Managing supply chain
Try to visualize this - a phone manufactured in China must reach an Indian retailer just before a consumer walks in demanding that make and model. If it arrives too late, it’s a lost sale. If it arrives too early, it adds to the inventory carrying cost of the retailer. Is it possible to ensure that no customer is ever disappointed, while also keeping your retailers happy? If we understand what prevents us from achieving both these objectives, maybe seamless availability of a product can be guaranteed? In this episode, we take a deep dive precisely into the root cause of this perplexing issue - why do supply chains often fail, despite the numerous people and the cutting edge technologies it has at its disposal? You can find more about the topic at: https://www.vectorconsulting.in/
| Shubham Agarwal : | Hi everyone, we’re discussing about managing supply chains today. For those of you who might not know what a supply chain is, it is basically the series of processes in the production and distribution of goods from when they were first made or grown until they are bought or used. In simple terms, think about the phone or the laptop, or any other device that you’re listening to us on being manufactured in some part of China, to the point in your hand where you unbox it and say hello. While it sounds interesting and cool, it is a mighty difficult job and companies break their heads around the clock to make sure the right thing is available to the right person at the right time. In fact, recently, Modi Ji had a few months back, given quite some gyaan and importance to supply chains in India to make our nation an Atma Nirbhar nation. |
| Shubham Agarwal : | Well Vector, has been helping organizations manage the supply chains for years now, using te TOC way the Theory of Constraints way, which is quite untraditional and counterintuitive. But then the results that they have delivered have been pretty remarkable. We have Puneet Kulraj with us today, the director at the vector Consulting Group, who used to play with supply chains as a kid.
Now, that’s a bad joke. I hope there’s no kid who’s had to play with supply chains in his childhood, because they really messy and difficult to manage. But then he’s a veteran at managing supply chains for sure. So let’s see if Puneet can enlighten us today on some of the core issues and problems of a supply chain reason as to why it is so and convince us that vector way has value in it and can suggest a sustainable solution. So let’s get started. |
| Shubham Agarwal : | Hi, Puneet. How are you?
Hi, Shubham. I’m fine. Thank you. Thank you very much for having me here. Great. So Puneet let’s get straight to the point. And let’s start with the core issue of a supply chain the inventory which is which changes hands. Because that’s the most important part of a supply chain. Right. Okay. So before we talk about inventory, let me just comment on the so called Bad joke you made. |
| Puneet Kulraj : | It wasn’t a bad joke. Actually, it was a sad joke. And I will tell you why it is sad. Yeah. Because you know, as as a kid, you never get to play with supply chain. But unfortunately, after you have got your education and you join as a professional, people spend their entire lives literally playing with supply chains. And what they don’t know is that they’re playing with fire. They don’t know how to manage supply chains, they play with it every month. And unfortunately, the entity which bears the brunt of their lack of skill is the organization itself. |
| Puneet Kulraj : | So in that sense, it was a sad joke, it wasn’t a bad joke. |
| Shubham Agarwal : | So if people were to start playing with it in childhood would they be better at it? Do you think so?
Maybe, yeah, you’re right. Because I think by by the end of this discussion, we will conclude that the best person to manage a supply chain is probably a six year old, okay. |
| Puneet Kulraj : | You are always dangerous to have a discussion with. |
| Puneet Kulraj : | Okay, all right, coming back to inventory. Yeah. So, inventory actually, by itself, inventory is not a problem, you see, inventory is a need, it fulfills a need of any any organization which which is, you know, what we call a make to stock or make to availability organization, those companies can’t do without inventory inventory is is the only way that they can sell which essentially means that they have to manufacture in advance to an order from a customer this is this is quite unlike other companies like you know, make to order companies, let’s say a company, which has manufacturing equipment or or an lnt for example, or or even a Ferrari, which gets an order from a customer and once they have got the confirmed order only then they start manufacturing the product and once they have manufactured it, they will ship it out to the customer. So, these companies traditionally will have no finished goods inventory, right, maybe as part of another discussion, we will discuss how they managed to screw up even then |
