the five most common fallacies surrounding supply chain management. Some of these are fallacies that have been around a long time and never seem to go away. Others are more recent in origin.
Fallacy 1: Companies win with functional excellence
Avoiding this trap is the core tenant of supply chain management. It is the very reason the profession was created.
Historically, it was thought if you had metrics for core functions – like sourcing, manufacturing, logistics, and sales – and those functional areas performed well on their key performance indicators (KPIs), that the company would be maximizing its performance. But if sourcing buys based on price, which makes them look good, but the quality is bad, manufacturing is hurt in their attempt to do well on their KPIs. In each functional area, we can find things that function would like because their metrics would improve. Unfortunately, the things that improve performance in one area can adversely impact not just other functional areas, but the overall ability of the company to hit its revenue and margin goals.
Everyone that gets a business degree learns this concept. But avoiding this trap is still devilishly hard to do. One functional area – often sales – can be more powerful than other functions. Further, when companies choose to benchmark one functional area’s performance in isolation, they can fall into this trap. Integrated business planning helps to break down these barriers, but many companies still do not engage in this process, and those that do approach it with varying degrees of maturity.
Fallacy 2: Better forecasting leads to lower inventory levels
Demand management optimization solutions do improve forecasts. And these solutions are getting better because of machine learning. Inventory optimization solutions have also gotten better.
But these solutions don’t ALWAYS lower inventory levels. If a company continues to add new products without retiring old ones, increases inbound lead times, adds new sales channels, or promises quicker deliveries and higher service levels, then inventory levels can go up despite these solutions. Further, if you have the bad luck to implement a demand management solution right before a recession, your forecasts will degrade despite these solutions; recessions are difficult to forecast.
But if we are not entering a recession, lead times are held stable, stock keeping unit levels are not increasing, no new channels are added, and service levels remain the same, then these solutions will absolutely lead to lower inventory levels!
Fallacy 3: There is a driver shortage because young people don’t want to do this work
There has been a slew of articles written on the driver shortage recently. Now we are beginning to hear the same thing around warehouse workers. Across a range of industries and nations, these kinds of articles have appeared for hundreds of years. Industry associations generally respond by attempting to allow lower wage workers from other nations to enter the market, or by reducing regulations that impact productivity. In this case, the trucking industry has worked to reduce Hours of Service regulations and the use of ELD devices which make these regulations much more enforceable.
According to Salary.com, the median annual truck driver salary is $42,553 as of March 29, 2018. What if the average salary was $60,000? Would there be a driver shortage? Basic economics tells us there would be an influx of new drivers into the industry. In short, there is not a driver shortage; there is a shortage of drivers willing to work for the prevailing wages.
Wages are going up. The American Trucking Association, a trade group that represents fleet owners, said annual truck-driver salaries rose between 15 percent and 18 percent from 2013 to 2017. Over time (drivers must be trained and certified) this should start reducing the driver shortage.
In many industries, wage increases lead to increased use of automation. In this industry, however, we are probably years away from autonomous trucks.
Fallacy 4: Corporate Social Responsibility initiatives will improve a company’s financial performance
When a company commits to corporate social responsibility (CSR), the company’s supply chain must respond. Manufacturing may try to reduce pollutants and use less clean water, transportation reduce the amount of emissions associated with shipments, and product development create products that will be easier to recycle at the end of the product’s life.
Executives understand that CSR programs may improve profits and revenues. They understand that a CSR program can promote higher sales; that these programs can enhance employee loyalty and attract better personnel to the firm.
Also, sustainability activities may lower costs and improve efficiencies. For example, transportation emissions can be reduced by better routing and more fully filling trucks. The transportation management system that enables this will simultaneously lower the company’s freight spend.
But, younger employees argue that sustainability will improve the bottom line. There is some evidence that more sustainable companies perform better financially. The evidence would be more compelling if it was not produced by CSR action groups. Or if it was replicated by academics.
But not all companies that engage in sustainability will perform better, as much the young might wish this was true. And I admit, I wish it was true as well.
Sustainability matters more to the young, it matters more in wealthy nations, and more to liberals. Further, it matters more for businesses that sell to consumers than to businesses that sell their goods to businesses. These kinds of customers are willing to pay more for sustainable products. But a company that targets poor customers, in third world nations, may get a negative return on investment from their sustainability initiative. This is particularly true if the program does not simultaneously lower operating costs.
Fallacy 5: Blockchain will solve the traceability problem
Blockchain is all the rage. Every week a new startup focused on blockchain for supply chain management seems to pop up. But the technology is not well understood. One explanation, that uses the kind of vocabulary supply chain personnel are familiar with, can be found HERE.
It is widely thought that the best application for blockchain in supply chain management is traceability. Walmart and some of the largest food companies in the world have teamed up to explore how to apply blockchain technology to their food supply chains.
Here is a quote from the journal of Quality Assurance & Food Safety: “By providing a permanent record of transactions which are then grouped in blocks that cannot be altered, blockchain could serve as an alternative to traditional paper tracking and manual inspection systems. Food products can be digitally tracked from farm to table through the digital connection of a food item to its farm origination details, batch number, factory and processing data, expiration date, storage temperature, shipping details, etc., with the information entered into the blockchain along every step of the process.”
There is only one problem with this. Blockchain does not solve the “garbage in, garbage out” problem. We may want to certify, for example, that a consumer is buying grass fed beef. If the first step of the process involves a farmer stating that their beef is grass fed, but this is not true, then the blockchain is providing an indelible record that the beef is grass fed. In short, blockchain does not eliminate the need for certification companies who inspect whether upstream suppliers are really doing what they say they are doing.
This is obvious once stated. But the vocabulary of blockchain is so arcane, and the rhetoric so inflated, it is easy to miss this.