Understanding the Supply Chain and Making It Work For You

by Mel Haynes, Sr. & Bill Scott

It doesn't sound like much if you say it fast. But understanding the term "Supply Chain Management" depends on where you happen to be in the chain and involves anyone who affects, and/or is affected by the supply chain. For a person such as myself who spent most of their productive life involved in database analysis and data modeling, it's just another way of envisioning 'process analysis', but even that requires setting up boundaries or the entire exercise becomes a useless mess.

For example: It is common practice to have the people that pay the bills and the people that buy the products separated into two groups, yet there is always an invisible link that tends to interfere with the capabilities of both groups. 'Process analysis' forces us to break down the processes in each group and identify redundancies or worse, where they actually cancel out each other.

Everything that happens in business affects every other thing in either a substantial way or ever so slightly so that the effects are imperceptible... or somewhere in between. To someone interested in getting the right products into a retail store at the right time the chain involves, manufacturing, marketing, advertising, logistics and distribution, etc. but is affected by CEO's, management teams, salespeople, warehouse workers, vehicle maintenance crews, etc.

How Much Is At Stake?

In retail stores, with $1.1 Trillion being lost annually due to inefficiencies in the supply chain in the U. S. alone, mainly those inefficiencies responsible for not getting the right inventory into the hands of the consumer at the time they are ready to buy, I would suggest the field is wide open for anyone with a passion for helping to clean up the mess.

One-hundred years of antiquated retail store management policies have kept us in a mass-market mentality, suggesting, ‘if you put enough stuff in a store, someone will buy it.’ If nothing else, Amazon should have taught us that we have moved into precision markets and using inventory for decoration in retail stores does not increase profitable traffic; in fact, mostly it increases non-profitable traffic.

The supply chain has always been there, but the supply chain alone is not the issue. It’s what you do with the data you accumulate to cause the supply chain to run efficiently. For example: it’s not enough to observe that the sales of corn flakes are going through an upward trend, you have to know why, and you have to use that information to affect the farmers producing the corn, the paper companies making the boxes, factories producing the glue to hold the packages together, and the advertising agencies planning the next marketing exercise for the products.

Obviously, we are just beginning. We have so much more to learn. Anybody can collect data from a supply chain. The real money is in how we refine the processes by using that data to increase profits. That’s the problem with selling the idea to retailers.

Mel Haynes, Sr. keeps reminding me, 'you have to make interesting stories out of otherwise boring data'.

As it stands, all retailers see are the complexities involved, take a look at their balance sheets and say, “I ain’t dead yet,” and forget about it for another month, adding yet another tiny weight to the ankle bracelet that's pulling them down. But they won’t be able to forget about it forever. Their day of reckoning is coming.

Retailers' customers are being spoiled. They know what they want, and they want it now. If you’re a retailer and you don’t have the item sought, you may have just lost a lifetime of sales. The problem is that retailers can no longer afford the luxury of carrying every possible item their clientele might desire on the spur of the moment. But equally as important is not having an item that not only produces profits, but affects items in the store that have no apparent relationship with items that could produce greater overall profits if only we had the data.

If you try to look at the chart above you will probably go blind. To the average retailer, it just looks like a mess, but to the trained eye, it provides an enormous about of valuable information that describes the connections and relationships of thousands of items. For example the the centerpiece of the chart above represents "Whole milk" and it's relationship to newspapers, bottled beer, hygiene articles, coffee and cream cheese, etc. The graphic also tells us we will sell more whole milk if we offer beef and buns.

"Who cares," you are probably thinking? Walmart, Target, Costco, and thousands of other retailers care (or should care) a lot. These are things beyond the capabilities of the human mind and without someone to make sense from data like this you are losing market share, and that's causing you to lose more money. Okay, so you can't afford such a person just yet, but there may be a way to get that kind of information without having to mortgage the store, and if there is, wouldn't you be better off?

Tracking the relationship between various items is only the tip of the iceberg. You have to go deeper than that… a lot deeper. It may be much more important to take into consideration the advantages and disadvantages that one single item adds to the whole picture. If you want to be the best, you must concern yourself with cannibalization, effects on companion items, and the overall store in general. Can you do that?

 In musical recordings they turn your favorite symphony into ‘ones’ and ‘zeroes’ by “sampling”. The idea is your brain can’t handle all of the sound available, so a percentage of that sound is discarded, leaving it up to your brain to fill in the gaps. They use a circuit called an ‘analog to digital converter’. It works pretty well... most of the time.

My good friend and customer Bobby Ash, who owned Hunt County Petroleum in Greenville, TX, did that all the time with his speech. He used less than 75% of the words necessary to complete a sentence. You had to know Bobby for a time before you could understand what he was saying. It was kind of like shorthand, but Bobby could put a thought into words faster than any human being I ever met. If he started a sentence and the outcome was obvious, he just skipped it. 

Efficient supply chain management uses a similar technique that attempts to discard extraneous material, leaving you with just the data you need to make decisions. The more data not discarded, the more accurate the decisions, but having part of the information is much better than no information at all. For example: a colorful graph is useless unless you know what it represents, who made it, and for what purpose. Refer back the picture at the top of this article. It's chocked full of valuable information, but in this setting it is virtually worthless.

One example is when Mel called me one day and blurted out, “Golden Flake Potato Chips drives Coca Cola sales in several locations.” The computer code required to come up with that information is extensive and by itself it's nothing more than an interesting anomaly. But my brain doesn’t function like that. Immediately I began to consider how that information could be used to increase profits, and I began to ask questions like, 'what would happen to Coca Cola sales if we had a sale on Golden Flake Chips? If we increased Coke prices, what would be the effect on the chips.’ The only way to determine the outcome of either is with an experiment, but the question still looms in my mind to this day. Without the experiment, the information is useless.

Another example that comes to mind is that Honey Buns sell like crazy at certain times during the day, and the rest of the time they just take up space. What would happen if we sold them for less when they normally don't sell? The results were obvious... we sold more honey buns, but we made money we would not have made otherwise.

Managing the supply chain means more than tracking items from their source through the manufacturing processes, the distribution channels, the retail stores and ultimately to the consumers. Changes at any level can cause universal occurrences up and down the supply chain, so the basic information is just that… BASIC.

One stark example can be seen when a supplier dumps a shipper off at a retailer which can wreak havoc throughout the entire store. The outcome of such an incident, in addition to causing a manufacturer to get rid of his mistake, clogs up the supply chain downstream for months, in some cases for years, causing everybody in the supply chain to pay a hefty price.

It all boils down to this: First, buy only what you can sell between delivery cycles, don’t run out, and stop using expensive inventory to decorate your stores. This will free up capital to concentrate on making as much profit as you can on the items you are selling, and as Mel Haynes tells me all the time, “Learn to lose less money.” 

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