Article taken from: www.supplychaintech.com
What to do when human bias tangles the supply chain
By Laurie Joan Aron
To err is human. At least that’s what I kept telling myself after my son’s bar mitzvah last summer. A fit of irrational exuberance (thank you Alan Greenspan) in forecasting guests’ appetites at the subsequent festivities had left us with a mound of smoked fish big enough to sink the Queen Elizabeth. And in three days, as the saying goes, it would stink it up, too.
But my regrets pale in comparison to Cisco Systems Inc.’s (www.cisco.com) more recent pain. In the teeth of a $2.69 billion quarterly loss earlier this year, the San Jose, Calif.-based networking giant wrote off $2.2 billion worth of unsaleable, unusable inventory of networking and telecom equipment and devices. That’s a lot of fish and irrational exuberance.
According to Miles Cook, director of the supply chain practice at consulting firm Bain & Co. (www.bain.com) in Boston, Cisco’s entire system was geared for continuing wild growth. "Then demand came to a screeching halt. They went from moving at 100 miles per hour to zero," he contends. And more importantly, nobody at the company seemed to have developed a Plan B to turn off suppliers in a timely fashion and switch over to austerity mode.
Steve Geary, a self-described "factory rat" who worked in manufacturing for years before moving to Tilion Inc. (www.tilion.com) , a supply chain visibility vendor in Maynard, Mass., tells what he insists is a true story about a Cisco supplier caught in the cruel afterglow of Cisco’s optimism: This supplier was shipping in February and March, 2001, against purchase orders released by Cisco. One day, the supplier got a call from a Cisco representative who asked, "Didn’t anyone call you in December? No? Then shut everything down."
No warning. No time to ratchet down.
Says Geary, "Cisco was still releasing purchase orders based on expected demand, even as demand was slacking off. They failed to react in a timely fashion to slow the suppliers down. They just woke up one morning to find a Mount Everest in the stockroom."
Was this supplier wise to the fall in demand and trying to push through as many shipments as possible? Or were they equally blindsided? While that’s not clear, what is clear is that in company after company, demand forecasts are routinely ignored or altered by managers who don’t believe them, or prefer that they forecast something else.
"Most suppliers ignore data. In fact, everybody ignores everybody’s data," says Tom Petersen, president of ThreeCore Inc., a procurement service provider based in Danvers, Mass.
Cook agrees, based on retailers he’s observed. "They took output from the forecasting system, threw it away and typed in their own decisions on a weekly basis," he says. That’s one way to create an inventory problem.
"When you override the system, bias creeps in, and it’s always optimistic. Hope springs eternal, despite what the data says," says Cook. In fact, Cook tracked maverick behavior on this particular system implemented in a dozen different firms. Managers always revised forecasts upward.
People prioritize based on how management provides incentives, points out Cook. If you get compensated based on low out-of-stocks, you’ll be yelled at for every one you have. "Bias is skewed from the top down," he says.
Naturally, visibility platform vendors want to sell visibility as the solution to human emotions like optimism and pessimism rocking the supply chain, and procurement services vendors want to sell their procurement services. Petersen, however, relies on his pre-ThreeCore experience working as a supplier to equipment companies for his understanding of bias dilemmas. He didn’t want to get caught holding the bag if a big customer cancelled an order with a long lead time to produce.
"I’d routinely be given a forecast and routinely make my own guess," Petersen says. "The only thing you know is that the forecast is wrong. The question is, by how much?"
Clearly, the forecast piece of the supply chain is the weak link that provides the biggest opportunity for people to alter future reality, for better or worse. But a lot of the bias could be nipped in the bud by improving the tactics of forecasting.
Since the best forecast is an order, reducing cycle times as much as possible is an obvious solution, as is increasing visibility across the chain.
"When I was a supplier, I always preferred to reduce cycle times rather than to look for more accurate forecasts," says Petersen. "But I’d rather have visibility of inventory and pull rates."
Also, advises Petersen, don’t waste energy blaming sales and marketing for poor forecasting. "All these people can tell you is that the system is screwed up by sales forecasting; the simple answer is to reduce cycle time," he says.
Another solution is to create shorter forecast windows that are continuously informed by the reality of orders. "Forecasts need to be living and monitored to get the bias out," says Geary. "A 90-day forecast gives you 89 days of old information."
Tilion helps companies capture real-time information on orders and reconcile it with the forecast. If you’re consistently deviating in a particular direction, you know to slow down or ramp up production.
But — and it’s a big but — systems shouldn’t run companies. People should.
Despite our tendency to want to see the glass half full and getting fuller by the minute, Cook is insistent that people who understand how to use all the forecasting and supply chain visibility software need to be on guard for limits the system may have. Maybe employees are aware that certain vendors are more reliable than others, or realize that marketing has forgotten to tell the system about an upcoming promotion.
"People need to look at what the system is telling them, and not take it for granted," insists Cook.
Yet, in a peculiar way, Cook argues, human bias is a result of people’s over-reliance on systems to make everything perfect. "Companies will try to plan based on perfect performance of vendors, but vendors don’t meet all their commitments," says Cook. Companies also try to plan based on perfect performance by eager customers.
I’ve got a bat mitzvah celebration to plan next summer. Anyone want to put their leftover fish orders in early?
Bias vs. bias
Sometimes, bias in the supply chain is simple a matter of the different priorities of different departments within a company. In particular, it's finance vs. manufacturing/supply chain that tend to duke it out.
Where a supply chain manager sees fulfilled orders and close to zero inventory, the chief financial officer may see underutilized assets.
"A CFO may even order uptime and continue to overproduce low-cost items on high-cost capital assets," says Jim Presley, senior vice president of SeeCommerce (www.seecommerce.com) , a Palo Alto, Calif.-based supply chain visibility vendor. "The poor humans trying to run the supply chain effectively have different metrics, and then the forecasting people are kind of another breed."
That all these views need to negotiate a trade-off is "intuitive," says Presley. If there is no settlement, the supply chain can clog up for tiers of suppliers.