| Puneet Kulraj : | in terms of inventory, but ideally Yes, they should not be carrying any inventory because whatever their manufacturing is against in order, so the moment it’s ready it should be shipped out right. Unfortunately, other companies and I use the word unfortunately with, with a little bit of irony in other companies, like you know our fmcg companies or appliances or anything that we buy as consumers, most of them are what we call make to stock make to stock essentially means that the company will have to manufacture the stock and then put it out at a point of sale where the customer will come to buy right. So when they are making they have no idea about when where and how much a customer will buy. So they have to make in advance of a customer order. Which means there is by definition inventory necessitated by the business model. Okay. So just, just as an aside, before we move forward, I would just like you and all the people who are listening. |
| Shubham Agarwal : | to ponder on this question yeah as a as a supplier What would you like your customers to be make to stock or make to order and the answer is pretty obvious you’d like your customers to be made to order make to order yeah because it’s it’s no risk it’s simple yeah no risk
You start manufacturing only when you get an order and then you supply to the customer Yeah. Yeah. Now let me turn it around and ask you as a customer, would your supplier be make to stock or make to order. |
| Puneet Kulraj : | as a customer make to stock because I can’t I don’t want to wait. |
| Shubham Agarwal : | see how the how the tables turns. |
| Puneet Kulraj : | and and actually the the interesting contradiction of you know the two answers is where the game lies, right. All suppliers would like their customers to be to behave as make to order and all customers would like their suppliers to behave as make to stock stock and it is the interplay, interplay of essentially two things as we see which determines whether you know, inventory will exist in the system or not. So, obviously, as long as the suppliers are able to have an upper hand things will operate pretty much make to order customers will be made to wait right until this environment changes or one supplier in the industry switches to make to stock.
So remember those days you know when when we had license Raj in India and capacities were determined by the government and if you you’re probably too young to remember this, but some of the listeners may be remembering that they were products called you know a Bajaj Chetak for example, you used to book a chetak and you used to wait for years yeah, you you got an allotment letter for a scooter and you waited with that allotment later to buy your scooter when your turn came and it could take you know from a few months to a few years. Yeah. Yeah, your generation also goes through this ignominy whenever a new iPhone is released. |
| Puneet Kulraj : | And and the weight of those few days or a couple of weeks also is so, so painful for everybody involved correct Yeah, but essentially, you know, that is the time in the in the lifecycle of the product, when the company is actually you know, in a way operating as make to stock because the number of orders are too much compared to the capacity. So, they are manufacturing everything that will be sold after the initial couple of weeks and all the you know, Apple fanboys got their stuff, then iPhone also becomes a make to stock product, right. I understand. Yeah, interesting. So, essentially, it is the interplay of two things you know, one is the supply lead time that is how long will the supply chain take to deliver the product to the customer, which involves procurement, manufacturing and logistics, these three steps and the other factor is what we call the customer’s tolerance time how long a customer is willing to wait after the customer places an order till they’re going to receive the product right and it is the interplay of these two factors, which determines whether a company will be made to stock or make to order instead of company rather whether an industry will be made to stock on make to order. So, wherever the customers tolerance time is more than the suppliers lead time. Right? That means if it takes me x days to make and deliver a product and the customer is willing to wait for x or more than x days, then I have the luxury I can be make to order. But wherever the customers tolerance time is less than the suppliers lead time. That is I will take x days to make and deliver but the customer is not willing to wait for x days wants the product sooner. I will have no no choice but to switch to make to stock. Right.
