Description
Instructions This week you will select a company of your choice and create a diagram of its global/international shipping and receiving operations. Instructions: Read the course materials for this week to include Chapter 10 of the Hugos textbook and the Week 6 lesson. Select a company with global/international shipping and receiving operations using our online library and/or Internet. The 3-4 page paper should include the following: 1. State the purpose and background of the company. 2. Discuss the role(s) of the company within the retail supply chain. Hint: Include a diagram of the retail supply chain. An example is provided on page 20 of the Hugos textbook. 3. Discuss the shipping and receiving operations of the company. Hint: Include a diagram of the operations using a process flow. An example is provided on page 166 of the Hugos textbook. 4. Identify 3 possible problems or issues you see in the company’s operations. 5. Discuss 3 solutions to these problems or issues. Please remember to include a title page, in-text citations, and reference page in APA style. The title page and reference page are not included in the page count.
203
THE
INCREDIBLE
JOURNEY
C O N T I N U E S
OCTOBER 1—PRODUCT MEETS STAFF
In the wee hours of the morning, a CVS truck appears at McGee’s store with his order.
McGee unloads the tote in the back room and, voilà, there is the bottle of Listerine that
originated in the Australian eucalyptus grove back in May. He displays it on the shelf
according to the dictates of the store presentation managers at Woonsocket who
determine ideal store layouts and product placement.
OCTOBER 2—THE PURCHASE
Now for the last step of our journey—the customer. A man walks into McGee’s store to
pick up aftershave and a box of chocolates for the date he’s planned for the evening. On
impulse, he decides to buy a bottle of Listerine. His purchase is recorded by the cash register
and sent to E3 and Category Map that night for future forecasting. In a few days, McGee
will place an order for a replacement bottle of Listerine. And so begins the cycle again.
CVS management frowns upon stores keeping extra inventory in the back room
because it ties up capital. So instead of having each store manager project demand,
once a year, category managers at headquarters analyze annual point-ofsale
data generated in each store and calculate the weekly sales rate for every
product by store.Then they multiply that number by 4 to get the minimum shelf
quantity (MSQ). In other words, at any given time, CVS carries four weeks’
worth of supplies on the shelves. At Mike McGee’s store in Framingham, Massachusetts,
the MSQ for the 500-milliliter bottle of the best-selling Listerine flavor,
Cool Mint, is 20 because the store sells an average of five bottles per week.
How do store managers know how much product to stock?
Copyright © 2006 John Wiley & Sons
Copyright © 2006 John Wiley & Sons
205
THE REAL-TIME
SUPPLY CHAIN
AND BEYOND
C H A P T E R
10
The pace of business change and creativity today is both exciting and relentless.
Innovative retailers in different market segments have learned
to design and deploy their supply chains to improve their competitive
positions in the markets they serve. They create supply chains that enable
them to develop and deliver products, and provide levels of service at price
points that their competitors cannot match.
What tools do they use to accomplish this? This chapter explains the importance
of some of the current trends in retail supply chain management,
including:
Copyright © 2006 John Wiley & Sons
The “always-on” connection and its impact on supply chain partners
A realistic look at global sourcing
Inventory management and product identification technology
Strategic thinking for supply chain success
The concepts of emergent behavior and adaptive behavior
We all sense that something profound has happened in the world since the invention
of online communication. But it’s about a lot more than the Internet or
eCommerce, as you’ll see in this chapter. It is about combining various types of
technology with people skills—fine-tuning our abilities to cooperate and observe
and learn from other business partners in a supply chain.
206 Chapter 10 The Real-Time Supply Chain and Beyond
POWER ON DEMAND
As an historical analogy, let’s consider what happened some 200 years ago at
the beginning of a time period that came to be known as the Industrial Age. The
people of the time sensed that powerful potential had been released with the invention
and growing popularity of the steam engine. For the first time, this invention
provided a movable source of power that could be generated on
demand and efficiently harnessed to perform a wide variety of tasks.
The Industrial Age was not so much about the steam engine as it was
about the possibilities it opened up with the power and convenience that it created
in business. Of course, as the era continued, technology outgrew the
steam engine as more advanced engine capabilities evolved: internal combustion,
jet engines, electric motors, and even atomic power.
In much the same way, the Internet has created a new kind of “power on
demand” that has changed the way business is done. Today, even the tiniest
specialty firms work as part of a global, multidirectional communications
network that is “always on.” As more and more companies use the Internet,
EDI, and other communications networks to create always-on connections,
they find ways to share data that enable them to better coordinate their interactions.
They also learn and adapt to changing conditions more quickly.
These capabilities clearly result in efficiencies that can be turned into business
profits.
The always-on connection is a new light that sheds steady illumination on
a landscape that, before real-time connections, could be seen only in periodic
snapshots. The effect is a lot like seeing a sequence of still photos turn into a
moving picture. As more pictures are taken at shorter intervals, you cease to
see a sequence of still photos and instead come to see a continuous, moving
Copyright © 2006 John Wiley & Sons
image. This continuous, moving image is what we see as we move from the
snapshot or batch-time world into the real-time world.
Supply chain management is a process of coordination between companies.
Those companies that learn to coordinate comfortably in real time will
become incrementally more efficient. They will become more profitable and
perhaps see new opportunities more quickly than their competitors who are
still working in a batch-time world of business snapshots.
