October 14, 2008

How to kill a "sacred cow"

By DC Velocity Staff

Attendees who arrived early for the session on "Supply Chain Management Professionals Case Studies" were rewarded for their punctuality. Prompted by a question from an audience member, Intel Senior Supply Chain Master Jim Kellso gave an impromptu lesson in "sacred cow" killing.

For years, Intel had assumed that when demand for their products exceeded supply, it was good for business—the company could charge more, leading to greater profits. But when supply chain analysts cast a critical eye at this assumption, they found that not to be the case. Instead constrained supply often led to severe whipsawing down the supply chain. Unsure of whether they could get all the product they needed, customers would place a larger order than they actually needed. As a result, Intel would ramp up production to match orders. Customers would start receiving exactly the amount of product that they had ordered. Unconvinced that this trend would continue, customers would continue to overorder until they had built up a significant inventory. At that point, they would greatly decrease the size of their order. Intel, however, working off recent order history, would continue to manufacture the same amount of product. This would lead to an oversupply of product, which Intel would then have to drastically discount. "It created horrific complexity on top of complexity," said Kellso.

When the company modeled the situation, it found that a certain amount of constraint is good. When demand exceeds supply by roughly 4-6 percent, the company benefits. But if demand went over that amount, the results would be bad for all. "A little constraint is good," concluded Kellso, "Massive constraint is bad."