Thought Leaders II
What Makes Supply Chains More Profitable?

With advances in information technology, the great dream has been a supply chain like the human nervous system that can translate the warm touch of a customer at the fingertip into a series of reactions throughout the system to deliver a "real-time" response. But reality often gets in the way, introducing hiccups and spasms. As T.S. Eliot writes, "between the idea and the reality, between the motion and the act, falls the shadow."

"The big challenge for retailers is achieving what they call the four ‘rights' — delivering the right product in the right place at the right time and in the right quantity — and they are failing miserably," said Marshall Fisher, Wharton Professor of Operations and Information Management and academic director of Wharton's Supply Chain Management: Creating Competitive Advantage program. Companies suffer from stockouts or excess inventory that cost millions of dollars. "Retailers struggle with matching supply with demand. For example, department stores routinely end the season with huge unsold inventories, with the result that department store markdowns have grown from 8% of sales in 1970 to over 30% currently. Yet at the same time, surveys and analysis of data both show that something like a third of the consumers entering a store are looking for a specific item but fail to buy because they can't find it."

The benefits of fixing these problems are enormous. Tighter systems have allowed companies such as Wal-Mart to have suppliers manage inventory or Dell to rapidly build its personal computer business using just-in-time inventory. But fashion retailers still have supply chain inefficiencies such as excess inventory or stockouts that Fisher estimates cost as much as 10 percent of revenue in an industry with margins of just 2 or 3 percent.

The promise of tight supply chain integration led to the rapid rise of companies providing supply chain management software, a sector that grew to a $4.5 billion market by 2000, led by firms such as i2. Like all dreams, it was followed by a period of sobering disillusionment, fueled by the need for costly and complex customization, the technology slump, and public criticism. In February 2001, Nike blamed troubled supply chain implementation for inventory problems that caused it to miss forecasts. Cisco, which had installed a variety of sophisticated supply chain management software, still found itself in 2001 with an embarrassing $2.25 billion in excess inventory as a result of inflated forecasts of demand.

Strategies for Supply Chain Success

How can companies continue to improve their supply chain performance? Among the insights from research by Fisher and colleagues (see references below):

  • Avoid garbage in, garbage out: The effectiveness of the supply chain is only as good as the data going into the system, and most systems suffer severely from misrecording returns, assigning the wrong SKUs, or other data errors. Fisher points out that companies that audit data accuracy have the most effective supply chains. His research on national and local retailers found that stockouts (running out of popular items) were 90 percent from data inaccuracy and only 10 percent due to prediction errors. Companies that apply Six Sigma or total quality management programs to this problem can significantly improve data accuracy.

  • Go beyond off-the-shelf solutions: In a study of retailers, Fisher found that companies with homegrown IT solutions had more efficient supply chains. This is because the technology was aligned more closely with their own business strategies.

  • Tailor your supply chain to your offering: Different types of product or service offerings require different supply chains. Fisher distinguishes between functional products such as light bulbs and toothpaste, with longer life times and more predictable demands, versus innovative products such as fashion goods. The latter require a much more flexible supply chain.

  • Recognize the complexity of systems: Systems are based on complex interactions among operations, marketing, and other parts of the business. A classic case: In the mid-1990s, Volvo noticed it had a surplus of green cars that were not moving off lots. Its marketers offered all kinds of incentives, and the cars started to sell briskly. Manufacturing didn't know about the promotions and took it as a sign of demand, so it increased production of the green cars. Apparel makers chasing lower costs moved production to Asia but found the long supply chain made them slower in responding to demand for certain styles. There also are bullwhips of demand because of inflated forecasting followed by reactions to excess inventory.

  • Don't forget about people: In general, companies have over-relied on technology to solve supply chain problems. Often humans are smarter and more efficient than machines, as Delta Airlines found when it combined a centralized procurement web site with a team of talented employees who review the requests.

  • Focus on continuous learning: Staples identifies supply chain problems through a "zero balance walk," in which employees search 20 percent of the store daily for stocked-out SKUs. The reasons for the stock-outs are then investigated so systems can be improved.


Recommended Reading:
Marshall L. Fisher and Kumar Rajaram, "Accurate Testing of Retail Fashion Merchandise: Methodology and Application," Marketing Science No. 3, Summer 2000

Marshall L. Fisher, Ananth Raman, and Anna Sheen McClelland, "Rocket Science Retailing Is Almost Here — Are You Ready?" Harvard Business Review, July-August 2000 (Reprint R00404)

Marshall L. Fisher, "What Is the Right Supply Chain for Your Products?" Harvard Business Review, March-April 1997 (Reprint 97205)

    

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