Logistics and Supply Chain Management, 4th Edition

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Reduced to its basic essence, the goal of supply chain management is very

simple – to try to match supply and demand. However, what makes this seem-

ingly simple task so difficult in reality is the presence of uncertainty. In other words,

for most organisations, on both the supply side and the demand side, there can

be no certainty what tomorrow will bring. This uncertainty brings with it a serious

challenge to the classic practice of running a business on the basis of a forecast.

The levels of volatility and turbulence that typify today’s business environment add

to the problem. It will be apparent that in conditions of stability – and hence lower

uncertainty – forecast accuracy should generally be high. Equally the converse will

be true, i.e. as uncertainty increases so too will the forecast accuracy reduce.

All forecasts are prone to error and the further ahead the forecast horizon is, the

greater the error. Figure 4.1 shows how forecast error increases more than propor-

tionally over time.

The lead-time gap

Most organisations face a fundamental problem: the time it takes to procure, make

and deliver the finished product to a customer is longer than the time the customer

is prepared to wait for it.

This is the basis of the lead-time gap. Figure 4.2 highlights the problem.

Matching supply

and demand

4



The lead-time gap



Improving the visibility of demand



The supply chain fulcrum



Forecast for capacity, execute against demand



Demand management and planning



Collaborative planning, forecasting and replenishment

The customer’s order cycle refers to the length of time that the customer is pre-

pared to wait, from when the order is placed through to when the goods are

received. This is the maximum period available for order fulfilment. In some cases

this may be measured in months but in others it is measured in hours.

Clearly the competitive conditions of the market as well as the nature of the prod-

uct will influence the customer’s willingness to wait. Thus a customer may be willing

to wait a few weeks for the delivery of a car with particular options but only a day for a

new set of tyres.

In the conventional organisation the only way to bridge the gap between the

logistics lead time (i.e. the time taken to complete the process from goods inwards

to delivered product) and the customer’s order cycle (i.e. the period they are pre-

pared to wait for delivery) is by carrying inventory. This normally implies a forecast.

Hence, the way most companies address this problem is by seeking to forecast the

market’s requirements and then to build inventory ahead of demand. Unfortunately

all our experience suggests that no matter how sophisticated the forecast, its

accuracy is always less than perfect. It has been suggested that all mistakes in fore-

casting end up as an inventory problem – whether too much or too little!

Whilst improving forecast accuracy will always be a desirable goal it may be that

the answer to the problem lies not in investing ever greater sums of money and

energy in improving forecasting techniques, but rather in reducing the

lead-time gap.

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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Forecast

error

Time

Figure 4.1 Forecast error and planning horizons

Logistics lead time

ManufacturingProcurement

Customer’s order cycle

Delivery

Order fulfilment

Lead-time gap

Figure 4.2 The lead-time gap