PHYSICS OF A CUSTOMER-CENTRIC SUPPLY CHAIN

The supply chain strategy shift from business cost efficiency to customer purchase location flexibility is similar to the Copernican Revolution. Many companies are becoming customer-centric and putting the customer’s experience at the center of business objectives.

Nicolaus Copernicus’ Revolution was the creation of a heliocentric model where the sun—instead of the earth—is the center of the universe. Like Copernicus, supply chain managers today need to overcome the perception of financial heresy in the business world by supporting a transportation cost increase that would maximize margins.

Consider the financial implications and distribution options to satisfy omni-channel demands. Through sophisticated programs such as export distribution centers and direct-to-store services, we have seen companies improve product velocity by seven to 14 days, reduce supply chain operating costs by 15 percent, and cut carbon emissions by 15 to 20 percent.

Do the Math

The velocity of products moving through the supply chain and being available when and where a customer wants to purchase them is a combination of lead time, safety stock policy, and demand variability. In many respects, the math to calculate the velocity is easy; it’s the demand variability input that holds much of the complexity. In many industries, we are challenged to design and execute a supply chain that is agile enough to respond to demand while being cost efficient.

An agile supply chain is analagous to a ball rolling downhill. The ball has both kinetic and potential energy until it hits the bottom with an impact. Interestingly, kinetic energy increases while potential energy decreases as the ball gets closer to impact.

Similarly, products have the highest potential for business impact at the beginning of the supply chain. At this point, goods can be configured, labeled, or packed based on customer requirements. If you can delay flowing goods through the supply chain until demand is known, and design a faster speed-to-market model, you minimize waste and maximize the margin impact.

A less tangible factor is friction caused by conflicting internal objectives across multiple business stakeholders. Friction slows the speed at which the ball rolls down a hill. A merchant or production planning group usually plans when and where goods are needed. Their objectives gravitate toward product availability and flexibility to allocate goods as close to final use as possible; whereas, other stakeholders’ objectives hinge on cost efficiency. Friction is a crucial element to consider when deciding the optimal distribution model.

Maximizing Impact

Many companies design and implement sophisticated supply chain programs. The spectrum of distribution options to enable these programs spans from export distribution centers at origin, multi-country consolidation, merges in transit, destination crossdocks, import distribution centers, and distribution center bypass. These distribution options are like points on the hill where the ball is rolling. Understanding the appropriate business KPIs to focus on will identify the best distribution option to use for maximum impact.

The customer-centric calculus required to satisfy customer demand, while managing the supply chain efficiently, needs to include the continuously changing supply chain environment that products must move through—from point of creation to point of consumption.

As the new theorem states, why hold inventory when you can flow it?

This article was previously published in Inbound Logistics