Why Magical Ideas Are More Appealing than Standard Supply Planning

Executive Summary

• Magical thinking permeates supply planning over implementing the fundamentals.
• We explain why this is the case.

Introduction to Magical Ideas in Supply Planning

Several magical ideas are 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. 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 revised within lead time — which does no one any good. Demand sensing is equivalent to changing one’s bet at the halftime of the SuperBowl. Indeed, 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 reiterating involved safety stock formulas, the question needs to be asked: “why.”

I believe the answer lies 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 a 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 low 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 the 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 the supply chain for a moment, we can see several consistencies regarding non-scientific thinking.

• Around 1/2 of the general US population believes they have a personal angel. This belief diminishes with 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 careers 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.

Conclusion

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.

References

https://news.gallup.com/poll/207119/half-concerned-global-warming-believers.aspx