The Challenges of Technology
As beneficial as all this sounds, it is not easy to automate a supply chain. There
are many challenges to be faced by companies and their supply chain partners,
who must commit to sharing data and keeping up with the technology once
they’ve embarked on the course together. As Advanced Manufacturing magazine’s
online columnist Predrag Jakovljevic correctly observed, “Neither planning
nor execution tools can fix a dysfunctional supply chain, but planners
need to analyze and optimize both areas.”1
Here are a few examples of issues that commonly create tension:
It is often difficult to get suppliers on board. Mega-retailers like Wal-Mart,
Albertsons, and Target can mandate the adoption of certain systems or
technologies, but not everyone has this kind of clout. Deciding to automate
a supply chain means not only your employees but other key players in the
chain have to learn how to work with the new system. When automation
means less work for the distributors, or layoffs of pickers and packers in the
warehouses, not everyone is going to cooperate cheerfully.
Most supply chains are made up of companies large and small, and not all of
them can afford to make similar investments in technology. Better-funded
partners in the chain must decide if their less prosperous partners’ participation
is important enough to step in and assist with the initial costs and/or
system upgrades to allow the necessary interface.
Retail is an intensely people-oriented business, and people throughout the
supply chain may protest the lack of human contact in a highly automated
system. Distributors’ representatives may be more comfortable with phone
calls and sales visits. Store managers pride themselves in knowing their inventory
inside and out. They may balk at using a system that places automatic
reorders or that stocks each store with exactly the same items and
quantities. A balance must be struck between using technology and maintaining
the uniqueness and camaraderie of the business relationships.
“If you can’t convince people that using the software will be worth their
time, they will easily find ways to work around it,” wrote Lee Pender in a
2001 article for CIO magazine. Forecasters and planners will soon decide
the data is “useless” if they don’t realize it takes a while to get the bugs
worked out of a new implementation, and to input enough historical data to
Power on Demand 207
Copyright © 2006 John Wiley & Sons
the system to ensure accurate output. Retailers must also be confident about
the security and reliability of their own systems, as well as those of their
supply chain partners.
The same CIO article mentioned the dilemma of companies that buy software
and customize it. Customization is expensive, and often the original
developer of the software or hardware will not support the altered system.
In other words, companies can inadvertently lock themselves into using
“homegrown” systems that may not provide the agility required to react to
market changes or multichannel demands.2
Multiple distribution channels require multiple supply chains. Office Depot
is an example of a retailer with two separate supply chains—one for retail
and store shipments, the other for corporate accounts that buy online or
through its office supply catalogs—both under the purview of an executive
vice president of supply chain to help avoid duplication of efforts.3
208 Chapter 10 The Real-Time Supply Chain and Beyond
GLOBAL SOURCING
Another major supply chain trend today is a by-product of technology. Global
sourcing is the ability of a company to get what it needs from anywhere on the
planet, a trend that has skyrocketed in the last 50 years. The primary reasons
companies look outside their traditional regions for manufacturing capacity are
to take advantage of lower-cost materials and labor, or that they have discovered
a more favorable climate for their type of business—more tax advantages,
familiarity with certain types of industries, perhaps fewer environmental restrictions,
and so forth. Many nations have, in turn, scrambled to make these
foreign investment arrangements even more appealing.
There are two types of technology that have allowed global sourcing to
blossom. One is the use of communications technology, such as the Internet,
cellular phones, wireless technology, and the like. The other is that international
freight companies have developed larger and more sophisticated vessels,
more than double the size of “traditional” cargo ships. They can now carry so
much more freight per load that they have significantly reduced shipping
costs—by some estimates, up to 70 percent less than in past decades.
While the cost impacts of these developments may be impressive, they also
increase the complexity—and literally stretch the length—of the retail supply
chain. A 2003 study by Maersk Logistics, the giant Danish-based shipping
company, showed that compared to a domestic supply chain, there may be as
many as seven additional partners in a global supply chain—from customs departments
to compliance authorities to the freight companies themselves. The
long overseas manufacturing and shipping journey may add only 2 to 5 percent
to the final cost of the item but may account for 30 to 50 percent of the
item’s total time in the supply chain.4
More partners and more distance between them also mean more room for
Copyright © 2006 John Wiley & Sons
error. Back in 1988, professors Constantinos Markides and Norman Berg criticized
some of the first efforts to move American manufacturing operations
offshore in a report published in the Harvard Business Review. Alan Braithwaite,
executive chairman of LCP Consulting in the United Kingdom, says
their initial points ring true almost 20 years later:
There are risks that the total acquisition cost may be greater than anticipated
and erode the net benefits that the initial purchase cost implies. When
all factors including transportation, handling, duty, obsolescence, inventory,
lost sales, and “market blocking” are factored in, the total cost may not
be as attractive as the headline advantage—labor costs are typically as little
as 7 to 10 percent of the total product costs, and even less on the selling
price (of most items).
The extended chain cannot be as responsive to demand variations as local
sourcing; hence, there may be opportunity costs of lost sales.
There may be risks with quality and execution due to the long-distance relationships
and the many handoffs in the process to move the product to its
destination. Inaccuracies cause service failure and hence (increase) cost.
Valuable know-how may be given away to vendors, allowing others to enter
markets and for product and engineering skills to be lost.
The long-term impact on supply and demand is less clear and may distort
markets, both in terms of the benefits gained and also for the risks of secure
supply.5
Markides and Berg did not take into account another reasonable assumption
that has come to light more recently—that unstable governments and terrorist
threats can disrupt commerce just about anywhere in the world today. In
addition, the glut of containers entering the United States—at least 7 million
of them per year—has caused enormous backlogs at seaports, in Customs, and
with Homeland Security’s efforts to screen the incoming merchandise in antidrug
and antiterrorism efforts.6
Braithwaite, working with England’s Cranfield School of Management,
has charted the types of supply chain risks companies face (as seen in Figure
10-1), in three external and three internal categories. The external categories
include the following:
Demand risks are potential or actual disturbances to the flow of product, information,
and/or cash that begin in one company and impact other companies
and customers “downstream” in the supply chain.
