Supply Chain Management Guru Hau Lee on Demand Forecasting

Hau Lee envisions the perfect supply chain not as a chain at all. Instead, it?s an intricate network of suppliers, distributors and customers who share carefully managed information about demand, decisions and performance, and who recognize that success for one part of the supply chain means success for all. The problem, of course, is that companies do not always want to share. That?s where CIOs need to step in and help manage the flow of information and build trust among business partners, says Lee, a Stanford University professor and director of Stanford?s Global Supply Chain Management Forum.

In a telephone interview with CIO, Lee explained the types of supply chain information that he thinks companies need to share and described what CIOs can do to help. The following is an edited transcript of that conversation.

Getting Stuck on Demand

The first problem companies face is a lack of visibility into your partners? demand forecasts. For example, 3M needs information about Procter & Gamble?s production schedule of diapers so that it can plan for the components that go into the diapers. Meanwhile, P&G needs point-of-sale data from Wal-Mart to plan its diaper production. Having demand information from everyone in your supply chain lets you synchronize what you are doing with your customers and suppliers. It also helps you avoid some fatal mistakes, such as building too much manufacturing capacity?or too little.

Cisco embarked on an e-hub project to help solve this problem last year, and it is the most ambitious undertaking that I have ever seen. Cisco?s plan is to try to involve not just its first-tier suppliers but the second tiers and third tiers. What the company found is that sometimes when it has materials shortage problems or delivery problems, it is because of the second-tier or third-tier supplier. For instance, the first-tier supplier to Cisco is Solectron. The supplier to Solectron might be Quantum. Then there are suppliers to Quantum. If the supplier to Quantum is late, that creates problems at Quantum, which would then stop production at Solectron. Cisco wants to have information transparencies at all these layers. Because if Cisco had gotten wind of these problems right away, it could have found an alternative supplier in time to avoid any delays.

Sharing Decisions

Companies are oftentimes not aware of the decisions that other players in the supply chain have made. When that happens, we get burned. Say I?m Hewlett-Packard, and I?m going to introduce a new generation of laser printers and do heavy-duty promotions in North America. If the retailers are not informed, then they may run other promotions that are counter to the HP promotions. Or, they won?t know to start discounting existing products to make room for the new stuff, and they are stuck with obsolete products. Sharing this decision information isn?t very difficult?an e-mail will usually do the trick. It?s more an issue of trust and understanding the consequences that your decisions have on others.

Metrics for All

When companies collaborate, it is difficult to know how well everyone?s doing. I can measure what is happening to me, but I don?t measure any of the activities that fall between my company and a supply chain partner?what I call interface activities. Interface activities tend to be the things that nobody measures?what everybody thinks is another partner?s responsibility.

For example, the Singapore airport is one of the most efficient at moving passengers in and out. Not only does it measure the time passengers spend going through customs, claiming baggage and so on, it even measures the time that passengers spend waiting for a taxi. The Singapore airport measures these things because if it doesn?t, nobody else will. The airport commissioner shares flight schedules with taxi drivers and keeps track of whether they are picking up passengers within a reasonable time. That?s a way to improve the overall supply chain instead of a segment.

The CIO?s Role

CIOs are going to be the arbiters of their company?s information visibility. CIOs need to design systems and processes so that the right information goes to the right players, not simply to everyone. The role of the CIO is not just asking questions about what technology we should have in place but also asking questions like: What type of data should we be sharing and what should remain private?

Companies today are more likely to share demand information than decisions or performance metrics. Companies become concerned that suppliers might leak those decisions and metrics to competitors. For example, consider what happens when a third-party logistics company puts your stuff in the same truck or warehouse as your competitor. You?re doing a big promotion and suddenly those trucks and warehouses start to fill up, and your competitor starts wondering why he can?t get his stuff in there.

Performance measures are even tougher because companies are afraid of showing their weaknesses to anyone. But even if old habits die hard, I don?t think we can afford not to share this information. Customers don?t care who is at fault if they don?t get their product?if you sold it to them, they will blame you no matter what.

Customers are going to demand more and more from your supply chain. If you are late because your distributor is late, your customers will go to a competitor whose distributor isn?t late. That is more than a company-to-company competition. We?re going to see more supply-chain-to-supply-chain competition. If one link suffers, the whole thing suffers, which means that you have to use supply chain measures. You can?t just measure within your own four walls anymore.

The challenge for CIOs is that their strength is internal focus. Now the CIOs have to go hand in hand with the people who are managing supplier relationships to lobby for why suppliers should be sharing this type of information. It?s a different role?CIOs not acting as information gurus but working as a team with traditional, functional relationship management people and with customers. Their perspective needs to expand.

The mental picture that I have in mind is really the supply chain network, a network of companies where people see eye-to-eye. There?s congruence of information: You don?t have one view of future and I have another. There?s congruence of decisions: If you stock more, I stock less. And there?s incentive congruence: We see eye-to-eye that the success of the overall supply chain is our success.

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