Looking back over my 30 years in supply chain planning, one thing always stands out: companies that focus on reducing risk multiples achieve faster, more significant, and more sustainable results than those that concentrate on risk sources.
What are Risk Multiples?
In supply chain management, "risk multiples" are factors that can amplify the impact of uncertainties. Lead Time and Replenishment Cycle (RC) are two of the most significant risk multiples.
- Lead Time is the time it takes for a product to move from the supplier to the customer. Longer lead times increase the risk of disruptions as they provide more opportunities for delays and errors. Effective lead time management means reducing the time taken to fulfil orders, thereby minimizing the window for potential problems.
- Replenishment Cycle (RC): The replenishment cycle is the period between placing one order and the next. If this cycle is too long, you risk stockouts or holding excess inventory, both of which are costly. Shorter cycles reduce these risks but require more frequent ordering and potentially higher costs. Finding the right balance is crucial in optimizing inventory levels and ensuring a smooth supply chain.
Key Risk Sources: Forecast Error and Lead Time Error
Risk sources are the underlying uncertainties that can disrupt supply chain performance. Forecast and Lead Time Error are two of the most critical risk sources.
- Forecast Error: This occurs when there is a difference between predicted and actual demand. High forecast error means your predictions are often inaccurate, leading to excess inventory or stockouts. Reducing forecast error involves improving demand forecasting accuracy using better data and more sophisticated models.
- Lead Time Error: This happens when actual lead times differ from expected ones. Variability in lead time can cause significant disruptions, impacting when replenishments arrive. Reducing lead time error requires working closely with suppliers for more consistent delivery times, improving internal processes, and possibly using local suppliers to minimize transport delays.
Where Should Management Spend Their Time?
Historically, supply chain managers have focused heavily on forecast risk, investing heavily in AI-driven applications that promise better demand prediction insights. While this is undoubtedly important, my experience shows that companies focusing on reducing their multiples outperform their peers.
I cannot begin to tell you how many companies I work with that have just "set and forgotten" about Lead Times and Minimum Order Quantities (MOQ). Yet, the irony is that getting these factors correct will have a much more significant impact on your business than making incremental improvements to forecasting.
DDMRP to the Rescue
This is what I love about the Demand-Driven Material Requirements Planning (DDMRP) methodology: it doesn't focus on forecast risk. Instead, it aligns the entire company around managing risk multiples during both the implementation phase (the 5-steps of DDMRP) and the ongoing operations improvement phase (Demand-Driven Sales & Operations Planning, or DDS&OP). This approach consistently delivers bigger and more sustainable results.
While there isn't a magic formula for reducing lead times and minimum order quantities (MOQ), as leïla bouhali taught me in my early days with DDMRP, reducing lead time and MOQ ultimately comes down to a negotiation with your suppliers and production teams. It is not an easy negotiation, but it is one worth having soon.
(P.S. and if you haven't updated these in a while, you have an opportunity to make a big impact with minimal effort.)
Think flow,
Kevin Boake
