Systems before basics to achieve Agile supply chains?

Roger OakdenGlobal Logistics, Logistics Management, Supply Chains & Supply Networks

Balance demand and supply

Systems or people approach.

In consumer fronting organisations it appears that each generation of managers must relearn the basics of customer service, including the customer service culture being displayed daily by senior management undertaking MBWA – management by walking around. It enables them to understand the challenges that staff have in doing their job.

The 2018 Third-Party Logistics Study by Dr John Langley states that in Europe and the US “Shippers and 3PL providers are struggling to adjust to demands in the market place…Among respondents, there was recognition of the importance of both agility and improving services in the last mile and yard”. However, over 40 percent of shipper respondents said they had not made the required changes to improve their agility in the past five years.

The concept of being Agile in a retail distribution situation contains the final delivery, including terms of ‘last mile’ and what Langley calls the ‘last yard’. He states that more than 70 percent of responding shippers and 3PLs recognise its influence on key retailer metrics such as consumer satisfaction and brand loyalty.

Yet, this is not a new realisation. It was extensively discussed in the early 1990s, following publication of the book Moments of Truth by Jan Carlzon. His underlying philosophy concerning serving customers was based on experience of turning around a loss making airline. It relates to customer service in business relationships that have a direct customer interface, such as retail stores, eCommerce sales, banks and entertainment venues (and airlines).

The new term ‘last yard’ has the same meaning as ‘moments of truth’. This relates to the total number of customer orders (experiences) per year multiplied by the number of people representing a business who could have contact with the customer (and unlikely to be managers). For example, in an eCommerce situation, with 10 million orders per year and five front-line contact people, there are 50 million possible ‘moments of truth’. Each ‘moment’ lasts a short amount of time, but this is when a customer’s perception about the business is formed and a decision made concerning a repeat of the buying experience.

In many developed countries, the delivery of parcel packages to homes and offices is often done by people engaged by a shipper or 3PL as a ‘casual hire’ from a labour hire firm or ‘independent contractors’ (any term that does not mean employee). This is the ‘gig’ economy, where the hire person may have to provide their own vehicle and are paid for each delivery, so take all the risks associated with variability of orders and ability to deliver. They are unlikely to be trained, except in how to use the ‘app’ of the shipper or 3PL.

Compare this situation with Carlzon’s four perceived ‘truths’ about people working in a service organisation:

  1. Everyone needs to know and feel they are needed
  2. Everyone wants to be treated as an individual
  3. Give a person the freedom to take responsibility. This releases resources that would otherwise remained concealed
  4. An individual without information cannot take responsibility. A individual who is given information cannot help but take responsibility

Carlzon also identified that managers are conditioned to think of their business as the sum of its physical assets. They rarely identify that paying customers provide the money for paying wages and invoices of the business. Nor that customers’ perception of the business is not the physical assets, but contacts between themselves and representatives of the business (including communications).

A difference between Carlzon’s approach and the most recent survey is that the solution to the challenges of final delivery now appear to lay in implementing more electronic systems, not building people resources. The Langley survey also highlighted this approach concerning Agility in businesses. As noted, although more than 40 percent of shipper respondents had not made the required changes to improve their agility over the past five years, they identified the solution as implementing more systems, such as:

  • enterprise resource planning (ERP);
  • warehouse management systems (WMS);
  • transport management system (TMS) and networks;
  • supply chain visibility tools

Inventory basics for Agile

Not mentioned in the survey results was the basic building block of a business becoming more Agile, which is inventory management (consisting of policy, planning and control). Only when the pattern of inventories in an enterprise is understood can decisions be made about how to best respond to customer and consumer requirements. Defining the pattern (called Inventory Deployment) requires an analysis of where inventories:

  • Should be held, to meet customer service requirements and minimise stock-outs; e.g. enterprise owned and leased premises, customer locations, supplier distribution centres or warehouses and third party managed locations
    • centralised or decentralised locations;
    • finished goods range or assortment held by location
    • customers and demand channels that can be served from each location
    • locations where inventory can be held in a part-finished form (postponement), yet meet customer response time requirements
  • In what form e.g. raw and packaging material; part-finished form (as sub-assemblies or postponement); finished goods
  • For what function e.g.
    • cycle inventory – inventory at the mid-point through the replenishment cycle
    • fluctuation inventory (safety stock, reserve stock or buffer stock)
    • anticipation inventory (built in advance of a peak demand – a product launch, seasonal demand, public and religious holidays, planned maintenance, extended holiday periods or supplies of an item becoming restricted)
    • in-transit inventory
    • hedging inventory as a buffer against anticipated price increases
    • slow and obsolete (SLOB) inventory required by sales

Finished goods inventory is provided from items that are: made to stock, assembled to order or made to order. The selected mode will define decisions concerning the Form and Function of inventory at each node in your ‘core’ supply network. This approach generally applies for businesses selling Consumer Packaged Goods (CPG) – controlled by the ‘use by’ date, or Fast Moving Consumer Goods (FMCG), but can be applicable for organisations further up a supply chain.

The analysis should be anchored by a ‘Cost to Serve’ calculation, to balance customer expectations within each customer segment and the cost of operations, including the cost of back-orders, stock-outs and lost-sales. Although still used, static inventory policies such as ‘weeks of cover’ are not applicable, because they are not responsive to changes in supply chain variability and risk, service level targets or costs.

Whatever new systems and technologies are implemented within individual businesses, people and inventory (in some form) will remain in supply chains and must be managed. Without capable management of the basics, success with systems and technologies will be less assured.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...