The decision to change the supply chain operations strategy can be one of the hardest a company has to face. The supply chain is the lifeline of a company, and any changes to it can have a drastic impact on a company’s bottom line. But while most of the news we read focuses on supply chain disruptions and other disasters, there also exists a significant opportunity for many companies to use different supply chain strategies to their advantage.
Many companies today operate a single supply chain and fail to realize that distinct products often require distinct supply chains. Depending on the characteristics of the product as it relates to demand uncertainty, price sensitivity, and timing requirements, there are different options for building supply chains that maximize a company’s bottom line. The key is to find the right push/pull boundary, which defines at what point in the supply chain we keep stock and when it is safe to pursue a make-to-order strategy.
Long tail analysis is a method that graphs the relation between product demand, margin and variability, typically creating a long tail shaped graph. By employing this analysis, we can segment a company’s product offerings and determine how many distinct supply chain strategies are needed and also where to set the push/pull boundaries in each supply chain.
We recently employed a long tail analysis at an industrial company that was struggling with their single supply chain. In their case, the company had approximately 300 unique articles they ordered to be processed into the final products. However, they had a long lead time to receive the articles and low forecast accuracy for customer demand. They were struggling to meet customer demand for quality, quantity, and timing of deliveries because they were operating a single supply chain for all product types.
This was the case despite the fact that over 50% of their sales volume was made up of less than 10% of the articles they had to order. This presented an opportunity for the company: by designing a different supply chain for these few articles, they can keep stock and offer quick delivery of final goods to customers where before they only offered long delivery times. The other articles (lower volume, low forecast accuracy) would still be ordered as needed, and thus continue to follow the current supply chain strategy.
By utilizing long tail analysis to optimize supply chain strategies, we help our clients deliver significant benefits to their customers and increase the bottom line. To learn more about this topic and related case studies, we recommend MIT Professor David Simchi-Levi’s webinar “Complexity Reduction – Long Tail Analysis.” Also, download our white paper on Managing Supply Chain Complexity.
Written by Jeff Keene, a consultant at OPS Rules.