I wonder if sugar and toothpaste were available like that. |
| Puneet Kulraj : | Yeah. So so. So you’re right. Imagine if we had to place the order for sugar and you know, wait for it wait for delivery. But But yeah, I understand. Yeah. So essentially, it is the interplay of these two factors, which determines, you know, whether inventory is required in the system, or is not required in the system. So that’s, that’s, that’s the fundamental. Okay, now, so I’ll probably leave a quiz for your listeners, and they can probably comment to you or, you know, they weren’t sure. And I would like them to ponder on an interesting company, which is called McDonald’s. Is McDonald’s make to stock or make to order? Okay, think about it. Just Just a little hint that the first answer you get is most likely wrong. Another hint that the second answer you get is also wrong. |
| Puneet Kulraj : | Okay, so let’s move on. So for all the companies which are make to stock they require to have this animal called inventory. And the trouble with with inventory is is twofold. One is that you you will either have too much of it, or you will either have too little of it. I can’t have the right amount. The Holy, the holy grail of having the right amount of inventory is probably what people are toiling their lives upon. And they are not able to you know, figure out what is the right inventory barring Of course, shameless plug barring some of us in vector who seem to have cracked it, at least in our minds yeah vector and vector clients, |
| Puneet Kulraj : | vector vector clients are extremely secretive about the formula. But But yes, so So look at it. Let’s Let’s go one step deeper into this
Sure The conflict of inventory is this that the inventory shortage and surplus happens across two dimensions. If I take one location, right, let’s say a depot or a city or a or a shop, whatever location the inventory is kept across the dimension of time, I could have a shortage at one time or a surplus at another time, right, right. Correct. I will see this if I plot the inventory data at one particular location across a period of time, I will find that it yo-yos between shortage and surplus. Yeah, there’ll be crests and troughs also. Yeah, the other dimension of inventories if at the same moment in time, I plot the inventory across locations of an organization or of a supply chain, I will find that at the same time, I will have shortages in some places and surpluses in other places, but that is not a great situation right? It is never It is never none of the two is a great situation, right? Yeah. Having shortage or surplus at the same location across time or having shortage of surplus across locations at the same time. Right. Yeah. So the the point that I was trying to illustrate is that inventory will always occur in only two forms as the world sees it shortage and or surplus. Actually, if you look at it, it is never or it is always and shortage and surplus always come together. Okay. Yeah, that’s that’s why you know, understanding those two dimensions are very important. If you are plotting across time, you will have shortage and surplus at the same location, if you are plotting at one location, you will have shortage and surplus across time, you will never find a location perennially stocked out or perennially surplus. |
| Puneet Kulraj : | At the same time, you will never find at the same time all locations perennially stocked out or perennial surplus, barring Of course, those stray exceptions, you know, which which do not make the route. Yeah. Right. That’s that’s essentially, the problem of inventory that people are dealing with, you know, no matter how they look at it, they are grappling with this too much, or too little, too much, or too little.
So interesting. And I agree, and I understand what you’re trying to say. But what I’m thinking is in a company, the sales team is the one who needs more inventory. Yeah, you know inventory, increase the inventory, while the finance team wants less inventory, because they want to reduce costs. Yeah, you know, and they and they keep telling the sales teams to reduce inventory across their holding stations warehouses. Yeah. Now, there’s a conflict within the departments then? Absolutely. Absolutely. And, like you say, they’ll be stock outs and I’m sure stock outs would be mostly of fast selling SKUs, while the surpluses would be mostly of slow moving SKUs. Right. Yeah. So the conflict is within the company, then? Absolutely. You’re right, the conflict is within the company across departments. But and yes, in general, you’re right that the sales team is pushing for more stocks, because they know that in order to sell they need stock. |
| Puneet Kulraj : | and the supply chain team and or the finance team will push to limit stocks largely because you know, there is working capital involved and more stock means more working capital and more expense right. So, obviously, they are they are pushing for less inventory or limited inventory in order to keep a tab on the costs or the working capital. But having said that, the the interesting fact is this that it is it is not the nature of sales, to want more inventory or nature of supply chain to want less inventory. Actually, this whole game is about measurements.
Oh right. So you know, if if you measure sales on sales and not on inventory, then they will want as much of it as possible, correct. And if you measure the supply chain on the costs of inventory, then they will want to have as little as possible. Yeah. But But my salary, my job, everything is based on that. Absolutely. And I am a selfish man. So if your KRA or your KPI is governed by inventory, yeah, then you will behave accordingly. Right? And I mean, it’s natural, we are all human beings, human beings are, in that sense, predictable. And a lot of companies that we’ve worked with, or you know, we’ve met some of them have understood this. So, therefore, they they try to bring in a balance and they they also put some load of costs of inventory or something related to the amount of inventory on the sales team. So that you know, the sales team does not go berserk in terms of wanting inventory. Right. So you know, if they load the sales team with the responsibility of the amount of inventory, then the sales team says yes, I want inventory. But yes, I would like to see a limited amount of it not too much. But who’s the real loser who’s the real loser in between the conflict this this game of inventory? |
| Shubham Agarwal : | This is now like the debate of a one nightstand versus a committed relationship. |