Supply risks are the upstream equivalent of demand risk; they relate to potential
or actual disturbances to the flow or product or information that disrupt
companies “upstream” in the supply chain.
Environmental risks are external, uncontrollable events that can impact a
company directly or through its suppliers or customers, upstream or downstream.
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Copyright © 2006 John Wiley & Sons
The internal risks can be categorized as follows:
Process risks are disruptions to the managerial or value-adding activities undertaken
by a company, which are likely to be dependent on internally
owned or managed assets and a functioning infrastructure.
Control risks occur when the rules, systems, and procedures used by a company
are applied or misapplied, either way with incorrect results. They include
anything from safety stock policies to order quantities to the way
assets are managed in a company.
Mitigation is a hedge against risk built into the operations; hence, the lack of
mitigation can itself be a risk. Contingency is the existence of a plan, and resources
that can be mobilized to carry it out, in case a risk is identified.
In short, retailers must consider all aspects of their global partnerships to
accurately quantify the risks as well as the benefits, and even when cost savings
are evident, they must still plan much further in advance in order to take
advantage of them. Every company’s senior management team deals with potential
risk factors differently, and Braithwaite’s conclusion is that “global
sourcing is not a consistent proxy for higher sustained profits.”7
210 Chapter 10 The Real-Time Supply Chain and Beyond
RETAIL TECHNOLOGY TRENDS
The types of technology most likely to impact retail supply chain partners in
the coming years are as follows.
In inventory management, order pickers who pull and group products to
prepare them for shipment in a traditional warehouse generally start at an assignment
desk, where they are given their orders on papers known as picking
labels. They refer to the labels as they go through the warehouse and select
the merchandise that corresponds with the labels.
Environmental
Demand Supply
Vulnerability
Process Control
Mitigation
Contingency
INTERNAL EXTERNAL
Figure 10-1. The drivers of
supply chain risk. (The use of
global sourcing increases
supply chain risks, making
companies vulnerable in a
number of areas.) (Source:
Alan Braithwaite, LCP
Consulting, Ltd.,
Berkhamsetd, United
Kingdom and Cranfield
School of Management,
Bedfordshire, United
Kingdom. Used with
permission of Alan
Braithwaite.)
Copyright © 2006 John Wiley & Sons
Using voice-activated technology, the picker wears a headset and
microphone, and a wireless terminal on his or her belt that links to the software
of a warehouse management system (WMS). The system tells the person
what to pick (and perhaps where it is located); the worker responds by speaking
to the system through the microphone. The system is sophisticated enough
to recognize human speech, and it can be programmed to trigger inventory
counts and restocking activities. Voice-directed picking is 10 to 20 percent
more accurate than the old system and has the side benefit of keeping the
warehouse cleaner with the elimination of paper labels.8
Universal Product Codes, more commonly known as UPCs or bar codes,
have been in existence for more than 30 years. The original idea behind this system
of instant product identification by a computerized reader or scanner was to
speed up checkout time at stores and improve the accuracy of prices, and for
these aims it has been a huge hit. There are literally trillions of bar codes printed
and placed on products worldwide every year! But technology will certainly
change—and perhaps eventually eliminate—bar codes in the coming decades,
for several reasons.
First, the plethora of new products demands the constant creation of new
codes, and with only 12 digits in the United States and 13 digits in Europe’s Electronic
Article Numbering (EAN) bar code system, these systems are reaching
their practical limits. Second, the global nature of business also makes a single
code system a smarter idea. The Uniform Code Council (UCC) suggests adopting
a 14-digit code system called Global Trade Identification Numbers (GTIN).
Third, there are limits to the amount of information that can be contained in
a single bar code—hence, the development of two- and three-dimensional (2-D
and 3-D) bar codes. They require special bar code readers. All three of these
developments in bar code technology require significant additional investment
on the part of supply chain members.9
Some businesses are hesitant to make bar code investments because they
believe the future of product identification is in radio frequency identification
(RFID). RFID tags are small computer chips placed on products. The chip
transmits a large volume of information about the product to a wireless reading
device, far more than a bar code can contain. The device does not have to
make contact with the chip, or even be in its line of sight, in order to “read” it.
RFID allows for an amazing amount of precision and accuracy in inventory
management, giving companies the capability to literally track a shipment’s
exact whereabouts in the supply chain.
Wal-Mart made headlines when it mandated its Top 100 suppliers to be
RFID-compliant by January 2005, which sent them scrambling. The problem
has been that this new technology is expensive. The chips themselves cost far
more to manufacture—now and in the foreseeable future—than the much simpler
bar code label, and they require new, more sophisticated types of readers
and software. Thus far, most companies are experimenting with RFID tags on
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Copyright © 2006 John Wiley & Sons
caseloads or containers rather than individual products. RFID-related expenditures
are expected to approach $27 billion by 2015, compared to $2 billion in
2005.10
212 Chapter 10 The Real-Time Supply Chain and Beyond
In 2003, Home Depot announced plans to increase capital spending 21 percent (to $4 billion) for
store remodeling and using technology to improve customer service. The list of projects included
the creation of digital dashboards to monitor store operations, reengineering business processes to
focus employees’ efforts on the sales floor, upgrading point-of-sale equipment, speeding up replenishment
at stores, and implementing SAP (the leading ERP software system).
