Page 167 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes (b) “Second quarter sales at U.S. Surgical Corporation declined 25 percent, resulting in
a loss of $22 million. The sales and earnings shortfall is attributed to larger than
anticipated inventories on the shelves of hospitals”.
(c) “EMC Corp. said it missed its revenue guidance of $2.66 billion for the second
quarter of 2006 by around $100 million, and said the discrepancy was due to higher
than expected orders for the new DMX-3 systems over the DMX-2, which resulted in
an inventory snafu”.

(d) “There are so many different ways inventory can enter our system it’s a constant
challenge to keep it under control” [Johnnie Dobbs, Wal-Mart Supply Chain and
Logistics Executive].
(e) “Intel, the world’s largest chip maker, reported a 38 percent decline in quarterly
profit Wednesday in the face of stiff competition from Advanced Micro Devices and
a general slowdown in the personal computer market that caused inventories to
swell”.

Obviously, this difficulty stems from the fact that months before demand is realized,
manufacturers have to commit themselves to specific production levels. These advance
commitments imply huge financial and supply risks.
2. Inventory and back-order levels fluctuate considerably across the supply chain, even
when customer demand for specific products does not vary greatly. In a typical supply
chain, distributor orders to the factory fluctuate far more than the underlying retailer
demand.

3. Forecasting doesn’t solve the problem. Indeed, we will argue that the first principle of
forecasting is that “forecasts are always wrong.” Thus, it is impossible to predict the
precise demand for a specific item, even with the most advanced forecasting techniques.
4. Demand is not the only source of uncertainty. Delivery lead times, manufacturing yields,
transportation times, and component availability also can have significant supply chain
impact.
5. Recent trends such as lean manufacturing, outsourcing, and offshoring that focus on cost
reduction increase risks significantly.

Example: Consider an automotive manufacturer whose parts suppliers are in Canada
and Mexico. With little uncertainty in transportation and a stable supply schedule, parts can be
delivered to assembly plants “just-in-time” based on fixed production schedules.
However, in the event of an unforeseen disaster, such as the September 11 terrorist attacks, port
strikes, or weather-related calamities, adherence to this type of strategy could result in a shutdown
of the production lines due to lack of parts. Similarly, outsourcing and off shoring imply that the
supply chains are more geographically diverse and, as a result, natural and man-made disasters
can have a tremendous impact.

Example:
 On August 29, 2005, Hurricane Katrina devastated New Orleans and the Gulf coast. Proctor
& Gamble coffee manufacturing, with brands such as Folgers that get over half of their
supply from sites in New Orleans, was severely impacted by the hurricane. Six months
later, there were, as a P&G executive told the New York Times, “still holes on the shelves”
where P&G’s brands should be.

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