas Gas separation plant produces propane
Ship PP to processing country
Extrusion of PP compound with color and fillers
Assembly of lighting, sensors, etc.
Painting Assembled on car Ship car to market Vehicle storage yard
Figure 2.1 Flowchart of supply chain for a front fender on a typical car
Understanding Your Supply Chain ◾ 13 organization Over them, you have no control, but you will still need to plan for and mitigate their influence on your supply chain.
The supply chain consists of a series of steps and processes that enhance a product's value and facilitate its delivery to the end customer A valuable tool for comprehending the supply chain is the value stream map, which will be explored later in this chapter.
The Most Important Supply Chain
Metric: Delivery in Full on Time
Delivery in Full, On Time (DIFOT) is a crucial metric for evaluating supply chain performance, as it assesses the ability to provide customers with the right products in the right quantities and at the right time Just as measuring profit and cash flow is essential for any business, managing DIFOT should be a priority for manufacturing and distribution companies However, a significant number of small and medium-sized businesses fail to track this important metric, which can hinder their operational efficiency and customer satisfaction.
DIFOT, or Delivered In Full On Time, is a key performance metric that measures the percentage of orders delivered on schedule, with all items provided in the correct quantities as requested by the customer This ratio is calculated by dividing the number of timely, complete orders by the total number of orders shipped, making it essential for assessing supply chain efficiency and customer satisfaction.
DIFOT Number of orders delivered on time and in full
In small businesses, tracking performance can be as straightforward as tallying daily orders and comparing the number shipped on time and in full to the total orders For those utilizing an enterprise resource planning (ERP) system, the Delivery In Full On Time (DIFOT) metric can typically be generated as a standard report It is recommended to record DIFOT daily, a feature that most ERP systems support.
DIFOT measurement can be contentious, especially when companies implement intricate rules regarding due dates A common scenario arises when customers place orders with lead times that are shorter than what the company can realistically fulfill, despite prior agreements.
In the context of On Time, In Full (OTIF) delivery, businesses may choose to set a "first agreed date" for delivery at the time of order with the customer While some purists argue that this practice constitutes a failure in Delivery In Full On Time (DIFOT), I believe it can be a reasonable approach for measuring performance However, if there is a subsequent change to the delivery date after the initial agreement, this should be classified as a DIFOT "miss."
To effectively measure Delivery in Full, On Time (DIFOT), compare it to your established standard delivery lead time For instance, if your standard dictates that orders placed before a specific cutoff are shipped the same day, assess your DIFOT performance based on how well you meet this criterion.