The company decided its best move would be to use technology to up-sell goods and services. Selfcheckout
aisles allow Home Depot to deploy an average of two cashiers to the floor instead of
standing behind the checkout counter. These people can restock shelves or sell big-ticket items like
appliances and kitchen cabinets. If one former cashier sells just one customer on a home installation
in every Home Depot store, that equates to $1 billion in additional revenue per year! Kiosks
can be used to handle special orders when products such as window treatments aren’t in-store.
The result: a steady increase in average tickets (sales totals). The retailer closed 2004 with an average
ticket of $54.89, up 7.3 percent from fiscal 2003’s tally of $51.15.
On the back end of the store, Home Depot is rolling out an automated inventory replenishment
system. Its pilot project with the new system showed 20 percent fewer out-of-stocks. The 2005
goal is to have auto-replenishment systems for 20 percent of the SKUs carried in Home Depot
stores.
Source: Excerpted from www.baselinemag.com, with permission. Copyright © 2005 Ziff Davis Publishing Holdings, Inc. New York,
April 10, 2005. All rights reserved.
S U P P LY C H A I N S K I L L S — H O M E D E P O T ’ S S E L F – C H E C K O U T
PAY S O F F
In addition to linking to other members of a supply chain, companies that are
competitors are learning to link up for procurement purposes in collaborative
trade exchanges. Six major airlines, for example, have joined forces to buy at
least some goods together. The trade association Grocery Manufacturers of
America has spearheaded one of the largest trade exchange efforts with more
than a dozen major consumer goods companies. The idea is still fairly new, but
member companies of the GMA trade exchange can purchase materials, supplies,
and services from each other, and even share cargo space jointly to
THINKING STRATEGICALLY
Copyright © 2006 John Wiley & Sons
increase efficiency. Companies that regularly order electronic components can
do so on iSuppli, an online trade exchange for manufacturers.11 All of this collaboration
is enabled by technology and aimed at reducing costs and improving
supply chain efficiencies.
Many of the global supply chain risks outlined earlier in this chapter can
be managed with strategic thinking. Companies can design products using
generic materials or components that can be used in a number of products instead
of just one. Orders can be filled based on a forecast made just before the
order is placed, improving accuracy. RFID technology will allow products to be
correctly identified and tracked at every moment during their journey through
the supply chain.
The Self-Adjusting Feedback Loop
Tracking performance and making adjustments accordingly is sometimes
called a self-adjusting feedback loop, and it is another useful tool in the supply
chain arsenal. A simple example of the principle is the cruise control in an
automobile, which constantly compares the vehicle’s actual speed to the speed
it was set for and responds to bring the actual speed in line with the desired
speed. This causes the engine to either accelerate or decelerate accordingly. You
might say the cruise control is operating the engine in order to achieve its goal.
Other examples of self-adjusting feedback loops are a thermostat that controls
the temperature in a room and a guided missile that zeros in on a heat
source or radar emission source. Self-adjusting feedback loops use negative
feedback to continuously correct their behavior—and that does not mean
“negative” in the sense of criticism. This type of negative feedback occurs
when a system compares its current state with its desired state (or goal) and
takes corrective action to move it in the direction that minimizes the difference
between the two states. A continuous stream of negative feedback guides a system
through a changing environment toward its goal.
How can the self-adjusting feedback loop be used in a supply chain? As
companies link up using always-on communication networks to conduct business,
they begin to collect useful data as a by-product of their interactions:
electronic purchase orders, order status, order receipts, invoices, payment histories,
and so on. It is no longer a huge administrative chore to regularly track
performance in the “big four” areas of customer service, internal efficiency,
demand flexibility, and product development.
Performance can also be tracked by individual store or sales associates. For
example, Home Depot receives more than 200 customer comments per store,
per week—and it’s not because they fill out and mail in customer comment
cards. Every sales receipt has a code number printed on it, with instructions
prompting consumers to rank their sales experience in a simple format on the
company’s Web site.12
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Copyright © 2006 John Wiley & Sons
Similarly, corporate customers can use supply chain “report cards” to grade
the performance of their suppliers and to ask for suppliers’ critiques in return.
The next step is for companies to move beyond using these report cards as
merely convenient tools for “beating up” their suppliers, looking instead for
ways to work together to meet mutually beneficial performance targets. A dominant
company in the chain can set the performance targets, or groups of companies
can negotiate among themselves to set targets. The important things are
that all participating companies in a supply chain believe the targets are achievable—
and that when they are achieved, there will be rewards as a result.
The natural desire to receive these rewards is what brings the self-adjusting
feedback loop to life. If companies and people in a supply chain have real-time
access to the data they need, then for the most part, they will steer toward their
targets. If they are rewarded when they achieve these targets, then they will
learn to hit them more often than not, allowing companies to realize the profit
potential of the feedback loop.
SCM as a Strategy Game
Supply chain management is often such serious business that perhaps it would
be helpful to think of it for a moment as a game of strategy. From childhood,
most of us learn and improve our skills by playing games. Companies such
as Wal-Mart and Dell and their supply chain partners have, in many ways,
created evolving games of managing their supply chains. They have steadily
learned and developed supply chain organizations that are better than those of
their competitors, and that clearly hold business advantages for them.
There are only a few things required to start a game. In the early 1990s,
SRC Holdings Group (formerly Springfield Remanufacturing Group) President
and CEO Jack Stack wrote a popular business book, The Great Game of Business.
