Monday, December 7, 2009

Managing the Fickle: The True Nature of Supply Chains

The essential nature of the supply chains is to master the change, the variable, the fickle. Quoting the compact oxford dictionary:

variable

adjective 1 not consistent or having a fixed pattern; liable to vary. 2 able to be changed or adapted. 3 Mathematics (of a quantity) able to assume different numerical values.

noun 1 a variable element, feature, or quantity. 2 Astronomy a star whose brightness changes, either regularly or irregularly. 3 (variables) the region of light, variable winds to the north of the NE trade winds or (in the southern hemisphere) between the SE trade winds and the westerlies.

— DERIVATIVES variability noun variably adverb.

Variability or statistical variability or dispersion is the spread of a variable. Supply chains have a lot of variables. And supply chain management is essentially the management of the variability of these variables while maintaining predictably stable business operations of a firm. There are three main variables to manage: demand, supply, and lead-times. These are the three independently changing variables that supply chain managers cannot directly control. All supply chain processes are designed to manage these three variables with the objective of optimizing stability of operations, reducing the cost of changes (or volatility), and increasing the efficiency of asset/resource utilization in spite of the changes.

How do supply chains manage variability? Through buffers. In the supply chain context, the buffers provide the ability to absorb the shocks in the supply chain due to changes in these variables. Again, there are three types of buffers that a supply chain can create. These are inventory, resource, and time. Creating and maintaining these buffers costs significant amount of capital, but provides hedging against the variables of demand, supply and lead-time.

An Optimized Supply Chain

Supply chain management, then, essentially means managing the variability in demand, supply, and lead-time through creation and maintenance of buffers using inventory, resource, and time. Supply chain optimization is the science of optimizing the costs of maintaining these buffers for the best supply chain performance that could mean minimizing the volatility or cost operations, or maximizing the utilization of assets or resources.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

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