On Industry 4.0, Complex Adaptive Systems and DDMRP

This interview will be published in the presentation booklet distributed to the participant to the Logistik Technologie- und Innovationspark (TIP) fair in Zurich on April 6th and 7th, 2016. Please visit http://www.vnl.ch/en-us/events/logistik-tip.aspx


Where do you see the mid and long term supply chain challenges in for Switzerland?

Switzerland must become price competitive without disrupting quality and service. The major challenge is to change our thinking of how supply chains work: companies want to reduce their unit cost and they see Industry 4.0 as a way to achieve it. But: reducing unit cost is not the same as improving your company returns: in fact, often exactly the opposite happens. Without understanding how supply chains work you may well end up digging your own grave with Industry 4.0.


Switzerland uses innovation to differentiate from its competitors. How do you see the situation for an innovative logistic?

I believe that from a technology standpoint we will be leading. Switzerland has a tradition of leading technologically. But here again, I don’t see the major challenge as a technological one, but in our mental ability to understand and accept some fundamental changes in how to think about supply chains. Otherwise we will end up at becoming very efficient at doing the wrong thing: this would be a catastrophy.


Where do you see your contribution in addressing these future challenges?

We help companies to get their supply chain under control. To do this you need first to understand that supply chains are not linear system but Complex Adaptive Systems (CAS). CAS behave with different rules that are sometimes counterintuitive and the opposite of generally accepted rules used todays. Unfortunately some of todays rules, which are more than 60 years old, are firmly embedded in the algorithms at the core of our ERP systems. These rules are outdated and are not fit for today’s highly volatile and complex supply chains. Then we help companies designing and implementing a demand driven operating model and use Demand Driven MRP (DDMRP) to plan and execute their supply chain. When you do that you truly get amazing results. Generally inventories go down by 30-50%, service levels are maximised and most expediting activities, which account for a major portion of supply chain cost, disappear. We have seen companies where their returns on capital employed, and hence their profitability, has increased by several times.


Could you describe the problem that you are helping your customers to overcome?

You procure raw materials (with long lead time) and you create your manufacturing plan based on forecast figures provided by your sales department. You have optimised your production schedule to achieve high utilization and lowest cost. Unfortunately the forecast turns out to be wrong. Priorities have changed and what you produced doesn’t seem to be needed anymore. Worst still, management is asking you to disrupt the schedule on your bottleneck equipment to fit the new priorities. You need to call your suppliers and ask them to expedite and increase – or delay and decrease – some of the orders already placed. Express shipments, reworks and inventory relocations are necessary to achieve service level. Everybody is constantly under stress and the customer is unhappy. Finally you will sell at discount prices products that you produced but nobody wants…


How does your solution to this problem look like?

Demand Driven planning is fully aligned with the new CAS theory of supply chains. When you know what the relevant information is and where the leverage points are in your supply chain you can get it under control and it works. The good news is: it is much easier to implement and operate compared to traditional planning. The two fundamental changes are: a) the placemement at very specific positions of buffer stocks that act as decoupling point and stop the transference of variability (Bullwhip) across the supply chain and b) the use of sales order and pull signals to generate supply and manufacturing order recommendations. Forecast can be used for sizing and adjusting the decoupling buffers, but are not used to generate supply or manufacturing orders.


Could you summarise the core concepts in one sentence?

The flow of relevant materials and information drives company returns, not unit cost reduction.