Key Takeaways

Explore the key insights on supply chain management, focusing on the complexities of demand forecasting, capacity variability, and the importance of embracing uncertainty for effective operational solutions.

Unpacking the supply chain paradox

In a bustling manufacturing plant, the operations manager, Manohar, is juggling multiple fires. A key customer just called to expedite a critical order that wasn’t even on this month’s production plan. His team scrambles to re-prioritise, but the ripple effects are immediate—materials for other orders are delayed, suppliers are demanding the evacuation of inventory produced last week, and workers are stretched thin trying to meet sudden changes in the schedule.<o:p></o:p> <o:p></o:p>Meanwhile, across the office floor, the veteran sales manager, Shyam Sundar, is frustrated. He has just been told that that few strategic orders meant for delivery in the current month will be pushed out to the next. "If we don't deliver this, we’ll lose credibility!" he protests. “We can’t help, the raw material meant for the orders was only expected in last week”, replied the operations team.<o:p></o:p> <o:p></o:p>Caught in this cycle, the two managers aren’t just managing their departments—they are managing a deep-seated conflict that has become routine. By the end of the month, as always, both teams will come together in a hurried effort to meet targets, making countless compromises along the way. And when the dust settles, leadership will discuss the same question in the next quarterly meeting: why, after spending millions on <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/solution-frameworks/supply-chain-and-distribution/">supply chain management</a> solutions, do these issues still persist?<o:p></o:p> <o:p></o:p>Amidst the confusion, fresh back from an international conference, the CTO is proposing a new digital solution that is supposed to be cutting-edge technology.<o:p></o:p>__________________________________________________________________________________________<o:p></o:p>This story isn't unique—it’s the reality of many organisations grappling with <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/media/supply-chain-a-force-multiplier/">supply chain</a> complexity - dealing with changing product mix, supply uncertainties and demand vagaries.<o:p></o:p> <o:p></o:p>Billions of dollars have been invested in cutting-edge IT tools with the ability to handle and process increasing loads of data, new predictive algorithms promising to be the perfect oracles of future demand, optimised planning and scheduling, and algorithms to get the best out of plants. The supply chain management space has always been buzzing with the latest tools that promise to solve  chronic issues. But as we look back, it has mostly been disappointing results for most of the firms.<o:p></o:p> <o:p></o:p>The best proof of this is, that even after years of attempting automation and digitisation, the IT tool that has more than 90% market share in supply chain management and <a target="_blank" rel="noopener noreferrer" href="https://www.vectorconsulting.in/en/research-and-publication/blogs/the-essence-of-managing-operations/">operations management</a> is Microsoft Excel! When the deployed standard tools fail to deliver, Excel sheets with the flexibility to create any heuristics-driven-algo and complete flexibility to correct erroneous master data come in handy. Chaos needs tools with unlimited flexibility!<o:p></o:p> <o:p></o:p>However, be it standard tools or Excel sheets, the business problems, as in the above case, continue to plague many businesses. Supply chain management continues to be an artwork, best left to be managed by an experienced guy who has seen it all.  After years of trying to correct the problems, these issues, are often assumed as unchangeable facts of the user’s industry. Experience, as someone said, is the increasing confidence of making the same mistake over and over again.<o:p></o:p> <o:p></o:p>What are we missing?<o:p></o:p> <o:p></o:p>It is time to go back to the basics!<o:p></o:p> <o:p></o:p><h5>Supply chain management 101: Unpacking the supply chain paradox<o:p></o:p></h5>The challenges of supply chain management often stem from a set of flawed assumptions that underpin most models. At their core, supply chains operate under the belief that:<o:p></o:p><ol style="list-style-type:decimal;" type="1"><li class="MsoNormal" style="mso-list:l0 level1 lfo1;mso-margin-bottom-alt:auto;mso-margin-top-alt:auto;tab-stops:list 36.0pt;">Demand can be predicted accurately: The assumption is that with better tools and more data, companies can forecast demand with much-improved accuracy, which can enable precise production schedules.<o:p></o:p></li><li class="MsoNormal" style="mso-list:l0 level1 lfo1;mso-margin-bottom-alt:auto;mso-margin-top-alt:auto;tab-stops:list 36.0pt;">Capacity as a fixed, predictable resource: Supply chain models often presume that capacity can be clearly defined and reliably mapped to the expected demand.<o:p></o:p></li><li class="MsoNormal" style="mso-list:l0 level1 lfo1;mso-margin-bottom-alt:auto;mso-margin-top-alt:auto;tab-stops:list 36.0pt;">Re-planning solves variability: It’s widely believed that when disruptions occur, re-planning and resetting schedules can bring operations back on track seamlessly.