How to Reduce Supply Chain Costs and Risks to Boost Profits

The topic of June 2012 for Executive Study Group seminar entitled “How to Reduce Supply Chain Costs and Risks to Boost Profits”, which organized by An Executive Study Group under the Chinese University of Hong Kong (CUHK) and the Hong Kong Science and Technology Parks Corp (HKSTPC), was held on 8 June 2012.

Dr. Mark Lee's talk included “Challenges of Supply Chain Uncertainty”, “Law of Variability”, “Bullwhip Effect”, “Sales and Operation Planning (S&OP)” and “Group Discussion”.

In the beginning, Dr. Lee raised the problem of excess inventories in different industries such as Li Ning, Nokia and Acer. Then he quoted Mr. Gianpaolo Callioni (Director of Supply Chain Strategy and Planning, HP) statement, indicating that the excess inventory cost equaled the total operating margin of HP PC business.

Then Dr. Lee mentioned the four industry challenges below:
i) Short Product Lifecycle
ii) Short Lead-time
iii) Unstable Demand and Supply Conditions
iv) Frequent Order with Small Sizes

Dr. Mark Lee introduced Prof. Wallace Hopp (University of Michigan) who mentioned the Law of Variability in his famous book named "Factory Physics". It defined that increasing variability always degrades the performance of a production system. Supplier deliveries, Manufacturing processing time and customer demand were source of variability that impacted on cycle time, utilization, service level, quality and inventory.

The trade-off between variability and buffer was introduced by Dr. Lee through balance diagram. It indicated that any change of supply and/or demand would affected / compensated among Time, Inventory and Capacity.

The second topic was Bullwhip Effect. The P&G - Pampers variation was very different between retailer (WAL*MART) and raw material supplier (3M). It caused negative loop of forecasting.

Bullwhip Effect was proposed by Prof. Hau L. Lee (Stanford University). It described the order variability is amplified as it moves up the supply chain from end-consumers through distribution and manufacturing to raw material suppliers (e.g. Wal-Mart to 3M).

It was suggested to share information in the supply chain to reduce such variation. It involved Vendor Managed Inventory (VMI), Demand Management, Order and Logistics Management.

The last skill was Sales and Operation Planning (S&OP). Dr. Lee said it needed to align among departments. But he observed that company usually was lack of medium-term planning alignment.

Therefore, good and regular communication could reduce the bullwhip effect.

After effective alignment, each department would dance with same rhythm.

At the end, Dr. Lee showed the balance which was ultimate goal to manage variability.

After that talk, we had an exercise to find out two current biggest challenges and one the least challenge to variability for discussion.

Reference:

The Centre for Logistics Technologies and Supply Chain Optimization, CUHK: http://www.logitsco.cuhk.edu.hk/  

HKSTP - www.hkstp.org