In it, Stack laid out the four conditions that are needed (in this case, for a business
pursuit) to qualify as a “game”:
1. People must understand the rules of the game and how it is played. They
must know what is fair, what is not fair, and how to score points.
2. People must be able to pick the roles or positions they want to play in the
game. They must also get the training and experience necessary to keep
developing the skills required to succeed in their positions.
3. All players must know what the score is at all times. They need to know if
they are winning or losing, and they need to see the results of their actions.
4. All players must have a personal stake in the outcome of the game. There
must be some important reward, either monetary or psychological, that
provides a reason for each player to strive to succeed.13
Seen in these terms, the “game” of supply chain management is not quite
as complex as today’s business experts would have one believe. In fact, the
214 Chapter 10 The Real-Time Supply Chain and Beyond
Copyright © 2006 John Wiley & Sons
game is relatively simple, like soccer or basketball or golf—which is not to say
that any of these pursuits can be mastered without years of practice and
play! The main techniques and operations of supply chain management are
well enough understood to be taught to a wide range of people in different
supply chain positions. Online, real-time access is the way for everyone to
know the score at all times and see the results of their actions. Profits generated
by operating efficiencies provide people with rewards and reasons to
strive to succeed.
In supply chain management, everyone can acquire and install technology,
so technology alone cannot constitute a significant competitive advantage.
The advantage, then, must lie in the way the game is played. Let’s
rethink the example of Alexander the Great in Chapter 1. Remember, his
army did not have any type of technology that was not also available to his
opponents—in fact, Alexander deliberately used less technology. He simplified
his army’s operations and equipment in order to make it more mobile and
more efficient, and, therefore, his army could travel faster and lighter than his
adversaries’ forces.
Advantage goes to those players who learn to use simple technology and
simple tactics extremely well. Alexander’s soldiers were well trained in how to
use their technology. Further, the simplicity of their tactics allowed the soldiers
to remember and use them effectively in the heat of the moment, when it really
counted.
Even today, supply chain success is often just a matter of consistent performance
and making fewer errors than the competition.
Recognizing Emergent Behavior
In the workings of a free market system, we witness emergent behavior—an
interconnected system of relatively simple elements, which begins to selforganize
to form a more intelligent and adaptive higher-level system. The famous
British economist Adam Smith referred to it as the “invisible hand” of
the market, which “emerges” to set product prices so that available supplies are
best allocated to meet market demands. Local interactions between large numbers
of agents, governed by simple rules of mutual feedback, produce a macro
effect that results in emergent behavior of the system as a whole.
If we begin to think of supply chain management as a game between companies
and people who are motivated to achieve certain performance targets,
we see emergent behavior in supply chains. Good “players” in the supply
chains of particular markets seek each other out because by playing together
they can create more efficient supply chains and generate better profits. Modern
supply chains form like sports teams, who compete with each other for
market share. Just as the games of basketball or soccer evolve over time, so too
does the game of supply chain management. New tactics, techniques, and
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Copyright © 2006 John Wiley & Sons
216 Chapter 10 The Real-Time Supply Chain and Beyond
Steven Johnson is a “techie” and former magazine editor who authored the book Emergence: The
Connected Lives of Ants, Brains, Cities, and Software (Scribner, 2002). Michael Hugos asked Johnson to
share his insights, including how companies can organize their supply chains to encourage and benefit
from emergent behavior.
Q: What is an “emergent system”? How is an emergent system different from, say, an
assembly line?
A: The catchphrase I sometimes use is that an emergent system is “smarter” than the sum of its
parts. They tend to be systems made up of many interacting agents, each of which is following
relatively simple rules governing its encounters with other agents. Somehow, out of all these local
interactions, a higher-level, global intelligence “emerges.” The extraordinary thing about these
systems is that there’s no master planner or executive branch—the overall group creates the intelligence
and adaptability; it’s not something passed down from the leadership. An ant colony is
a great example of this: Colonies manage to pull off extraordinary feats of resource management
and engineering and task allocation, all by following remarkably simple rules of interaction, using
a simple chemical language to communicate. There’s a queen ant in the colony, but she’s only
called that because she’s the chief reproductive engine for the colony. She doesn’t have any actual
command authority. The ordinary ants just do the thinking collectively, without a leader.
A key difference between an emergent system and an assembly line lies in the fluidity of the
emergent system: Randomness is a key component of the way an ant colony will explore a
given environment—take the random element out, and the colony gets much less interesting,
much less capable of stumbling across new ideas. Assembly lines are all about setting fixed patterns
and eliminating randomness; emergence is all about stumbling across new patterns that
work better than the old ones.
Q:You refer to emergent systems as “bottom up,” not “top down,” because they solve
problems by drawing on masses of simple elements instead of relying on a single,
intelligent “executive branch.” What does this mean for people who are trying
to design and build emergent systems?
A: One of the central lessons, I think, is that emergent systems are always slightly out of control.
Their unpredictability is part of their charm—and their power—but it can be threatening
to engineers and planners who have been trained to eliminate unpredictability at every turn.
Some of the systems that I’ve looked at combine emergent properties and evolutionary ones:
The emergent system generates lots of new configurations and ideas, and then there’s a kind of
natural selection that weeds out the bad ideas and encourages the good ones. That’s largely
what a designer of emergent systems should think about doing; it’s closer to growing a garden
than it is to building a factory.
S U P P LY C H A I N S K I L L S — E M E R G E N T B E H A V I O R
I N S U P P LY C H A I N S
Copyright © 2006 John Wiley & Sons
Thinking Strategically 217
Q: What do you mean when you say that emergent systems display “complex adaptive
behavior”?
