The Tao of supply chains

Sun Tzu was a Taoist philosopher who lived in China about 2,500 years ago. He wrote a book called The Art of War. It isn’t so much a book about war as it is a book about the art of competition and collaboration—whether in business, politics, the military or even sports. I have puzzled through this book several times, and the concepts that I have taken away have helped me develop and preserve a reputation for IT agility within my company.

My company, Network Services, is a nationwide distribution cooperative that sells food service items, janitorial supplies and printing paper. We are wholly owned by our 86 member companies, each of which has its own facility and internal IT system. They have local customers, and we work together to serve national account customers. Our members’ collective revenue is over $7 billion, and Network’s total national account revenue is over $500 million, growing by double-digit percentages every year. We provide customers with a tailored package of products and supply chain services to lower their overall operating costs.

One of our biggest national account customers is a chain of stores that each holiday season uses specially printed paper items to promote its holiday theme. These items are used in the customer’s 4,500 stores during November and December, and when January arrives, any remaining inventory has to be written off. The same holiday print designs are never used two years in a row. In years past, there was excess inventory of around 4 percent, amounting to almost $600,000 in costs that had to be written off by the customer.

This retail chain hired a new purchasing manager who decided we could all do better than that this holiday season. He called us out to the company’s headquarters last summer for a meeting. There, he announced his intention to reduce excess inventory of the specially printed holiday items by 50 percent or more. We still had to maintain 100 percent product availability for all its stores and minimize expensive movements of inventory from one region to another to meet unexpected demand. He asked us how we were going to work with him to make that happen. I told him we understood what he wanted and that we’d be back in touch with the specifics in a few weeks.

As we flew home, our sales director on the account told me this was a high-visibility project with the customer, and we had to figure out how to do it. He reminded me that it was already halfway through the summer, so we had to be ready to go in 90 days because we would begin stocking inventory in our distribution centers by October. And, of course, we couldn’t spend lots of money on this because margins are tight. In addition, all the parties in this supply chain used different ERP systems. And even within Network, the 26 member companies that served the account used different ERP systems. Several times on that flight, I experienced a sudden falling sensation in my stomach, and it wasn’t due to air turbulence.

Look for the underlying patterns

At times like these my identity as IT Agility Man hangs in the balance. Can I rise to the challenge, or will I flee in panic? Agility means doing three things: First, take a deep breath; second, take another deep breath; then, remember The Art of War and ask, “What would Master Sun Tzu do?”

The concepts that I’ve been able to absorb from Master Sun tell me that apparent complexity is really composed of simple underlying patterns. If I can discern those underlying patterns, then I can devise simple and effective responses. So what’s the pattern here? As I saw it, the need was to track daily product usage, constantly update demand forecasts, move inventory so as to cover demand and use it all up by the end of the season.

That meant effective collaboration among all parties in the supply chain to respond as actual demand unfolded. If our initial assumptions about demand were not entirely accurate (and they never are), we needed to be able to reposition inventory among distribution centers earlier and more efficiently. No sudden air-freighting of paper goods to stores across the country.

So, I asked myself, “What can IT provide that will enable this collaboration?” Obviously, what was needed was a continually updated, end-to-end view of product in the supply chain that’s visible at all times to people at my company, the manufacturers and the customer. That would be the basis for our collaboration and decision making.

I know of several fine software vendors’ products that can do that, but they cost more money than I had to spend and took more time to install than I had available. So much for the orthodox ideas. What else could I do? Master Sun says, “Therefore, those skilled at the unorthodox are infinite as heaven and earth, inexhaustible as the great rivers.” Wow. What unorthodox ideas could I come up with?

Master Sun says, “There are only five notes in the musical scale, but their variations are so many that they cannot all be heard. There are only five basic colors, but their variations are so many that they cannot all be seen.” Does this mean that there is a combination of basic IT components that I could use to quickly create my end-to-end supply chain picture and keep it constantly updated?

What basic IT components do all parties in this supply chain have easy access to, and how can I combine them into the system I need? I’m not going to give you the whole answer because then you wouldn’t get to practice your own agility and figure it out for yourself. But I will give you some hints. The components are spreadsheets, text files, e-mail, a few webpages, a relational database and some Java programs that took about three weeks to write and test.

We assembled these components into a system that collected data from all members of the supply chain. The data consisted of inventory amounts that were in production, in warehouses and on order. It also included invoice data that showed our deliveries to the customer’s stores, which allowed us to track actual demand at the store levels and regional levels.

The system was up and running by October. It was extremely cost-effective to build. We used it to facilitate conference calls that increased in frequency as the season progressed. On those calls, we all reviewed the numbers and projected run-out dates. We made decisions and continued to tweak the system to incorporate new views of the data and new calculations.

We reduced excess inventory from 4 percent last year to 1.3 percent this year on increased total sales, and the dollar value of the excess inventory dropped to less than $200,000. As we reviewed the holiday season results this January, the new purchasing manager said he was quite pleased with our performance. We are working with him and the manufacturers to document what we learned, make further improvements and extend the system to cover the rollout of other new products—not just holiday items. Thank you, Master Sun.

Mike Hugos is CIO of Network Services headquartered in Mount Prospect, Ill. If you want to know more about how he built this system, e-mail him at[email protected]. E-mail comments to Executive Editor Alison Bass at[email protected].

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