Flostock News #7: Five lessons for Supply Chains

 

5 Lessons for Supply Chains from the Financial Crisis

Five lessons

In October McKinsey (a consultancy) published an interesting article in the Supply Chain Management Review describing best practices in the crisis, with as first reference our publication about the Lehman Wave. The  5 lessons are: Understanding True Demand, Monitoring and Safeguarding SupplyCreating Flexible, Breathing Supply Chains, Aligning Inventories to Free Up cash and Preparing for the Upswing.The article was written by Kai Hoberg from Kühne Logistics University and Knut Alicke from McKinsey. The authors describe how “Top Companies have endeavored to answer these types of questions”, and how several companies even (so those companies are more than “Top”)  developed  “more advanced economic models to analyze the effects of early indicators on the world economy”. Sounds good. There is a growing number of citations involving this publication and we are very proud of that. For a review see the Flostock website.

Every company should know its end markets

Know where your products are going

Every company should follow its end markets, because in the medium term the consumption in the end market determines your business much more than all your marketing and sales effort combined. If you multiply the indexed and extrapolated end market with a bit of seasonality or with your monthly  sales pattern, it should not be too difficult to get a better forecast than what your own sales force has been producing. 

The next step is than a Flostock project, which will do the same and a lot more. Good sources of end market information include Eurostat (Construction, Retail, Food, Industrial Production, White Goods, etc, etc), the US Bureau of Census, Euroconstruct, ACEA (for automotive),  and of course commercial sources like IHS and Markit.  For every branch there is a branch organization, and one of the things they do is gather and publish the turnover. Less relevant sources for demand forecasting are sentiment indicators like the PMI.  One could wonder how any company can survive without following its end markets. 

 

Fleets buffer, according to Flostock’s 7th Law.

Fleets buffel.

 We defined a fleet as a stock of any equipment that is used for a longer period, and that includes machinery, houses, vehicles, cloths, tires, phones, tooth brushes, etc. : anything that is used but not consumed.  The 7th Law says that Fleets act as buffer between flows. In fact, Flostock believes that the buffering effect of Fleets is the main reason we have economic cycles (together with the 10th Law that will be explained in, uh, February).  The problem is that most people don’t look at Fleets as stock, and not as buffer.  Most people have a linear view of the world and consider fleets inert, that means not influencing the flows. One example is that the massive introduction of winter tires has maybe doubled the Fleet of tires in use, but increased the flow (=sales) of tires only temporary. The full list of Laws published so far is available on the Flostock website.

What is System Dynamics?

Stock & Flow in System Dynamics

System Dynamics can be described as an approach to understanding the behavior of complex systems over time, dealing with internal feedback loops and time delays, with stocks and flows. Your business is not just flows like production and sales, but also stocks, and many more different stocks than just your physical inventory. Every stock has its own optimal setting and thus its own feedback loop with delay. Examples of stocks are the forecast, the pipeline of raw materials coming in, production capacity, the work force and the sales backlog. All stocks give inertia because they buffer, and sometimes stocks create un-expected volatility. It is when stocks are combined with delays that it becomes impossible to predict the outcome by just an excel spread sheet: the help of System Dynamics thinking is needed.

System Dynamics was developed in the 60's at MIT in Boston  and has recently enjoyed a strong growth in popularity thanks to improvements in easy-to-use software. In fact, every manager should be able to do some System Thinking. A good introduction is the book by Sterman Flostock uses System Dynamics to build models of the Supply Chain, quantifying the interaction of variables, generating insights in the chain and thereby forecasting demand.