A: The complexity refers to the number of interacting parts, like the thousands of ants in a
colony, or the pedestrians on a street in a busy city. Adaptive behavior is what happens when all
those component parts create useful higher-level structures or patterns of behavior with their
group interactions, when they create something, usually unwittingly, that benefits the members
of the group. When an ant colony determines the shortest route to a new source of food and
quickly assembles a line of ants to transport the food back to the nest; when thousands of urbanites
create a neighborhood with a distinct personality that helps organize and give shape to
an otherwise overwhelming city—these are examples of adaptive behavior.
Q: What is negative feedback, as opposed to positive feedback? What role does negative
feedback play in the ability of a system to exhibit adaptive behavior?
A: Negative feedback is crucial, and it’s not at all negative in a value-judgment sense. Positive feedback
is what we generally mean when we talk about feedback, as in the “guitar effect” that we first
started to hear as music in the 60s—music is played through a speaker, which is picked up by a microphone,
which then broadcasts it out though the speaker, creating a sound that the microphone
picks up, and so on until you get a howling noise that sounds nothing like the original music.
So positive feedback is a kind of self-perpetuating, additive effect: plug output A into input B,
which is plugged into input A. Negative feedback is what you use when you need to dampen
down a chain like this, when there’s a danger of a kind of runaway effect, or when you’re trying
to home in on a specific target. Think of a thermostat trying to reach a preset temperature: It
samples the air, and if the air’s too cold, it turns the heat on, then samples it again.Without negative
feedback, the room would just keep getting hotter, but the thermostat has been designed to
turn the heat off when the air reaches the target temperature.
Ants use a comparable technique to achieve the right balance of task allocation throughout
the colony. An individual ant who happens to be on foraging duty will sample the number of
ants also on foraging duty that she stumbles across over the course of an hour. If she encounters
a certain number, she’ll switch over to another task (nest building, say) in order to keep the
colony from becoming overrun with foragers.
Q: In your book, you mention a designer who has proposed building a learning network
of traffic lights that will find an optimal solution to continually changing traffic
conditions.You observe that,“You can conquer gridlock by making the grid itself
smart.” What is it that would make the grid smart, and would this grid be an example
of an emergent system?
A: The idea proposed in the traffic model is not to take the traditional engineering, top-down
approach and say: “Let’s look at the entire city and figure out where all the problems are, and
try to design the roads and the light system to eliminate the problems.” The smart grid
Continued
Copyright © 2006 John Wiley & Sons
218 Chapter 10 The Real-Time Supply Chain and Beyond
approach is to give each light a local perspective with a little bit of information, and give it the
goal of minimizing delays at its own little corner. So the light would be able to register the number
of cars stacked up at the intersection, and it would be able to experiment with different
rhythms of red and green, with some feedback from its near neighbors. When it stumbles across
a pattern that reduces delays, it sticks to that pattern; if the delays start piling up again, it starts
experimenting again. The problem with this sort of approach is that on Day One, it’s a terrible,
terrible system, because it doesn’t yet know anything about traffic flows! You’d have to teach it
quite a bit before you could actually implement it. But it would learn very quickly, and most importantly,
it would be capable of responding to changing conditions in a way that the traditionally
engineered approach would not. That’s a hallmark of adaptability.
Q: Okay, let’s apply these ideas to a system composed of many different companies—a
supply chain, whose goal is to provide a market with the highest levels of responsiveness
at the lowest cost to themselves. High levels of responsiveness require that
these companies work together to design, make, and deliver the right products at
the right price at the right time in the right amounts.What could these companies
do to organize themselves into an emergent system?
A: There’s a telltale term in supply chain systems, which may well be unavoidable—the term
“chain” itself. Almost all emergent systems are networks or grids; they tend to be flatter and
more horizontal, with interaction possible between all the various agents. The problem that
supply chains have with positive feedback revolves around the distance between the consumer
and those suppliers further down the chain; because the information has to pass through so
many intermediaries, you get distortion in the message. Most emergent systems that I’ve looked
at have a great diversity of potential routes that information can follow. The more chainlike they
become, the less adaptive they are.
The other key here is experimentation: letting the system evolve new patterns of interaction
on its own, since these can often be more useful and efficient than the preplanned ones. Of
course, you don’t want to waste a few economic quarters experimenting with different supply
chains, most of which are a disaster. But that’s where some of the wonderful new modeling systems
for complex behavior can be very handy—you can do the experimenting on the computer
and then pick the best solutions to implement in real life.
technology will continue to be introduced. Market demands and the desire for
competitive advantage will drive companies to collaborate and innovate with
each other to win at this game. Some chains (and retailers) will remain at the
forefront; others will lag behind.
Computers are best used to automate the rote, repetitious activities that
humans consider boring—the routine and/or mundane activities of recording
and monitoring supply chain operations. Computers do these tasks very well.
Copyright © 2006 John Wiley & Sons
Thinking Strategically 219
In February 2005, Robert J. Bowman, senior editor of Global Logistics & Supply Chain Strategies magazine,
shared his choices of 10 business trends that make supply chain management, in his words,
“more complex than ever before.” These are most definitely the areas to watch in retail as well as
many other industries.
Look on the Web site SupplyChainBrain.com for the current issue of Global Logistics & Supply Chain
Strategies, as well as archives of past issues and many case studies involving specific companies and
how they are meeting these “top 10” challenges.
1. Globalization. In a relentless push for cost-cutting, companies large and small are sourcing
product far from their markets. China is the location of the new gold rush for cheap manufacturing.
