The American inventor Charles Kettering, who worked for GM from 1920 to 1947, once famously said: "a problem well stated is a problem half-solved." This quote reflects the current state of supply chain management (SCM) very well. One can even argue that problem statement in SCM can be much harder than executing a solution plan. A concise problem statement should start with identification of key trade-offs that are linked to the problem. Although identification of such trade-offs would be straightforward for another discipline, it is never the case for SCM. Indeed, supply chain complexities (due to diverse set of actions, agents, decisions, risks, and uncertainties) often cause misidentified trade-offs, leading to chronic problems along supply chains.
One of the often misidentified trade-offs is between standardization vs customization. This trade-off is quite problematic because supply chains must be designed to meet diverse needs of customers as much as possible. When the cost of diversifying services exceeds potential benefits of customization, decision makers should stop promoting customization and focus on standardization. Finding the right balance between customization and standardization is easier said than done. Here, supply chain professionals need rigorous analysis based on well-known metrics rather than rough terms of standardization and customization. For that reason, organizations should focus on the trade-off between amortization vs inventory costs, instead of the one between standardization vs. customization. When companies have expensive resources (e.g., machinery), they incur high amortization costs. This forces them to utilize such resources at a very high rate, which could only be possible with a certain level of standardization. The flip side of this approach is the accumulation of inventory of standard products that may stay in warehouses longer than customized products. Naturally, it may take longer for companies to sell a large batch of standard products than selling small batches of (similar) customized products that are designed for targeted customer segments. Focusing on the trade-off between amortization vs. inventory costs, companies can calculate economic order quantities and reduce setup costs of their resources. This helps them reach the peak level of customization without compromising the cost advantage of standardization.
Another often misidentified trade-off is between responsiveness vs efficiency. Supply chains ought to be responsive enough to meet uncertain customer demand without keeping excessive inventory. Such a responsiveness requires companies to keep idle resources, so they can utilize the resources whenever needed and respond quickly to customer demand. However, having slack resources causes operational inefficiencies and, subsequently, higher expenses. This may be unnecessary for some companies. If a company has superior products, for example, their customers may be willing to wait for a long time to buy the products. In this case, investing in responsiveness would be unnecessary. Managing this trade-off would be very difficult in the absence of detailed analysis. A detailed analysis is only possible with some measurable metrics rather than rough terms of responsiveness and efficiency. For that reason, decision makers should focus on the trade-off between utilization vs lead times, instead of the one between responsiveness vs efficiency. The direct relationship between utilization of resources and wait time of customers is indeed given by the Little's law. Thus, supply chain professionals can find the right balance between responsiveness and efficiency by concentrating on the trade-off between utilization vs lead times and employing related analytical models.
These two trade-offs (i.e., amortization vs inventory costs and utilization vs lead times) are not the only ones. There are different trade-offs in supply chains, having an impact on business models. Please check my forthcoming book for a detailed analysis of all fundamental trade-offs.
Author: Isik Bicer, PhD