| Puneet Kulraj : | Loser, and also the most key link in the supply chain is the retailer. Okay, because it is the retailer Finally, who is subjected to all the inefficiencies of the supply chain that are happening before him, right. So whatever problems that the company is facing whatever problems that the distributor is facing, ultimately all of them come and rest at the retailer in terms of either surplus or shortage. Okay, correct. Yeah, at the same time, the retailer’s customer, which is the next link in the supply chain, the end consumer, the end consumer will not bear any of these problems. Yeah, obviously. Right. So therefore, the retailer is left holding the ball. And if you see, he’s, he’s the weakest link in the chain, he is the smallest link in the chain, he is the fellow who’s at the mercy of everybody, and all the accumulated, you know, gains or losses of the supply chain finally come to rest at the retailer. So yes, to answer your question, ultimately, the retailer suffers the most. But unfortunately, there are so many retailers and they are so small, each one of them that nobody realizes, right? Because at any point, any point of time, any point of time, you know, there could be 1000s of retailers suffering, but then who knows? Who knows them? So, you know, it’s like, I wake up in the morning, and you know, some part of my body a couple of aches here and there, I carry on life, you know, but yes, the the day my I have a chest pain, then I become serious about it. Tabtak chalta hai. |
| Puneet Kulraj : | I love the analogy, so you know the the importance of the retailers, unfortunately not seen by by supply chain managers. Because if actually why I say this is because if you realize that the retailer is where the game is actually being played, where the retailer is selling to the end customer, yeah, then you would go all out to ensure that the supply chain problems that I just described, you know, shortage and surplus across time, and across locations, you would try to eliminate them at the retail level. And the moment you do that, actually, not only will the retailer gain, the company will also gain because a retailer carrying a surplus actually hits the company, the retailer’s got limited capital, if he’s carrying a surplus, obviously, he is not going to buy from the company for some period of time. Or he may not buy other products of the company because he is he’s carrying surplus. Yeah, so he limits range. And if the retailer is having a shortage, then again, the company may suffer because once the customer walks in and tries to buy the company’s product, the retailer is not going to go let the customer go back empty handed saying I’m sorry, the company’s supply chain is screwed up, I don’t have this product, why don’t you please go and buy it from the next retailer, the retailer is going to try and switch the customer to something else so the company loses. So if they realize the power of the retailer, if they realize the importance of the retailer, and if they do something to solve the problem at the retailer end the magic is the entire supply chain problem will get solved because the entire alignment will happen.
So taking cue from that, you know, in order to solve that problem, I can see a pattern right pattern across the sales at the retailer point. And if I get data about it, and plotted over a period of time, I can predict and see what can happen in the future and, you know, manage my inventory according to that. I mean, there’s a lot of human cry about data and data being the new oil, that would definitely increase the level of prediction that I can make or not. |
| Puneet Kulraj : | Yes and no. Okay. Okay. |
| Puneet Kulraj : | So yes, it’s, it’s nice to hear, you know, that data is the new oil. But I just shudder to think if the oil companies would work like you know, the data mining or Big Data companies work, then they won’t, you know, try to drill for oil everywhere they get a signal without bothering about the quality of oil, right and what you and I would be filling in our cars could be any kind of oil and whether the car will run or not, is anybody’s guess. |
| Puneet Kulraj : | So, you know, fortunately, oil is not data so so we get good quality oil, if oil were data, then we would get any kind of any kind of quality of oil. |
| Shubham Agarwal : | you have a knack for turning tables I see. |
| Puneet Kulraj : | I just say things as I see them, unfortunately, I see them probably as a realist would. |
| Puneet Kulraj : | So coming coming back to data being oil, you know, yeah, that’s right, data can serve a very valuable purpose, provided, we know what to look for. Indeed, if we are enamored with data for data’s sake, then we can go anywhere we want, you know, I I forget who said it, but you know, data data will confess to anything, if you torture it enough. Right?
One of my professors used to say that as well that data se to kuch bhi karva sakte hai. Exactly right. If you torture it enough, it will confess to anything. The idea is data is good, as as you rightly said, data is good to look at trends, data is good to draw insights about the the performance or the lack of it, of any entity in the supply chain across a period of time. But data is is very bad. If you’re trying to do a deterministic analysis. If you’re trying to do crystal ball gazing using data, then there is a problem. Okay. So, |
| Puneet Kulraj : | you know, and and this brings me probably to the to the area that you were alluding to, is is using data for forecasting. Okay, yeah. So, you know, a forecast is such an interesting thing, such an interesting thing. If I were a stand up comedian, then I would I could devote my entire life to, you know, shows about just forecast, okay. That is the number of jokes I have about forecasting. |
| Puneet Kulraj : | People love forecasting. Yeah, I mean, especially in organizations, especially when it comes to sales and supply chain. You know, why they love forecasting, because you can do anything you like, you know, you will go wrong, but you know the blame will never come to you. |
| Puneet Kulraj : | That’s, that’s the beauty of forecasting. If I if I see it, as a manager, I can put out any damn forecast I want. I know, at the end of the month, it will go wrong. But I can as easily wriggle out of the blame game saying boss by itself, the forecast was wrong. And the factors that go into either determining or fulfilling the forecast are so nebulous. I mean, I, you know, a butterfly flaps its wings in, in Brazil. Yeah. And it is supposed to start butterfly effect. |
| Shubham Agarwal : | Who knows how these causal linkages are? Nobody knows. Right? |
| Puneet Kulraj : | So that’s the that’s the problem about forecasts that you can blatantly forecast and go wrong and still come out smiling. And the beauty is this, that the two warring factions, if I take just two warring factions of the supply chain, sales and logistics people, both of them agree to the fact that a better forecast is needed.
