Using the term “supply chain management” in a discussion will initially earn you some confused looks. Some of your discussion partners will think of the complete supply chain – from procurement to processing and ultimately distribution –, others only of sub-suppliers. And quickly, the discussion will move on to commodity prices and other issues.
However, supply-chain management is quite an important issue. Just try to combine this term with the words “partnership” and “key account management”, ideally in the same sentence. Distributors will at once begin to fear that their flexibility is to be restricted or that they may have to accept unacceptable “Terms and Conditions” in their distribution agreements.
The “beer game” brings it all to light
No-one will think of the “beer game”, a role-playing game which was developed in the early 1960s at the MIT Sloan School of Management to demonstrate a few basic principles of supply chain management. At the beginning of the millennium, I played the game during my training at INSEAD in Fontainebleau (one of the leading MBA schools in Europe) – and it significantly improved my understanding of several key issues.
In a simplified version of the game, four market participants (retailer, wholesaler, regional warehouse operator, brewer) form part of a supply chain. While players can see each other’s inventories, only one of them sees actual customer demand. Communication is restricted: the only contact between the players is via the ordered amounts. In each round, each market participant can freely determine his order and production volumes. In order to simulate the time needed for transport, a delay of one round is included between the different links of the supply chain. Initial final customer demand is released simultaneously with the plans of the individual players; it is set at four cases of beer for the first two rounds. Afterwards, final demand rises to eight boxes for the remaining 50 rounds.
At Fontainebleau we found that, despite this one-off change, demand was very volatile at the individual levels of the supply chain. All groups registered frankly disastrous results, which ranged from “out of stock” for 50% of the time to exorbitantly high working capital.
What had happened? Let me ask you a question: Did you perhaps miss the word “can”? So did my group and I back then.
Management: Speech is golden
The phrase “supply chain management” includes the word “management”. And communication is a key component of management. In our days, getting information is becoming easier, but filtering it is more and more difficult. Communication between like-minded people is therefore a step in the right direction. Since a steady flow of innovation has become a necessity and new methods need to be implemented quickly, our understanding of the supply chain as a whole is shrinking anyway. As the “beer game” shows, people who are trying to go it alone (or have to do so) will get lost, even in a short supply chain.
As in many instances, communication is key. If costs along a supply chain are to be kept as low as possible (in the best interests of all participants), I suggest an easy solution: Just talk to each other. That may be the whole secret of supply chain management.
When did you last talk to your suppliers about their latest developments, ideas or strategic plans?