<o:p></o:p></li><li class="MsoNormal" style="mso-list:l0 level1 lfo1;mso-margin-bottom-alt:auto;mso-margin-top-alt:auto;tab-stops:list 36.0pt;">Commercial transaction implies complete subordination: It is assumed that external partners—suppliers, logistics providers, and subcontractors—will prioritise and do everything possible to deliver as promised, just because we pay them for their services.<o:p></o:p></li></ol>  <o:p></o:p><h5>In practice, these assumptions unravel quickly:<o:p></o:p></h5>1. Forecasting's limitations: Even the best demand forecasting tools cannot account for the inherent unpredictability of markets. External shocks, shifting consumer behaviour, and unpredictable supply chain disruptions, inventory corrections in extended supply chains, add layers of complexity that no algorithm can predict.<o:p></o:p> <o:p></o:p>The problem with forecasting is not about information inadequacy but the entire premise of using patterns of the past to predict the future. Hidden and unaccounted casual variables emerge in future, which creates a multiplier effect on demand, making all calculations of the past go haywire.<o:p></o:p> <o:p></o:p>Hence, consistency in the accuracy of any forecasting model is a big suspect. And no amount of data or superiority of pattern detection algos (either auto-generated by machines or an intelligent human) can solve this problem. It is theoretically impossible to guarantee a consistent accuracy (within limits of expected standard deviation) of any model.<o:p></o:p> <o:p></o:p>It will fail fantastically from time to time, and the problem is we will not know upfront when will it fail! When it fails with fantastic outcomes, it will just derail everything. Since, you can’t blame an algo and escape scrutiny in any organisation, eventually, ‘human’ intuition will take over the tool. When managers add their intuition, they add their biases.<o:p></o:p> <o:p></o:p>Forecasting demand remains a wicked problem unless one is willing to stay limited to broad generalities like, the sales of consumer goods will go up in the upcoming festive season – by how much in a specific location and which product, and when exactly – don’t ask!<o:p></o:p> <o:p></o:p>2. The capacity-variability loop: Capacity is rarely fixed—it fluctuates due to labour availability, product mix changes, machine downtime, supplier delays, and other factors. Utilisation assumed in planning can get disrupted by variability in execution leading to cascading impact. In some plants, such disruptions can also lead to shifting bottlenecks which makes the entire plans go haywire within no time.<o:p></o:p> <o:p></o:p>The bigger issue is when the execution unreliability feeds back into demand uncertainty, (the act of adding more safety in the next forecast or going for inventory correction when demand is diverted to competition). These sudden change in forecasts further adds to variability in execution, triggering a vicious loop. Stability is restored only when demand falls much below capacity, helping the entire system to re-set before it gets disrupted again.<o:p></o:p> <o:p></o:p>3. All partners pursue their short-term targets, which may conflict with others: Most suppliers focus on their achievement of short-term result areas like monthly or quarterly production output, billing, and cash flows, depending on what the short-term focus of the organisation is.  They make decisions on specific order execution based on the impact of the above. If the execution of specific orders comes in the way of meeting short-term targets, it is likely to face reliability issues.<o:p></o:p> <o:p></o:p><h5>Typical solutions that are highly sensitive to the accuracy of forecasting and capacity definitions, and which ignore the short-term business needs of the partners will have issues!<o:p></o:p></h5> <o:p></o:p><h5>Is there a way out?<o:p></o:p></h5> <o:p></o:p>The biggest change that is required for organisations is the acceptance of variability and uncertainty of the environment and building solutions around it.<o:p></o:p> <o:p></o:p>If we accept uncertainty and variability, we need to design and maintain buffers at key points, which dampen variability and isolate its impact or in other words prevent it from traversing further in the supply chain.<o:p></o:p> <o:p></o:p>This also implies that one needs systems to ensure buffer status to be monitored daily and its status is restored to desired level when required. It also requires one to reconfigure buffer norms, when there is a need to do so. This way of working requires continuous demand and capacity sensing, examining the buffer status and more importantly, win-win partnerships between all partners in the end-to-end supply chain to integrate the daily execution to align to the dynamic buffer status.<o:p></o:p> <o:p></o:p>Understand in detail how buffers and execution processes for their effective usage can be designed for excellence in performance in the below environments….and yes, it is possible to eliminate the chaos in supply chains, as captured in the initial case study and restore the inherent harmony.<o:p></o:p>

Struggling with supply chain inefficiencies? Understand the paradox in the current assumptions and what is the new solution approach to address them to optimise operations and boost supply chain performance.