A STORY OF AN ORGANIZATION DYSFUNCTIONAL SCM SYSTEM

I have a story to tell and this is based on an organization which I will not reveal the name or location but it should be a good lesson on how to manage a Supply Chain System. We will not be interested the system they use. Irrespective of Lean management or some other conventional system they are using, this is not the real issue at all.....

This company was a small start up with core business in manufacturing and employees count was small with one management employee plus a number of production and warehousing personnel. Business was good and with a small set up and a single manager to make all the decision, thing was easy and decision making was extremely easy. We shall not discuss about if those decisions was effective or efficient for the company as this is not the real part.

However, over the years, business beginning to grow and the owner of this investment realize that to manage a organization which has a few hundred thousand dollar turnover a month and to manage the same set up worth business dealing worth 4 million to 6 million dollar a month is something else. They will need more resources and more employees in management, warehousing, shipping and production plus quality. They also need to be more efficient in handling the business.

The cost incurred to the organization in air freighting material from overseas due to no material in stock cost them a few hundred thousand dollar per year and the overtime cost to manage the order is worth at least in the 7 figures dollar per year. Payment to suppliers was based on invoices not properly verified internally before payment and worst of all planning is non existent for production, shipping and planning,

Soon, the organization decided to introduce a Supply Chain Management system in the organization and for this, they need somebody who will manage this task, hence a Supply Chain Manager came on board.

The first thing this manager did was:-

a) Set up a purchasing policy on purchase, verification of material receipt, warehousing management and supplier selection and review area where cost was not in the organization favor and desire that this will be turn around

b) Required a micro production planning system in order to ensure material are always available in stock for all orders

c) Production meetings on daily basis

d) Review and required demand planning system so that customers orders are able to be forecast and build to stock instead of made to order and this will be an efficient manner of operating to reduce overtime and material stock out when there is a sudden increase of order and this can be anticipated.


Except for (a) and (c), none of the above get done and as happened every year, customers orders started to increase on certain period of the year and material will be late in arrival, employees have to be placed on compulsory overtime and everyone in the organization was stress out.

The SCM Manager was blamed for these and was made to answer all the delayed on shipment and to compensate for this, she has no choice but to increase inventory and add up holding cost.

So a viscous cycle begin...

Even when the product are profitable, however due to overtime need to be perform, higher inventory level been kept (and sometimes the wrong item kept as well) the performance of this company begin to suffer. To add further to injury, recruiting was non performing to replaced employees which resigned and this reduce capacity further and again add up to cost....

What the problem with this organization?

The answer was simple,  beside the SCM system in name, all the others stake holders are non committal or understand  the system and the mentality of running a business was early 20 century style but with 21st century ideas. The is a GAP which need to be closed up.

To most of the employees and management team, when there is an issue with meeting an order, the guns are aim to one direction, i.e. SCM department. In fact they are wrong and correct at the same time but ......

When implementing SCM system, it is not the SCM department alone to carry the burden, and the responsibilities and accountability has to start directly from the very top of the organization and strategic decision to take place and implemented and this later to be developed into the operational (tactical) strategy which all departmental managers has to follow through.

Examples of strategic decision needed will be:-

a) Identify the capacity planning of the total organization and from this, identify the lead time for order with the customers in order not to increase operational cost

b) Identify which order need to to be Made to Stock (M.T.S) and which order has to be Made to Order ( M.T.O)

c) Inventory level of the M.T.S item to be set up. We need to understand here that when setting M.T..S system the driving force for raw material will be the stock of the finished products. With M.T..O system, lead time to customer to be identify and this run in tandem with lead time from supplier and reducing this lead time will be long term objective in many system implementation.

d) In which manner order to supplier to be managed and how delivery to be enforced from suppliers

e) Managing information flow and system efficiency and which Key performance Index need to be review on regular basis. Many companies are asking managers to report KPI for sake of reporting without understanding the true value of the reports and if these report can be independently verified

f) To what extend level of inventory for raw material / semi finished product and finished product to be invested will be also a key policy. Weight of each investment need to be calculated on the return of investment and stock turnover ratio which need to be achieved.

From these decisions, the operational level managers will then have to implement strategy into daily operational tasks.


Bottom line i wish to explain here is that Supply Chain Management is not a problem with supply chain alone but it is a system which need to be anchored to a very strategic decision, i.e. decision on how to run a business.

Closing sales and orders is one decision every one will love to have and hear but frankly managing Supply Chain will ensure if:-

a) the order will be profitable

b) what will be the actual cost of the order and if this cost can be managed in a better way