Supply Chains Are Plagued by Orthodoxy

Many organizations do things simply because they’ve always done them, but many of these rules of thumb were created prior to the advent of technology but remain, and ultimately have a negative effect on the supply chain.

“Most business rules were created under a technology constraint,” said Neogrid founder Miguel Abuhab in a recent Webinar, From Sell-In to Sell-Out. “But even once the constraint was removed, the rules remained the same.”

An excellent example of such an orthodoxy can be found in the hotel business, he said, where check-in and check-out times remain fairly rigid because it was the only possible way to manage guests and available rooms when everything was done with pen and paper. “That was the technology constraint.”

But despite the fact that hotels have moved to electronic reservation systems, guests still don’t have flexible check-in times, and similar phenomenon can be found throughout modern businesses and the supply chain.

A related concept, said Abuhab, is the combination of local optima and global optimum, where we look to define our space and make our space the best – local optima. “But the local optima can generate undesired effects outside the boundaries of that space.” With an organization, he said, each silo will search for its local optima to improve efficiency, but local optima are akin to air conditioners that cool as desired on the inside, but generate unwanted heat on the outside. “The global optimum is not the sum of many local optima.”

Abuhab said the same applies to the global supply chain. “We have a conflict in the supply chain. Most of the actors in a supply chain are measured by conflicted metrics.”

New technology can lead to the creation new business rules that move us to a simple system driven by what’s happening now at the consumer and retail level, rather than by historical data held in a manufacturer or distributor’s ERP system, said Abuhab. “This is the concept of ‘sell-in’.”

New technology allows the creation of a sell-out approach, which has the retailer pulling inventory what they need rather than retailers pushing what they think should be there based on their local optima rules. “There is no need to check the history or the past. We have the active consumption,” he said.

Under a new, simple system, inventory is held upstream as close the manufacturer as possible, rather than overstocking the store, and the system allows for automated replenishment, said Abuhab. “Until the consumer buys nobody has sold.”

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