From Push to Pull – Perfecting the Means

What is “hybrid mode” supply management? A recent SupplyChainBrain.com article that covered a study by AMR Research describes it as a mixed manufacturing mode that lies somewhere between a make-to-stock (MTS) mode and a make-to-order (MTO) or engineer-to-order (ETO) mode (1). To appreciate the significance of the hybrid mode, it is important to understand that the role of supply management and customer fulfillment management varies from one mode to another. This variance is explained below (2):

• Make-to-Stock (MTS): The supply management process stretches from the acquisition of raw materials to deployment of finished goods inventories into the channel, while the customer fulfillment process involves taking an order and delivering it to the customer.
• Make-to-Order (MTO) or Assemble-to-Order (ATO): The supply management process covers staging the raw materials or semi-finished sub-assemblies throughout the supply network, while the customer fulfillment includes taking an order, doing final assembly, and delivering the product to the customer.

• Engineer-to-Order (ETO): The customer fulfillment process includes all the steps in the MTO and ATO strategy, as well as product development, engineering or configuration, and some sourcing steps.

As the SupplyChainBrain.com article notes, the mixing of these networks is becoming more and more common – but not without consequence. Many companies are transitioning from their old push system to a pull system in an effort to minimize unnecessary operations and inventory costs and maximize customer service. However, in their attempt to create a demand driven supply chain, the AMR study notes, companies often fail to configure their processes as rapidly as they configure their physical networks. As a result, the hybrid mode of supply management emerges.

AMR’s study found that some companies in this hybrid mode have incurred up to a 5 percent higher supply chain operations cost with up to 30 percent higher inventory and significantly lower customer service (1).

As Albert Einstein once said, “A perfection of means, and confusion of aims, seems to be our main problem.” In the past, conventional wisdom led many operations managers to focus primarily on operating their business as efficiently as possible. They believed they could be most successful if they strived for high product volume, high product standardization and a continuous process. But turbulent demand left them with excess inventory. While efficiency will always be important for operations, if customers don’t buy what the efficient operations are producing, then the efficiency metric isn’t really gauging the profit constraint.

Hence, many companies desire to switch from push supply chains to pull supply chains. But they have had trouble doing this across the entire supply network. Take, for example, a company with a desire to expand into a new market. Suppose the new market requires its order winners to have an MTO operation. If the company wants to be competitive, then it will accommodate the customer’s needs. It will begin to do this at the front end of the supply chain. But at some point toward the rear of the supply chain, production is still dedicated to forecast. Thus, the hybrid mode is born: the front of the supply chain operates in MTO mode and the back end operates in MTS mode. Since the company did not implement this new MTO strategy across the extended supply network and processes, it is likely that the expansion will result in higher costs, higher inventories and lower customer service (1).

According to AMR’s research, most companies (over 60% of those surveyed) operate in a hybrid mode. So what should they do? AMR offers the following advice (1):

With respect to performance expectations, set the dynamic process boundaries for customer fulfillment and the supply management of different modes.

1. Operate with blurred lines of separation between customer fulfillment and supply chain management.
2. Separate supply management and customer fulfillment processes and strategies and create a solution using existing applications.

1. If this advice doesn’t make sense, then perhaps Albert Einstein was right. If it does make sense, then it seems all that is left is to “perfect the means.” No easy task.

References:

(1) Anonymous. (April, 2003) Hybrid mode supply management is the answer to demand driven supply chains. SupplyChainBrain.com

(2) Asgekar, V. (October, 2002) Finding supply chain strategies that fit. Znet.com.