Sunday, December 11, 2016

What is The True State of The Supply Chain Industry?

As we look at the profession of managing supply chains we tend to spend a lot of time working on specific areas such as S&OP, Six Sigma, Lean, Labor management etc. These are all part of what we would hope would be an incredibly efficient supply chain. So, given all the spend in technology and all the work in these areas, it is fair to ask ourselves how are we doing?

By two very macro metrics, I would say as an industry, we are not doing great.  Lets first look at inventory.  As we all know, inventory at rest is waste. We also all like to engage in case studies of companies such as Zara and Dell (former Dell) where inventory management is legendary.  But when we look at the macro numbers, we just are not doing that well. 

The Government publishes an inventory to sales ratio which tells us how much inventory exists for the level of sales that are being produced.  The below graph shows the most current:

As you can see, our inventory relative to sales is about where it was in 2002.  We bottomed right after the recession (when companies just slashed) but since then, even with all the studies and technology, we still grew inventory.  This is waste in the system (and also explains the reason there is excess transportation capacity - especially in ocean).

Now, let's look at cost and for this I go to the CSCMP report "State of Logistics".  The key metric here is logistics cost as % of GDP.  Using the newer calculations prepared by AT Kearney it shows last year we were at 7.85% of GDP.  In 2011 we were at 7.88% so with all of this work, we have improved our cost efficiency by 3bps.  Not a stellar performance.  

So, by these two measurements certainly this industry has a "cold".  One could argue that we have become a lot more efficient but we "consumed" that efficiency by increasing service dramatically (more next day and same day delivery for example).  That is possible and certainly deserves study. However, in total, we do not seem to have made much progress.