Having data is one thing. Making sense of it is another thing entirely. Without the second component, a supply chain management system is even worse than a guessing game because companies are forced into making bad assumptions.
That was the message Stanford University professor Hau Lee delivered to attendees in his keynote at the Institute of Supply Management annual conference this week. Lee, widely quoted since his research on the “bullwhip effect” was published 15 years ago, told the conference that many businesses use a “sense and response” approach to supply chain management.
‘Sense and Response’ Doesn’t Work
However, Lee said, they really need to get smarter. That means not making assumptions about customers, because the customers’ world might have changed – or be in the process of changing. The key is awareness.
“If you ‘sense’ without thinking exactly what the information meant, or understand what is behind the signals, you could interpret them wrongly. So I think we need to do ‘smart sensing’,” he said.
According to supplymanagement.com, Lee gave several examples of companies potentially failing to “sense,” or distorting raw data. One example: A spike in the sale of Spam canned meat. If you merely acted on the data, you might fill your store shelves with Spam. But what if you understood the reason for the spike was temporal: An earthquake or other crisis that would soon pass.
Another example Lee gave: A retailer who failed to order enough mosquito bite ointment one summer. The retailer said it couldn’t have predicted a spike in demand. The supplier of that ointment, however, understood the trends, if anyone had asked.
Better Decisions Through Collaboration
Avoiding such bad decisions means using technology to foster better collaboration with suppliers up the supply chain, Lee said.
“A large number of users say ‘I cannot respond fast enough.’ You cannot respond fast enough because the suppliers are not fast enough. The suppliers are not as flexible,” Lee said. “That requires a two-way collaboration of information. Suppliers have to give us more information about their capacity, about inventory. We have to give more advance notice of our forecast sharing. So I think that the importance is to be able to share two-way and not one-way.”
‘Hyper-Agility’ Can Defeat the Bullwhip Effect
Lee said it’s not enough anymore for companies to be “agile:” “If you want to be ahead of the competition, ahead of everyone else, you need hyper-agility.”
Lee has been banging the drum for better flow of information for a long time. His “bullwhip effect” research concluded that good context is the chief cause of supply chain distortion. In short, the effect occurs when demand order variability gets amplified from one end of the supply chain to the other, causing tremendous inefficiency.
The antidote, Lee argues, is getting better real-time information and constantly adjusting your reactions accordingly.