Yeah, I mean, think about it, the highest paying jobs in the world are two one a consultant, who is you. Yeah. And the second a data scientist, okay, I, I like the highest paying part of it. I don’t like getting bracketed with the data scientist. |
| Puneet Kulraj : | No but the forecasts and predictions and our the you know, the trending things in almost every organization. Yeah, you see, actually, okay, so credit credit to the data scientists and the and the weather forecasters, both forecasting by itself is not bad. The way you use the forecast is a problem. Okay, so making a forecast and trying to use that forecast to configure your supply chain for you know, some actions is not bad. But using the deterministic forecasts to actually send goods to a place in finite quantities to fulfill a forecast. That’s actually where the problem is because the forecast by its nature can never be correct. See forecast is is wrong on two counts the the longer the horizon we try to forecast it is wrong. And also the more deterministic or lower down or more granular we try to go in the forecast it is wrong. Okay. Okay. So for example, if I were to forecast what would be the sales across the country of a particular product, in a month, I would get a certain number. And if I were to try and forecast what would be the sales of that particular product in a retail shop, in Bombay, or Calcutta or you know, wherever, whichever city in the same month, the level of inaccuracy of the forecast would be much higher at a retailer level, because things can vary a lot across the country. Things won’t vary so much, right? I would still vary maybe across you know, five or 10% up or down. Yeah, but at the retailer level, I could vary by 20% 30% also. All right. And now think of it when goods are to be sold at at a retailer and I’m trying to forecast and fulfill the quantities at a retailer where the forecast is going to be more inaccurate. Right? Compared to the national forecast, obviously, things are going to go wrong, right? Because I’m trying to provide material deterministically at the location where the forecast is likely to be more wrong. So obviously, do you see the the point that I described that shortages and surplus will happen. They are bound to happen. Because if your forecast is pessimistic, then you know you are you’re going to get shortages. If your forecast was optimistic, then you’re going to get surpluses.
Oh, we’re still left with the same, right. And then you will deal with this. I hear you. Yeah. I mean, it could it could take, you know, multiple sessions to discuss forecast. But I will, I’d like to close it with with just one interesting thought that I’d like to leave with all the data scientists, or people who are who are trying to, you know, make a better forecast. And this is, this is the advice I’ve given to a lot of my clients, when they are trying to go in for you know, a new forecasting software. So I tell them, do me a favor. You You can buy a software, if you like. I mean, ultimately, if if you are in the habit of blowing up your money, who’s to stop you, right? But before you buy the new forecasting software, do me a favor, feed the previous two years data into the software and ask for a forecast of the last two years. Okay. Agreed. Yeah. Which is the best forecast. So if I try to forecast what what will happen last month, I think I will be very Correct, correct? Yeah, I can be very accurate. I once had a friend who used to joke that we must always make a plan for the previous month. Right? That way, we can’t go wrong. Yeah, we can never go wrong, I think you can never go wrong when you’re making a plan post facto. So this is this is an advice to everybody who’s listening in whenever you want to test, a forecasting method or a software, feeding past two years data or any prior period data and check against the actual of that, because you have the actual with you correct, get the forecast out of the system and match the two. Interesting, if if you arrive at somewhere nearby, then probably it’s a good software, I am yet to see one. Every time I speak to you, you take away one job at least. |
| Puneet Kulraj : | Okay, so I agree to you, I hear you that, you know, predictions, forecasts or predictions, and therefore they’re not as accurate as we want them to be. And even post facto, we will not get the same results. I know. And everyone who’s listening would agree to it. But in terms of supply chain, we did come up with another solution in the in the industries across across the world. And that’s the min max replenishment system. Yeah. Right, where the when an order is placed to the maximum level, when inventory reaches the minimum level. I mean, across my MBA in operations, I’ve read that and I have believed it, we call it the Reorder point. Right, the minimum inventory is going to take care of the fluctuations in demand during the time that it takes for the products to reach the retailer. Yeah, so that would solve it. Right?
