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An Introduction to Supply Chain Management- Part 4


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In this part of our ‘Introduction to Supply Chain Management', we will considering the risks associated with forecasting stock levels. In order to understand this we will be evaluating the risks using the following three considerations: the forecast, the demand data and the understanding that forecasts are skewed by previous events of the Supply Chain.

When a company runs out of stock, it can result in very expensive consequences. However, when considering this advice, it is essential to remember to be cautious in your approach to purchasing stock and to err on the side of caution with regards to having too many of an item. Of course, there are numerous issues which regards to this, how much stock is too much and stock and how can you be sure that you do not leave yourself at risk of being devoid of stock completely? Of course, the best way to evaluate this is to evaluate the risk of the downside. If you are putting together a sub assembly for a future order and the shortage requires you to expedite a packet of items from the nearby warehouse to the line – for a total cost of £35.00 – then you certainly would not make sure all eight stations (for example) had an extra £100 worth of parts sitting nearby just in case. However, if the same stock out meant a £100,000 penalty, then the additional £800.00 insurance costs (eight lines needing an additional £100 worth of parts) might prove to be excellent value. Of course, this can often appear to be common sense but what is less obvious is most productive way to assess the probability of the stock out or shortage and a find a level of confidence that balances the risk. This requires us to consider both sides of the equation and study the forecast data- this displays how much of an item is anticipated as being needed and any mitigating future factors such as an increase or decrease in orders. Secondly, we need to consider the historical data, which details how quickly the stock is being used and how closely the actual usage matches the usage which has been forecast. It is also imperative to consider that once forecasters have experienced misfortune then they are much more likely to be overly cautious in the future. In order to illustrate this example we can consider and examine past weather forecasts. There has been occasions in the past where a weather forecaster has made predictions of light snow only to see a blizzard arrive, causing great embarrassment and possibly enough criticism to lose their job. There is evidently, far less consequence to predicting an abundance of snow, therefore forecasts will always be skewed upwards. A predicted one to three inch snowfall becomes one to nine inches. This allows the weather forecaster the chance to arrive at work the next day not expecting to face dire consequences. This analogy can appear valueless to those of us who are watching but can be used to parallel those who forecast and acquire parts and materials. Fortunately, a supply chain is far more reliable than weather, so long the forecast data is compared to the pull data in an accurate manner.

When you are considering implementing any changes- whether it is an upgrade, a new technology, or even an elimination of a step in the process- we must keep in mind that people, not technology or spreadsheets, make up the backbone in any supply chain. It is important to remember that unlike machines, people require motivation to function at their best. It is important to remember that there is no proven or definitive method, nor is there a one time fix. Motivation is always a moving target and additionally, morale rises and falls in unpredictable ways, for unpredictable reasons. Before I provide any advice, let's start with a basic example: on one assembly line, we noticed that operators were hoarding parts, which was costing the company money, affecting their ability to predict usage and ultimately production. We identified and collected the hoarded parts and implemented a more controlled and traceable flow to each work station. We then waited to see the increase in productivity, however this did not come. It seemed that each time the line workers saw a decrease in the number of parts coming to their station, they also knew that redundancies and cutbacks would soon follow. While the plant had a record number of orders, the line workers could only judge the amount of future work by the parts they had near their stations. The more parts they had, the less they were afraid of losing their jobs. The fewer the parts, the higher the perceived risk to their job securities. The more they were afraid of job losses, the slower they worked to help stave off the day when they would have nothing to do. So, a all- hands on meeting was called and the entire situation was clearly outlined. The operations manager explained that the increased efficiencies- leading to a more controlled number of parts to each station- were due to the higher levels of orders. He then showed the stocks of open orders to make his point. After that meeting, an expected increase in productivity was witnessed. It is essential to consider two important factors, the more clearly and transparent the process is outlined to every member of the team, the more they can see how their part in the overall process is critical. Secondly, people are the most important element of the supply chain and their efforts should never be taken for granted.

To conclude the fourth part of our Introduction to Supply Chain Management, I would like to discuss one of the classic examples of negative motivation: buying more stock from suppliers with poor delivery histories. The reason for this very clear, to buffer yourself against their unreliable supply you add more stock, thus rewarding the supplier's poor performance with large orders. Conversely, the good suppliers are punished for their reliable service with smaller orders, shorter lead times and most likely, smaller profits. Eventually, you believe, this will come back to have a negative effect on the bad supplier. However, in the meantime, the wrong message is being sent out to your supplier base. With all of this considered, this is one of the main reasons consignment warehousing should be considered. While there is certainly a cash flow benefit for the procurer, there is possibly a larger benefit: it corrects this issue of motivation and allows good suppliers to beat the bad supplier out of the supply chain.

Waer Systems are inventory management specialists and have over a decades experience in providing businesses with Supply Chain Management software and assisting them in developing the most effective supply chain management solutions .


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