Supply Chain Sins, Fallacies, and Mistakes

Stephen DeAngelis

September 18, 2018

Nowadays people are quick to point out the mistakes of others and slow to take responsibility for their own failings. In the supply chain arena, this tendency can have serious economic and reputational consequences. Doug Surrett, Chief Product Strategist for BluJay Solutions, insists, “Companies need to come clean and eliminate common supply chain offenses to deliver the greatest value to their customers.”[1] By “offenses,” Surrett means practices resulting in inefficiency or waste. The Council of Supply Chain Management Professionals reports U.S. businesses annually spend over one trillion dollars on logistics and ensuring none of that spend is wasted is good for all stakeholders.

Sins, Fallacies, and Mistakes

In medicine, a common saying is “prevention is better than cure.” In religious circles, that same idea would expressed by saying “not sinning is better than repentance” or “be ye therefore perfect.” Surrett agrees with those sentiments as they apply to the supply chain. “Within the last 10 years, the bar has risen for supply chains in the quest for the ‘perfect order.’ Perfection is expected in the product, condition, quantity, documentation, and location.”[2] In the pursuit of perfection, Surrett insists companies need to avoid seven “cardinal sins.” They are:

1. Back Order. Surrett writes, “Orders are usually placed on back order when a product is out of stock. Oftentimes, we don’t realize the effects back orders may have, such as threatening market share, profits, and customer satisfaction and loyalty.” New technologies, like cognitive computing platforms, can help companies mitigate the deleterious effects of out-of-stock and back order situations.

2. Deadheading. Surrett explains, “The return of an empty trailer that does not produce any revenue is called deadheading. From both a financial and environmental standpoint, this can be extremely wasteful.”

3. Demurrage fees. Nobody likes being fined. Surrett notes, “Delayed returns of a carrier’s equipment beyond the allotted ‘free’ time results in demurrage fees for shippers and consignees. Unfortunately, this occurs frequently throughout the supply chain; the fines and lost time can add up to high costs for an organization — in more ways than one.”

4. Empty Repo. Waste is never a good thing in the supply chain and this applies to wasted movements as well. Surrett notes, “[Empty repo] refers to the movement or repositioning of empty containers — clearly an inefficient and costly process. What’s worse, the lack of visibility and tracking that contributes to empty repo can often ‘miss’ available containers that are nearby.” Technology and analysis can help limit the need for empty repo moves.

5. Inaccurate Billing. Having to correct errors can be costly in terms of time, money, and reputation. Surrett explains, “When shipping documents misreport significant attributes of cargo, the resulting inaccurate or false billing can prompt additional carrier charges. Hindering the process of a ‘perfect order,’ this violation impacts transportation arrangements as well. Modern-day supply chain software solutions help to thwart this expensive mistake through specific checks and balances built into the technology.”

6. Inbound Ignorance. In today’s data-driven business environment, ignorance as an excuse for poor performance is diminishing. Surrett writes, “Delivering goods into a factory, distribution center, or retail location is a common point in the supply chain where inefficiencies can occur. Many operators allow this key step to be managed by suppliers without regard to costs and procedures performed. This is especially detrimental when shipping and handling fees are relied upon to recover margins that may have been bargained away in the price of the goods. Leveraging technology to control each leg of an order’s journey from supplier to end customer is a successful tactic to avoid this costly mistake.”

7. Lack of Benchmarking. Surrett writes, “It’s important to validate the true value by benchmarking against others in the sector. Access to analytics and data enables companies to set benchmarks for a variety of KPIs and build an understanding of their position against competitors.”

Even though technology can help mitigate or even eliminate some of those cardinal sins, Steve Banker (@steve_scm), Vice President of Supply Chain Services at ARC Advisory Group, asserts it would be fallacy to think technology can solve all supply chain challenges. For example, he writes it’s a fallacy to believe “Blockchain will solve the traceability problem.”[3] He explains, “Blockchain does not eliminate the need for certification companies who inspect whether upstream suppliers are really doing what they say they are doing.” For more on that topic, read my article entitled “Can Blockchain Really Make Supply Chains More Transparent and Ethical?” Other fallacies he believes plague supply chains include: Corporate social responsibility initiatives will improve a company’s financial performance (“not all companies that engage in sustainability will perform better”); there is a driver shortage because young people don’t want to do this work (“there is not a driver shortage; there is a shortage of drivers willing to work for the prevailing wages”); better forecasting leads to lower inventory levels (“demand management optimization solutions do improve forecasts … but these solutions don’t ALWAYS lower inventory levels”); and companies win with functional excellence (“unfortunately, the things that improve performance in one area can adversely impact not just other functional areas, but the overall ability of the company to hit its revenue and margin goals”). To read more about why Banker considers these supply chain fallacies, read his entire article.

In life, all missteps aren’t sins and the same is true with supply chain missteps. Ken Koenemann (@kenkoenemann), vice president of supply chain and technology for TBM Consulting Group, suggests five supply chain “mistakes” companies should avoid to increase their chances of success. They are:

1. Chasing Low-Cost Countries. Koenemann explains, “The amount of lead time required, combined with the lack of flexibility in typical supply chains, is making many overseas sources problematic. Moreover, distant suppliers inhibit an organization’s ability to react to changes in end-user demand. Inventories tend to sit on the books, working capital suffers, and companies are left with difficulties in moving product.”

2. Indifference to Building Good Relationships. “All too often,” Koenemann writes, “supply chain partners are measured on price variance, rather than the quality of the relationship. … As with most areas of business, supply chain relationships are important and should come first over a single-minded focus on price.”

3. Less-than-Frequent Supplier Network Reviews. Second- and third-tier suppliers can adversely affect companies. Nevertheless, Koenemann reports, “Fewer than 50 percent of companies conduct supplier reviews on a biannual basis or less.”

4. Lack of a Cohesive Network Management Strategy. Koenemann writes, “It’s important to reach an understanding of how to strategically manage and leverage product and material sources across a supplier network for maximum advantage.”

5. Insisting on Minimum Inventories in Order to Make Sales. Inventory management is a constant challenge for most businesses. Koenemann writes, “Organizations need to evaluate the tradeoffs between inventory and customer service; a slightly slower sales rate may, in fact, be offset by reductions in carrying costs. This is a huge opportunity for most companies. A proper analysis can provide insight as to how such changes can positively impact the company’s profit and loss (P&L) and balance sheet.”

Summary

None of the subject matter experts cited above claim their lists of sins, fallacies, and mistakes are exhaustive. The lesson to be learned is that supply chain management is a complex and challenging field. New technologies, like cognitive computing platforms, can help professionals deal with this complexity and help executives make better decisions. This should come as no surprise since we live in the Information Age where data is becoming the lifeblood of most organizations.

Footnote
[1] Doug Surrett, “Adding Value to Your Supply Chain: Seven Cardinal Sins to Avoid,” Material Handling & Logistics, 16 July 2018.
[2] Doug Surrett, “Seven ‘Cardinal Sins’ of Supply Chain Management,” Quality Digest, 15 May 2018.
[3] Steve Banker, “The Biggest Supply Chain Fallacies,” Forbes, 9 April 2018.
[4] Ken Koenemann, “Five Mistakes Supply Chain Companies Make that Affect their Success,” Supply & Demand Chain Executive, 22 May 2017.