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Costly Chaos

Nov 18th, 2016
by Ashley Wilcock
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I was speaking with the planning manager at one of our clients recently about a challenge they are working through, related to a massive increase in demand on one part of the business in the short term.

Of course, this type of challenge is not uncommon, or unwelcome, to many businesses but how this one originated reminded me of a particular issue I came across in one of my previous supply chain roles.

 

A business I used to work in was a manufacturer and supplier of disposable paper and other hygiene products. We had customers from healthcare providers to restaurant chains and hotel groups, fuel station companies to schools and universities.

 

It would probably seem likely that other than the activity around holidays for napkins and table dressings, and a reduction in volumes in the summer at the end of the academic year, we would see no really major uplifts or reductions in sales of core products throughout the year. After all, hospitals have a pretty stable number of people washing their hands every day and, in the UK at least, filling station forecourts see a relatively steady volume of business.

 

You might think that in this business the high-level supply planning of the regular products would be relatively simple. It certainly should have been, however it really wasn’t when I first joined the company.

 

In reality we would see intense activity from some customers around period ends when they found themselves creeping up on the invoice levels at which rebates would be triggered. Needless to say they would order the necessary inventory to trigger the rebate, and we would run overtime or even outsource volume to sister plants to meet the demand. Of course, they would then order nothing for weeks on end due to being overstocked while we looked at spot-hire warehousing costs and tried to find somewhere to put the excess inventory we’d found ourselves sat on when the forecast for the next month failed to reflect the reality.

 

At other times we would see distributors running their own promotional activities, which resulted in a flurry of purchasing by their customers that filtered through to us. This again would be followed by periods of massively decreased demand when the distributor’s customers’ warehouses were packed to the rafters with stock they would only shift at the same volume per day as they ever did. And of course the distributor subsequently stopped ordering from us altogether for a period of time.

 

Even worse, due to our resultant overstocking we would sometimes then see commercial people offering deals to the same distributors to encourage them to order more of the stock they couldn’t shift. So we were left in the position of having run overtime in production, making the stock far more expensive to produce, and then having sold it at a lower price than we usually would have after storing it in probably the most expensive warehousing we could find.


On top of all this costly chaos the inevitable bullwhip effect of the multiple forecast and plan changes down the supply chain would add further cost and disruption at each level, including orders being placed at suppliers, then cancelled, then no doubt placed again a few days later. Of course, the bullwhip effect of all these changes being blown through the levels of the supply chain by MRP systems is a whole story of its own. But that’s for another day…

 

I’m sure these examples of commercial activity will seem odd, if not plain foolish, to many people outside the supply chain profession but they’re far from unusual really and, after all, it’s always easy to see the root cause of issues when you have the full picture laid out in front of you.

When each of the activities and issues is happening in real time, and in amongst the myriad other problems supply chain people deal with every day, it doesn’t seem quite so surprising that these poor outcomes arise.

 

Much of the cost and disruption could obviously be avoided by having a properly joined up commercial strategy, better communication and more challenging of other departments’ decisions beforehand, which was exactly how we went on to reduce our susceptibility to these types of issue.

 

Of course, another challenge is always lurking just around the corner but that’s what makes working in supply chain so interesting…

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