It appears to solve it. (Laughter) |
| Puneet Kulraj : | Okay. |
| Shubham Agarwal : | Okay, so what’s the problem with that? Again, now now, you will see, I’m going to take away another job and that of |
| Puneet Kulraj : | business school professors. Again, I have the deepest respect for them, what they’re trying to teach is, right, their efforts are in the right direction. But unfortunately, the subjects that they are teaching are ill chosen. See, I’ll tell you the problem with min max. Actually, people believe that that a min max system is is trying to eliminate the problem of forecasting and is closer to replenishment as it would appear. Right? But actually, min max is fooling yourself. Okay. min max is also forecasting. And I’ll tell you why. Okay, you know, in min max, the reorder point or the safety stock, I mean, the let’s let’s first take the issue of safety stock, yeah, you fix the safety stock, right? Correct. Now, the safety stock is defined as a level after which you have enough material left while the next lot is going to come in. Correct. Is that not a forecast? You have actually made a judgment that for the such period of time, this must stock is going to be sufficient for my normal sales while the previous stock is arriving? It is a forecast. Agreed. Yeah, I agree. I don’t want to but I agree. Yeah. And if a forecast is wrong, then even this safety stock could be wrong. Now take the case of a product which for whatever reason, has started selling very well. Yeah. Okay. You decided that the safety stock should be let’s say one week before, because it takes me four or five days to get the lot from my supplier. And you decided on a one week safety stock. Now the product is doing very well. Okay. Let’s say the rate of sale is 50% higher than normal. One week, safety stock is suddenly How much? Oh Okay, it is only four days, four days. Yeah. And your supplier will take five days to replenish you. |
| Shubham Agarwal : | And that is why we see a lot of stock outs still in the system. |
| Puneet Kulraj : | Exactly so even in a min max system, you will see stocks. So the point is this, that if by a new solution, you see that the same ill effects are happening, then probably the solution has not cracked the whole problem, right? It’s like you take medicine for fever, and the fever does not go away. Yeah, then you can’t you can’t blame the fever right, you got to blame the medicine, you got to take another medicine right. I agree, because the diagnosis is not proper. So therefore, even in a min max system, there is forecast, yes, it is reduced to an extent the dependence on forecast is reduced to an extent but you’re still exposed to the error of a forecast. The other problem that the min max people believe that min max tries to solve is that if I operate purely as per forecast, I would carry excess inventory, right? If I operate as per min max, then I can operate at a lower inventory. Right. So even that is a fallacy. And I’ll tell you why. Okay, okay. So, the first thing we proved is that min max is is actually not taking away the problem of forecasting, because of the safety stock, which is a forecasted stock, even Max is also a forecast, by the way, right? Max is also forecast safety stock is also forecast, right. The concept of an economic order quantity. |
| Puneet Kulraj : | And the reorder point fixed based on that actually eliminates the any chance of lesser inventory. Ohh right, yeah. Right. Because and unfortunately, it is it is not entirely the problem of min max it is it is the way people are thinking, when we set up a min max system, we set up min max for each product on its own right in isolation. |
| Puneet Kulraj : | But in a normal supply chain of an fmcg company, or a small small white goods or brown goods company, or you know, pens or hoisery or any of the stuff that people are selling. Yeah, supply chains don’t deal with only one SKU at a time they deal with an assortment of goods. That’s right, correct. So therefore, a depot will supply to a distributor, not just one product, but multiple products in the same order. Similarly, a DC will supply to a depot, multiple products of the same order. But when they set up min max at the depot, they will set it up for each SKU in isolation, assuming that this SKU is going to be supplied on its own by the DC, correct? Correct. So the economic order quantity, for the SKU will be as if this SKU is going to come on its own. So the economic order quantity will be higher. Oh right. If they were if they were taking and some of them do take but not all of them and that’s that’s why you know, I’m trying to illustrate this point, if you were considering the assortment of products and setting the EOQs accordingly, then probably you would gain the benefits of lesser inventory in a min max system okay. So, therefore, I hope I just proved to you that min max started out to eliminate two problems the problem of forecasting and the problem of high inventory because of replenishment but it ends up doing neither right it ends up doing neither okay. But let let none of my colleagues go into a depression I am I am not that bad. Even if you’re operating a min max system the best way to gain the benefits of min max. One simple way is to set a min is equal to max minus one Okay. Okay. If you set min equal to max minus one with the assumption that multiple products are being supplied from a DC to a depot, then you will automatically immediately start reaping the benefits of lower inventory. Because now even if one unit is consumed, an order for one will be generated. The concept of EOQ can just be banished because EOQ exists across the assortment, not for an SQU in isolation. |
