- Magical thinking permeates supply planning over implementing the fundamentals.
- We explain why this is the case.
Introduction to Magical Ideas in Supply Planning
There are several magical ideas which are extremely popular currently in supply chain management. The concept of Lean — which has been popular for some time, and demand sensing, which has recently become quite popular. Both ideas are primarily attractive to executives and have little to do with making supply chain planning work in systems. For instance, there is no setting in any supply chain system that one can activate if a decision maker wants to enable Lean.
Proponents of Lean Supply Chain Management
Proponents of Lean like to propose that one should only reduce inventory on “faith,” and this is due to some combination of stock being inherently evil, and some vague background story of how Toyota follows Lean principles — and therefore it must be good. The truth is that low inventories can only be held, without imposing even greater costs on the rest of the system by having lowered variability in the system (for instance lower procurement lead time variability and lower forecast variability).
If lower variability is achieved, the system will naturally require less inventory. But one cannot put the cart before the horse – which is what most Lean proponents would have companies do.
Why is Lean Magical Thinking
Lean is magical thinking because it provides little evidence — unless one considers unproven anecdotes about Toyota as evidence, and is inherently illogical — relying upon the listener to have a limited and second-hand grasp on supply chain principles. Demand sensing is another magical belief that changes the rules of the game by allowing the forecast to be changed within lead time — which does no one any good. Demand sensing is equivalent to changing one’s bet at the halftime of the SuperBowl. Certainly, it improves forecast accuracy — but only if one accepts the assumption that predictions can be modified when it’s too late to place a bet. Vegas bookmakers require you to solidify your bet before the game starts.
Why Dynamic Safety Stock Is Not Held
While many people attempted to list the standard safety stock formulas, I think what should be discussed is why the dynamic safety stock calculation is not used in companies. Rather than spending more time on reiterating involved safety stock formulas, the question needs to be asked: “why.”
I believe the answer lays with the high forecast error that most companies have. Because most companies have a problem mastering statistical forecasting systems for supply chain management and because they make their demand history as un-forecastable as possible by doing things like not performing historical substitution, not accounting for promotional sales.
It is a highly rare company — like Trader Joe’s, that makes its decisions with an eye towards how it will impact the supply chain. The higher the forecast error, the less likely the company will be willing to carry the safety stock as calculated by the dynamic safety stock formula.
A poor quality forecast increases the safety stock — but does not decrease the necessity to carry the calculated safety stock. This reality is covered in this article. The dynamic safety stock calculator is available at this link. This is a common problem with supply chain planning generally — that excuses are given as to why the standard formulas should not be followed.
The Relationship Between Education and Magical Beliefs
The fact is very few people that work in supply chain either have education in supply chain management or operations research, and this makes them far more susceptible to “magical” ideas. Look at what is emphasized.
- As an example, many more people that work in supply chain management can explain to you what “Lean” versus the difference between make to order, make to stock and assemble to order. There is no “Lean” setting in any system.
- Trendy concepts that have far less important than the real substance of inventory management are overemphasized.
- Companies that cannot master the actual content — are quick to move to trendy concepts. This is true for not only supply planning but demand planning and production planning.
The commonality of Magical Beliefs Outside of Supply Chain
If we step back from supply chain for a moment, we can see a number of consistencies regarding non-scientific thinking.
- Around 1/2 of the general US population believes they have a personal angel. This belief diminishes with the more education as the person has and in particular, the more exposure to science that that person has.
- Around 1/2 of the population does not think global warming is an issue.
Some schools have grown their curriculum to have either minor in supply chain management of majors in the topic. Either these programs are too few (and they must be as accounting and marketing programs are nearly universal in colleges) or the education that students are receiving is ineffective. Of course, a supply chain management degree is not the only level that should provide sufficient background to allow a person to question things like Lean and demand to sense.
For instance operations research is even more widely taught than supply chain management and covers some of the same principles. This is not working. Another major problem is that it is not merely a feature of one’s knowledge. Ideas become trendy, and then it is necessary to move against the notion — when it has taken root at the executive level. Many people have the appropriate training but are more focused on their career than what is true or false. For this reason, plants have been run inefficiently, and reduced supply planning has been employed because it is simply too risky to challenge the status quo. Magical beliefs are appealing because they hold the promise of vast improvements — with little work.
The fact is that the vast majority of supply chains are inefficient and wasteful — and while money has been expended on applications — the performance is not improving very much because improvement requires a lot more than only buying software and hiring a consulting company to implement supply chain software.
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Lean and Reorder Point Planning Book
A Lost Art of Reorder Point Setting?
Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?
Implementing Lean in Software
All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.
Are Reorder Points Too Simple?
Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.
There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.
Rather than “picking a side,” this book shows the advantages and disadvantages of each.
- Understand the Lean Versus the MRP debate.
- How Lean relates to reordering points.
- Understand when to use reorder points.
- When to use reorder points versus MRP.
- The relationship between forecastability and reorder points.
- How to mix Lean/re-order points and MRP to more efficiently perform supply planning.
- Chapter 1: Introduction
- Chapter 2: The Lean versus MRP Debate.
- Chapter 3: Where Supply Planning Fits Within The Supply Plan
- Chapter 4: Reorder Point Planning
- Chapter 5: Lean Planning.
- Chapter 6: Where Lean and Reorder Points are Applicable
- Chapter 7: Determining When to use Lean Versus MRP
- Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning