Giving degrees of freedom

Giving degrees of freedom Irresponsibly changing strategies brings Deep's temperature to a boil.

      The bleak economic climate is finally having an impact on my mood ' not because of the financial situation, but because of the ridiculous things we are seeing being implemented under the guise of 'strategy,' 'tactics' and 'market readiness' for the upswing.
      Business leaders are heading down a silly and dangerous path with the things they are making their businesses do, taking the adage 'never waste a good crisis' a little too seriously and going a little too far. Used irresponsibly, changing strategy or tactics can seriously harm a business and erode its ability to respond to changes in the marketplace. Cutting their wings, so to speak.

Case in point
      Take for instance one of our clients, who decided sometime last year to became obsessive with supply chain cost-cutting, hence pretty much disallowing all transshipments. Not a bad thought, considering how many times this is done due to lack of a sufficiently robust inventory policy or reflective of a business with a 'sales-gone-wild' phenomenon.
      Now, this is a good idea if, and only if, you're going to change something that impacts the root cause of these transshipments. More recently, the client instituted a policy to lower working capital, targeting inventory at all of its distribution centers, without a formal inventory policy ' across the board.
      Hence, the degrees of freedom have been cut significantly. If you can't compensate for a bad demand signal through transshipments, then it's logical to bolster inventory position to account for the demand variability. Obviously you would want to first look at the forecast to see if you can improve it.
      One of the ways to manage demand better is to stratify and segment products, which the client refuses to do ' there goes another degree of freedom.
      So, the next option (we're towards the end of the list of options now!) is to segment service level by product, customer and DC, so as to provide adequate service. But the client insists on having nothing less than 100 percent service level ' do you hear that chopping sound on the degrees of freedom? The business has been driven to a point of being unable to operate systematically.

Allowing degrees of freedom
      Going back to the client's situation, there are still further options, such as changing inventory strategy and consolidating its very volatile product in a few DCs and then sourcing the region from the few DCs, thereby implementing 'risk-pooling' logic, and consolidation. But the client is closed to this as well, because it will increase transportation costs. Its volatile product, as we discovered, is greatly due to certain product variations, which were 'combination packs.' One of the alternatives possible is also to discuss with sales to focus its promotions on certain standard 'multiples' (e.g. if you sell products in groups of four, then it would be greatly beneficial for sales to promote in increments of four, so as to be able to combine products at the very last moment), using principles of 'product postponement.' But the client has not explored this possibility with other functions yet.

Impact
      Not unexpectedly, everything has become an exception, and has forced everyone to be focused on day-by-day and hour-by-hour execution instead of planning to avoid the pitfalls that develop into execution crises.
      But this is only the superficial impact, felt in the here and now. In the near term (even one year out), the client will still be focused only on the short term, and will continue to suffer service issues and inventory imbalances because it is not looking further out to avoid the big things in the future. The client is sacrificing the Important for the Urgent, and not even realizing it, because they're convinced that the Urgent is, in fact, the Important.
      Recovering from this will take another year or two, and quite possibly a change in leadership because of the underperformance that the business will suffer during the recovery (which is bound to come sooner or later).
      Further, the company will have cut the wings of its competitive growth engine of innovation because it's never looking out far enough to actually plan and execute its innovations with sufficient rigor, discipline and, frankly, foresight.
      Deep R. Parekh is a partner with Equus Group LLC, a supply chain advisory services and management consulting firm based in New York and Sao Paulo, Brazil. He welcomes your feedback and comments at deep.parekh@equusllc.com, and can be contacted at (917) 940-7538.