Clock-Speed Mismatches in the Modern Supply Chain

I think just about everyone would agree that the pace of business is accelerating, and that supply chain organizations are expected to be more nimble and responsive; yet, many of the things that we do, collectively, in the supply chain appear to be at odds with this expectation. Many years ago, I started thinking about the cadence, or clock-speed, of different parts of the supply chain (a concept that was popularized in Professor Charles Fine's excellent book, Clock-Speed: Winning Industry Control in the Age of Temporary Advantage) with the idea that different parts of the supply chain operate with different cadences, or at different inherent clock-speeds.

This is not necessarily a new concept, as manufacturers have long recognized that fundamentally the demand side of their supply chain operates at a much faster rate than the supply side, thus the use of buffer inventory to synchronize these rate mismatches. Despite the use of buffer inventory, this mismatch continues to drive a multitude of problems. As demand cycles continue to accelerate, for example, and supply lines get longer and longer, the ability to use inventory as an effective buffer diminishes. Indeed, I have had more than a few conversations with manufacturers this year who lament the 'quality' of their inventory. They have the right absolute level -- so the CFO is happy -- but have a much more difficult time getting the quality right given the growing demand volatility across many business segments: with service levels as a frequent casualty!

Certainly there are newer tools in the marketplace that work very well to help manufacturers optimize their inventory, but at the end of the day any 'plan' is going run afoul of market volatility and fall victim to 'forecast error.' Beyond a certain point, the only practical way to better meet demand side service level obligations is to find ways to be more responsive to both predictable and unpredictable variability; and finding ways to better align the clock speed of supply with the clock speed of demand will prove, we believe, to be one approach to becoming more responsive as a supply chain.

At the same time, somewhat paradoxically, while IT tools can help to manage these clock-speed mismatches, they also have an inherent mismatch themselves. Namely, the acquisition of these capabilities, whether measured in months or years, is unable to keep up with the rapid requirements of the supply chain -- and indeed in many cases the overall business itself.

In Figure 1, we illustrate quite simply how the cadence mismatches between the supply side of the supply chain, the demand side of the supply chain, and IT are out of step, and can drive business issues such as poor quality inventory, product 'out-of-stocks' and declining service levels, and low utilization/usefulness of IT tools.

IGURE 1

Cadence Mismatches in the Supply Chain and IT

Source: IDC Manufacturing Insights, 2011

I don't want to suggest that cadence, or clock speed mismatches must always create business discontinuities, clearly that is not the case. The point of this discussion is that as business cycles shorten, we need to find better ways of managing interactions across the Supply Chain, and with IT.

Perhaps the best example in today's supply chains is the tendency for manufacturers to accept stretching their lead-times for products as an acceptable trade-off for, mostly, the perception of lower sourcing costs. In the IDC Manufacturing Insights Top 10 Supply Chain predictions for 2011, we talked extensively about the need for companies to look at lead-times through a more comprehensive lens, and in prior research we've presented a concept we call "profitable proximity sourcing," the notion that companies should design and implement their supply networks based on a combination of cost, lead time, and the location of demand. In some ways, it heralds a return to the 'make it where you sell it' principle of supply network design.

One size most definitely does not fit all, and products may have different inherent cadences, and thus varied priorities. For example, some products that have a 'fashion' element to them, where the clock speed is high, may benefit from local rather than longer-distance (and perhaps lower-cost) production in an emerging region; whereas labor-intensive, lower clock speed products will benefit more from low-cost country sourcing than they will short lead-times. Regardless, we are seeing the beginnings of a new focus on improving service levels and on the "costs" inherent in long lead times. Although it will vary by product segment, as we have suggested, we do expect to see companies actively looking to shorten lead times through a more balanced approach to global sourcing as a way to better align the clock speed of supply with that of demand, and rely less on large buffer inventories that typically perform poorly.

At IDC Manufacturing Insights, we expect to see more and more manufacturing companies recognize the need for speed, and particularly the imperative to address these clock-speed mismatches, wherever they may exist. Indeed, it is our opinion that this will drive a significant amount of technology investment over the next 3 to 5 years.

Simon Ellis currently leads the supply chain strategies practice area at IDC Manufacturing Insights, one of IDC's industry business units that address the current market gap by providing fact-based research and analysis on best practices and the use of information technology to assist clients in improving their capabilities in key process areas.