Recent surveys by Deloitte Research found that more than 80 percent of manufacturers
are either buying, or plan to buy over the next three years, components from other
countries. Nearly half engineer products outside their home regions. In this regard, don’t think
of a supply “chain,” forged from links of steel.Visualize a rubber band: stretch it too far, and it
snaps.
2. The need for supply chain agility, coupled with lower inventories. Customers want
it yesterday. Just-in-time is the new executive mantra. And products are getting to market
with unprecedented speed. According to Deloitte, manufacturers over the last three years
have cut product-development cycles by an average of 12 percent, to 16 months. By 2006, that
span will have shrunk to 13 months. At the same time, companies are struggling to slash inventory
levels, even as they acknowledge the need for core safety stocks in the event of supply interruptions,
labor unrest, natural disasters, terrorist attacks or unforeseen shifts in consumer
demand.
3. Mass customization and make-to-order. In another form of supply-chain agility, manufacturers
are looking to meet the needs of individual customers, configuring product in countless
ways. Dell Computer led the way on the consumer side. Cisco Systems has long offered a universe
of options to its high-tech manufacturing base. The technique calls for highly efficient
postponement programs, where basic components are customized at the moment of sale. The
impact on supply chains? More complexity, of course.
4. New-product mania. Increasingly rare is the consumer item that looks the same—or even
continues to exist—a year or two later. Faced with a limited base of consumers, suppliers
and retailers are forever shoving new items into the limelight. SKU proliferation is rampant;
just walk down the toothpaste aisle of any superstore. In 2003, Deloitte said products introduced
within the previous three years would generate 29 percent of manufacturers’ total
revenues for the year. That compares with 21 percent in 1998, and a projected 35 percent in
2006.
S U P P LY C H A I N S K I L L S — F U T U R E B U S I N E S S T R E N D S
Continued
Copyright © 2006 John Wiley & Sons
220 Chapter 10 The Real-Time Supply Chain and Beyond
5. Value-added services. Manufacturers used to make product or components, then sell them.
Not anymore. In a bid to cut overhead, buyers are demanding a raft of underlying services from
suppliers. Vendor-managed inventory (VMI) programs delay the ownership of goods until the
last possible moment—and saddle the supplier with the job of managing stocks. Even contract
manufacturers are getting into the game, offering third-party logistics services and direct shipment
to end users, bypassing original equipment manufacturers (OEMs).
6. Outsourcing. The rush to abandon links of the supply chain to outsiders continues. First, it
was back-office processes like accounting and payroll.Then came logistics. Next, nominal manufacturers
gave away their assembly work to contractors. Other functions ripe for outsourcing
include information-systems management, call centers, service-parts-repair, product engineering
and chief executive officers (well, maybe not that last one). The result is more partners in the
chain—and more chances for failure.
7. Security. For contemporary society, September 11, 2001 was in many respects the dividing
line between Before and After. For business, it meant a whole new universe of security concerns.
Billions of dollars have been spent on additional security measures, documentation and
oversight.And it’s still not enough. Ports and airports remain highly vulnerable to attack, analysts
say. Listen to Noha Tohamy of Forrester Research: “The next terrorist attack is likely to
be staged through a supply chain.”
8. New rules on corporate governance. The hijinks of executives at companies like Enron
and WorldCom have given rise to a slew of regulations, including the Sarbanes-Oxley Act,
requiring companies to keep a tight rein over operations.The new reporting and accounting
laws will have a huge impact on day-to-day supply-chain management, which touches virtually
every aspect of a company’s operations.
9. Mergers and acquisitions. Whether it’s hard goods, soft goods or software, big companies
are gobbling up smaller ones and growing even bigger in the process. This unstoppable trend
raises some new issues of scalability for the survivors. How does a typical supply chain handle
massive, overnight growth in revenues, product mix and customers? In most cases, not very
well.
10.Technology.Wasn’t this supposed to make things simpler? On the contrary, with every new
convenience offered by innovative software or hardware, new complications arise. On balance,
the impact on supply chains is usually a positive one, but getting to that point may require lots
of time, money and migraines.
Source: Robert J. Bowman,“Supply-Chain Complexity Masters: A Special Report,” Global Logistics & Supply Chain Strategies, Keller
International Publishing, Great Neck, New York, February 2005.
Copyright © 2006 John Wiley & Sons
Adaptive Networks 221
Cynical consumers may assume that the closer companies in a supply chain
work together, the more they are probably conspiring to boost profits at the
expense of the “little guy,” but that is both a limited—and limiting—viewpoint.
Instead, technology and the cooperation it enables can give retailers and
their business partners the ability to recognize and smooth out excessive
swings in demand, prices, and productive capacity. If other companies in other
areas of the economy do the same, it should create greater stability.
In industries ranging from electronics manufacturing to real estate development
to telecommunications, the bullwhip effect and related boom-to-bust
cycles have caused nothing but waste and disruption—and, of course, news
headlines that unnerve consumers and investors. These cycles also bring with
them all the related human hardships. Think of the wealth that was destroyed
by the excessive investments that created more dot-com companies and more
telecommunications capacity than were needed. Think of the shutdowns and
job losses when these companies and their suppliers finally had to face the consequences
of too much supply and not enough demand.
Adaptive supply chain networks using real-time information and “negative”
feedback can effectively dampen excessive market swings. This ability
alone will have a wealth creation effect that is even more powerful than what
was created by the steam engine two centuries ago. Retailers should be excited
to be part of it.
ADAPTIVE NETWORKS
They do not fall asleep, they do not miss details, and they can handle enormous
volumes of data without complaint.
