When I first learnt of the phrase supply chain during my grad school days, I thought that it had something to do with the supply of chains! Over the next few years as I started building a career in the field of supply chain planning I did a few things right and a few things wrong. One of the bigger mistakes and perhaps the biggest had to do with my refusal to understand the business level math behind it. For the longest time, I had an aversion to learning the Return on Investment (ROI) that can come from working on a business’s supply chain plans.
Now, I do not want to say that I did not learn any of the math related to supply chains. I invested a bunch of time understanding the different forecasting algorithms, ways to calculate safety stocks, and do calculations on material and distribution requirements. I did optimization projects, where one used the math programs to calculate the most profitable or the least cost options to run a business. Being trained as an Engineer, I was naturally drawn to this kind of ‘serious’ math. So, what is the difference between this math and the math that I did not spend time on? Well, let me explain.
The math that I neglected to learn in the beginning (and for quite some years if I am being honest) is a very simple one. Why should a company do any of the projects that I was working to become an expert in implementing? As I learnt over the years looking at the glazed over look from many a sponsor that they simply did not understand nor cared for the math behind the very detailed calculations. These were seasoned business people who looked at expenses as an investment and wanted a return on the same. The math they used was relatively straightforward, but greatly important, because it can be traced back to the bottom line. They were very interested in boiling down the claim to very simple numbers which they can take through a mental calculator to decide whether or not it was a worthwhile investment to make.
Questions that required this type of thinking
- What is a 1% improvement in forecast accuracy worth to my business? Does that mean I can sell more and increase the top line? Or supply better and improve the bottom line? How will this make my customers happier and how can I gain from that?
- What is a 1% gain in service level worth? At what cost can I get this 1% increase? What will I get in return? How can I dollarize it?
- What do you mean I can use my assets better? Do you mean I can reduce my labor force? Reduce shifts? Get cheaper raw materials? Assuming I trust that your solution’s math works to do this, can you show me the math of how it affects the business?
Over the years, I learnt that not knowing this math was, at best, a hindrance in communicating with the client’s decision makers. At worst, it became the roadblock in making a sale. As the old line goes, first someone sells something, then a lot of stuff follows. And selling in the field of supply chain planning was tough to begin with. A few reasons that I learnt were as follows:
- Planning is about the future, and future by definition is uncertain. The emotional response in most people to uncertainty is that of stress. As a result, planning is very often done as a compulsion and without a lot of motivation. And, as no plan is perfect, it is difficult for a lot of people to see value in the process of planning.
- Supply Chain planning departments have the unenvious job of balancing the two strongest departments: sales and operations. Given the fact that the leadership in many businesses very often was comprised of people from those two departments, it was often an uphill battle to make them understand the virtues of better planning. The same leadership would often not hesitate spending millions on a robot or a better sales support system because they could more easily grasp the value proposition.
- Many of the earlier vendors had made exaggerated claims about the gains in the 1990’s which failed to materialize after very big projects. This had created a negative perception of the ROI claims in the market place from supply chain planning projects.
It took me about 8 years to begin to understand how important this math was to my own success. Over time, I changed my way of thinking and got more and more interested in the math behind ROI. I also learnt the need to think hard into dollarizing every return so one could fit it into the math behind ROI. While the math behind ROI remained simple, the question of dollarizing every return turned out to be very interesting and thought provoking.
I would like to think I have learnt the lesson from my mistake. As they say: Better late than never.