| Shubham Agarwal : | Right? You will not send partial loads, you will still send full truckloads which even you today you do and you send a truck full of multiple products, not just a one product. So why not configure your IT to reap the benefit of that? |
| Puneet Kulraj : | Got it. But I think there we still need a more concrete solution. Absolutely. And while, everything sounds very common sensical to me. I also feel a bit dumb at this point, because for years I’ve been doing this, you know, and now suddenly, after spending so much time you tell me I was doing it wrong. You know, so Puneet, I need time to sink this in. And give it some proper thought and I’m sure
No it’s okay. So So, so my thought is this Don’t be too hard on yourself, not not just you, but everybody who’s listening Yeah, this is this is evolution, right you you go from one concept to another and you start grasping the understanding, yes, you need not necessarily go through it you can go to see you know, this is not like chemistry, where you have to first first teacher Dalton’s model of atom and then ultimately go to you know the Bohr’s model. We can start straight away with Bohr’s model in supply chain because it is practical, it exists. But yes, I I think it should energize you thinking that yes, I I have known something till now. But there is a much more powerful even if a simpler way of managing the same problem. |
| Puneet Kulraj : | Correct. And that’s that’s what this whole thing is about inventory. Actually, if you see inventory is very simple. And that’s why I said at the beginning, at the at the end of this discussion, we will probably conclude that a six year old can manage inventory much better, because it is actually very simple. We have complicated it, right.
So before we do that, I’m going to have a conversation with my professor at the College at my MBA college. And I’m going to have a discussion as to why min max is wrong, I will try to convince him. |
| Puneet Kulraj : | Or probably have a discussion around it and come back to you next week with discussing the solution with you. Okay, so before you before you do that, let me also give you one more pointer to talk to your professor
Sure and everybody else. So one problem of min max was we are still operating in a safety zone, which is a forecast. Yeah, the second problem is that we are not able to reap the benefits of low inventory because the concept of EOQ treats each SKU in isolation, correct. The third bigger missing thing in min max is that in cases of shortages, whether they are extreme or slight, when the demand for something is more than the amount of material present, min max does not provide any direction or any guideline as to how to prioritize the dispatches. Okay? Right. So if there are if there are 10 locations, and based on EOQ, each one of them has placed an order, oh right on the parent location and the parent location is limited material. Now, how do you service this demand? Hmm Interesting Yeah. Do you send orders to complete sets to some of them? And starve the others? Or starve the others In the sense don’t dispatch to others? Or do you send small lots to all of them? Right? If you send small lots to all of them, then you violated the principle of EOQ correct, right? and you’ve not fulfilled the entire order. And if people are tracking order fulfillment, then you’ve scored a big zero. If you send full orders to let’s say, four out of the 10 and leave the six out. Right? then yes, you have taken care of EOQ. But you are still very poor on order fulfillment, because you supplied only four orders out of 10, the six are still crying for material. And by the way, yeah, if there is a shortage situation, then those six could be losing sales. Yeah, and I don’t know if those six are bigger retailers or exactly we don’t know. So, therefore, you start applying all these things about you know, which is a bigger customer, which is a more well paying customer, where it is more cost effective for me to pay and then you start bringing all those things, which by the way, min, max never prescribes okay. So there is an absence of a priority or a guiding mechanism in min max. Right. Okay. And if we if we solve these three problems, then we will arrive at at the correct solution as per min max, which would also be the correct solution as per me, which we will discuss in the next episode. Wonderful. Thank you so much Puneet. This was great. And I think we understand the problem. And I’m sure the listeners are going to understand the problem as well quite in detail. If anyone has any questions about the problem, per se, you can write to us, and the details are given in the links. And we can share with you more details on that. Great. Yep, thanks Shubham. And everybody remember McDonald’s, MTS or MTO. Please come back with the answers. Thank you. |
| Shubham Agarwal : | All right, Sure |
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