Human skills are best suited to the creative and problem-solving activities,
putting their minds to work on problems that do not have clear right or wrong
answers. These are the types of pursuits that call for people to collaborate, to
share information and try different approaches to see which ones work best.
People are good at strategic activities, and they like doing them—so they learn
and keep getting better at them.
At a macro level, this will give rise to supply chains that, in effect, learn and
grow smarter. Computers will listen to the hum and crackle of data flowing
through the real-time, always-on supply chain. They will employ pattern recognition
algorithms to spot exceptions and events, and they’ll be programmed to
bring these to the attention of human beings. Like good pilots and navigators,
people will learn to respond effectively to these developments as they happen.
People will learn to keep steering their supply chain on a course toward its desired
performance targets.
Copyright © 2006 John Wiley & Sons
222 Chapter 10 The Real-Time Supply Chain and Beyond
CHAPTER SUMMARY
The “always-on” connection of the Internet and other communications networks
allows companies to see themselves and their supply chain partners’
data in real time. This makes it possible to constantly adjust, week to week or
even day to day, to gain significant new efficiencies in almost every aspect of
business. At least, that’s the ideal.
However, adapting to technology requires enormous flexibility and financial
expenditures, and every company handles the changes differently. This chapter
mentioned several of the most common challenges faced by supply chains
trying to get all members “up and running” with compatible systems and
software.
Global sourcing is so common as to not even be considered a trend anymore,
but it is included in this chapter as a by-product of technology, and to prompt
discussion of the inherent risks in “stretching” the supply chain across
continents. Most of the risks can be grouped into one of six categories, and
each must be mitigated to realize the full benefit of global business. Companies
must see the risks realistically in order to decide whether the potential
savings are worth using foreign suppliers and/or participating in trade
exchanges.
Other types of technology mentioned in the chapter are employed to improve
communication, increase supply chain efficiencies, and reduce costs—or all
three.
The chapter ended by bringing the human elements of business back into the
picture, because it is humans who will use the technology to make strategic
decisions. The authors suggest seeing the basics of supply chain management
as a sport or game to cut through the complexity. Everyone in the game needs
to know how to play, how to score points, and how to get the skills they need
to improve their performance. The self-adjusting feedback loop is harnessed to
the supply chain through the daily actions of the people who carry out supply
chain operations. They can be motivated by rewards for achieving predefined
performance targets and armed with real-time information that shows them
how to hit their targets more often than not.
The potential emergent behavior that can be created by this dynamic will create
supply chains that are both highly responsive and very efficient. Real-time
operation results in supply chains that can better adapt to business changes
and deliver performance and profitability without compromising quality or
service for the end users of retail products.
Copyright © 2006 John Wiley & Sons
DISCUSSION QUESTIONS
Endnotes 223
1. Other than the obvious—steam engines, automobiles, airplanes, telephones,
computers—name at least one other invention of past centuries
that changed the way people and companies do business. Has it evolved
into something that is still useful today?
2. Give a hypothetical example of each of the six types of risk to a global
supply chain, as described in this chapter.
3. Is a supply chain a type of self-adjusting feedback loop? Why or why not?
4. How do you feel about competitor companies teaming up in trade exchanges?
How much cooperation is “too much,” in your opinion? How
should companies avoid collusion or the appearance of unethical tactics?
5. In the “game” of supply chain management, name two of today’s retailers
that you believe have been left behind, so to speak. Explain the reasons
for your choice. What could they do to catch up?
1. Predrag Jakovljevic, “It’s One Thing to Plan, and Another to Execute,” Advanced
Manufacturing, © CLB Media, Inc., Aurora, Ontario, Canada, January 2005.
2. Lee Pender, “The 5 Keys to Supply Chain Success,” CIO magazine, © CXO Media,
Inc., Framingham, Massachusetts, July 15, 2001.
3. David Hannon, “Retailers Push the Logistics Learning Curve,” Purchasing magazine,
© Reed Business Information, Inc., New York, September 2, 2004.
4. Alan Braithwaite, “Making Global Networks that Maximize Net Margins,” for
Maersk Logistics, a division of A.P. Moller-Maersk Group, Esplanaden, Copenhagen,
Denmark, 2003. Used with permission of the author.
5. Alan Braithwaite, “The Supply Chain Risks of Global Sourcing,” © LCP Consulting,
Berkhamsted, United Kingdom. Used with permission of the author.
6. 2004 estimate, Retail Industry Leaders Association, Arlington, Virginia.
7. See endnote 5.
8. “A Guide to Voice Technology in Warehousing,” VoicePicking.com, © Information
Technology Toolbox, Inc., Scottsdale, Arizona, April 2005.
9. “The UPC Bar Code at 30 Years of Age,” Retail Insight, newsletter of LakeWest
Group, LLC, Cleveland, Ohio, April 2004.
10. Evan Schurman, “RFID Market In for Major Shakeup, Report Shows,” eWeek.com,
© 2005, Ziff Davis Publishing Holdings, Inc., New York, April 7, 2005. All rights
reserved.
11. Daniel Lord, “B2B eCommerce,” © Business Insights, Ltd., London, United Kingdom,
2001.
12. “Home Depot Self-Checkout Boosts Sales, Satisfaction,” eWeek.com, © Ziff Davis
Media, Inc., New York, April 10, 2005.
13. Jack Stack, The Great Game of Business (New York: Doubleday/Currency Publishing,
1992).
ENDNOTES
Copyright © 2006 John Wiley & Sons
Copyright © 2006 John Wiley & Sons