Managing demand and supply at maximum efficiency requires coordination among supply chain stakeholders. Synchronization has a significant effect on performance in every aspect of the chain including manufacturing, procurement, distribution, and customers. Companies that adopt collaborative approach tend to increase visibility across the network, allowing them to minimize variability than those who do not. The lack of collaboration partly due to siloed working culture, creates unwanted interruptions including a bullwhip effect, expediting costs, and ultimately lost sales. Let us find out some of the implications when there is a lack of internal and external supply chain collaboration.
A bullwhip effect is created when a demand shift from the customer creates an increasing swing in inventory as it moves farther up through the supply chain. The bullwhip effect distorts demand data because each stage has its own prediction different from other players within the supply chain. For 100 watches consumer sales a month, a retailer places an order to the wholesaler for 150, then wholesaler to manufacturer for 250, and manufacturer to supplier for 350. We see that the demand data sent to the next stage creates large variances than the actual consumption. It results into exaggerated demand estimates that translates into huge inventory costs becoming matching supply against demand more difficult.
If the retailer’s order increase is due to planned promotion by which the manufacturer is unaware, the producer might assume that it is a permanent demand increase and will place orders to suppliers consequently. Oftentimes, demand data is distorted when one chain relies on the order from the preceding chain without understanding the actual demand. To avoid bullwhip effect, an information sharing and close coordination between stages are effective solution to better manage supply and demand.
The lack of coordination will translate to costs increases in manufacturing, inventory, distribution, and almost every touchpoint of the supply chain. As an outcome of bullwhip effect, warehouses are flooded with excess inventory resulting to unnecessary holding costs. In worst case scenario, the company may be forced to build excess capacity – outsource warehouse, increase labor, etc – which in turn increasing manufacturing cost per unit produced. Because demand variability is high, a manufacturer must hold high inventory level to respond to fluctuations created by bullwhip effect. The inventory would have been lesser if coordination occurred in the supply chain.
Expediting costs are also incurred when the demand growth projection is underestimated before it materializes. Such factors affecting the demand surge must be coordinated to the supplier to avoid last minute premium costs. Lack of coordination on anticipated increase in demand will result to expedited production and shipping.
Synchronization of people, processes, and systems across the supply chain is key to produce real-time data enabling managers to make an informed decision, identify constraints, and up-to-the-minute insights to demand. For example, due to shifting customer patterns across the global market, technology software is playing a pivotal role in capturing a high volume of consumer data the business requires. The collected information laid the foundation for further analysis to produce analytics and insights necessary to power key business decisions. Integrated supply chain companies are gearing towards greater automation by leveraging data to better understand consumer behavior, improve forecast, and respond quickly to customer needs.
However, what would happen when the organization is operating under a fragmented supply chain? first off, a fragmented operation is characterized by the siloed or functional system by which people or processes are broken into groups to achieve their objectives rather than the common vision of the entire organization. As a result, knowledge-sharing and information flow across the enterprise are limited hampering business growth.
Delayed data is one of the major consequences of fragmented supply chains. Instead of feeding information into a single platform to effect real-time data across all process owners, different teams are utilizing different tools such as spreadsheets or legacy system to satisfy their own priorities. Using spreadsheets is not a bad thing as we all use it to automate certain analysis. However, spreadsheets limit businesses to have interactive real-time data in order to gain complete visibility (inventory, demand, supplier risk, etc.) in their supply chain.
Real-time communication means faster and accurate responses to supply chain partners and customer needs.
Poor customer service
This is the end result of the unsynchronized supply chain. No business wants it as everyone is aiming for improved, world-class customer service. But how the lack of coordination results in poor customer service?
We have identified the above-mentioned consequences – bullwhip effect, increase in supply chain costs, and delayed data. Those consequences prevent the business to respond quickly to disruptions and demand leading to ineffective customer service. For example, lack of information sharing across stakeholders create bullwhip effect throughout the supply chain as characterized by unfulfilled orders, missed production schedules, or too much inventory – all these lead to poor customer service.
Every company deserves a high performing supply chain. But it won’t happen until executives change their mindset to realize the importance of integration throughout people, processes, and systems. The coordination of these elements is a fundamental undertaking for innovation, competitive advantage, and growth.