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The idea behind the term Supply Chain Management is that the different companies along the supply chains could make much more money (or whatever is their goal) if they closely collaborate and synchronize the efforts along the chain as if it is one system. In other words, adopting the holistic approach means a lot for the supply chain. The Theory of Constraints (TOC) as a holistic management philosophy certainly is in full agreement. However, there are several obstacles for this main idea to become true:

1. Every company within the supply chain collaboration needs to employ the holistic idea within its own operations. It would be absurd to require a systemic view from an

Figure 6.6 Supply Chain Scorecard. (From Supply Chain Council, copyright 2003. With permission.)

Level 1 Performance Metrics Customer-Facing Internal-

Facing Performance Attribute Reliability Responsiveness Flexibility Cost Assets

Delivery performance Fill rate Perfect order fulfillment Order fulfillment lead time Supply-chain response time Production flexibility Supply chain management cost Cost of goods sold Value-added productivity Warranty cost or returns

processing cost

Cash-to-cash cycle time Inventory days of supply Asset turns

organization that does not recognize the importance of the systemic view for its own internal operations.

2. Every company in the supply chain must profit from the collaboration. If some of the links in the supply chain make more and some make less, the collaboration will stop to function after some time.

3. Every link in the chain needs also to realize that a sale is truly a sale only when the chain has sold to the end customer. When a company in the chain has sold certain items to the next link and if that link fails to push those items further into the chain, then no additional sale of that item would be generated. The same happens when the items get stuck in a higher-level link in the supply chain.

The current business rules between adjacent links in the supply chain dictate that whenever a company ships products ordered by the next link it should be paid for that. This normal business rule contradicts the above realization that a sale is a sale if and only if the chain has sold to a customer. More importantly, this common business rule almost forces companies to behave in a way that is dysfunctional to the supply chain.

Suppose you are a manufacturer of components sold through a supply chain in which you participate. You realize that in order for you to sell more, you need better information on the market for the end-products of the chain. Those end-products contain your components. So, with the collaborative help of your immediate client, the next link in the chain, you have an access to the actual sales of the end products. You suddenly notice a clear shift in the sales from end-product P100 to P120. This change of products means different components. What should you do? The only action that you can take is to convince your immediate client that this shift is not incidental and hence the client should buy more components for the P120 product and reduce the orders for P100. However, if the people at your client company have different ideas regarding the trend in the end- products then you have nothing to do. You will continue to sell the components for P100 until that company is stuck with too much stock. By then it is hoped that it will switch to P120. You might have lost sales because of the slow reaction to the market trend, but what do you do?

Suppose also that your regular lead-time is 4 weeks. Certainly that is too slow for a long supply chain. Would you listen to those who tell you how much more business the chain can do if everyone cuts the lead time to one fourth of the current lead-time? Your client now orders based on 4 weeks of forecasted sales (for its link). Cutting the lead-time to 1 week would cause your client to make fewer mistakes in asking for components that are not in urgent need. In most cases the immediate result of a link cutting its lead-time from 4 weeks to merely 1 week is less sales in the short term. Now, how strong do you believe that in the long term you will sell more? How strong do you believe that all the other links would do the same? You are aware, of course, that only when the total lead- time of the chain as a whole is significantly reduced would the chain experience more sales and less excess inventory. The above description is not an argument against collaboration in the supply chain. The point is that for the supply chain to truly make more, the business rules need to change!

The TOC vision of the new business rules are that the participants in the supply chain get paid immediately following the sale to the end customers. The natural objection is that the further you are from the selling point, the more investment you have in inventory.

Your cash flow would be very slow if you were at the earliest phases of the chain. That is quite right. The proposed vision can be materialized only if that inventory will be very small throughout the chain. Payment terms are usually anything from 30 to 90 days. If the proposed solution has a chance to be effective, the overall inventory in the system should be no more than 30 days.

If this possible the general approach of TOC to the supply chain is similar to JIT. Each manufacturer in the supply chain would manage its own finished goods inventory at the site of the next link. Stock levels would be very frequently replenished according to the daily consumption.

How does the whole supply chain function? Every day the selling links report what was sold during the day. Certainly a very good real-time information system is required to ensure reliable reporting of each sale. The sale triggers two types of processes. One process is the calculation of the payments to each link collaborating in the supply chain. The other process triggers immediate replenishment to the selling points. The replenishment triggers a whole move of replenishment throughout the chain. This ensures that each link is properly adjusted to the actual sales, not to any mid to long-term forecast.

The advantages are huge. The selling links would be able to think much more widely on how they can improve sales without worrying about not being replenished. Inventory levels would be much lower than they are today and the manufacturers would feel the real market demand and not a distorted demand impacted by the bullwhip effect. The TOC production planning techniques, especially for make-to-stock, and controls by Buffer Management as applied to distribution are key elements in the TOC vision for Supply Chain Management.

Other key elements are the TOC performance measurements. Both throughput dollar days (TDDs) and inventory dollar days (IDDs), explained in Chapter 11, are not just relevant but absolutely necessary for maintaining the trust along the supply chains. The TDD as explained for distribution networks provides focus for suppliers. The role of the IDD is even more significant. Supposed the manufacturer has invested in inventory and gets paid only when the selling point sells. This means that then calculating the IDD of its inventory through the downstream links is mandatory to validate that the inventory truly moves in acceptable pace.

One important and general insight: The role of ERP/information technology (IT) in Supply Chain Management is certainly necessary, but very far from being sufficient. Significant efforts were invested in developing collaborative IT support in recent years. However, collaboration is still a problematic paradigm in business. TOC can be very helpful in defining and supporting the right business rules for collaboration between companies, so the win-win culture would eventually be considered common sense business. For that you need good rules and good performance measurements to make it all work as it should. And, yes, eventually we all will need good technology to support the new business vision.

SUMMARY

Most of this book is internally focused within the enterprise in order to get the internal house in order. However, the big return on investment and the future revenue and profit growth come from integrating the enterprise to its supply chain. According to Jan Hammond from Harvard University, School of Business, “In every implementation…of these types of partnerships and coordinating practices within the supply chain, sales have gone way up and markdowns have gone way down.” While product is moving forward from the supplier to the customer, information is needed backward to provide adequate time for planning and replanning. The term supply chain is really quite descriptive for the concept. The integration of the supply chain is an area where the speed and accessibility of technology will make the biggest impact. This technology can include EDI, E- commerce, the Internet, or a variety of other possibilities. However, without the accurate data feeding this technology and robust business processes supporting the strategy, the risk is that the same bad information will be the result—only now more quickly. The experts are claiming that in the future it will no longer be single companies competing against each other. The individual company must position itself into a competitive supply chain and the different supply chains will compete against each other. Others would say the future is here today. Are you ready?