Overview

As logistics and supply chain professionals, we all have one thing in common. This commonality is that time is a scarce resource, one that must be treated as a treasured commodity. This means that we must choose wisely when deciding what books to read or what avenues to pursue for professional development. With any luck, when we do invest our time in reading an industry book, we will walk away with one or two “golden nuggets” that can help us with our dayto- day responsibilities and challenges.

As the competitiveenvironment changes the way we do business, companies are embracing Lean and Six Sigma initiatives to support cost reductions and quality improvements. Although Lean and Six Sigma programs were separate initiatives in most organizations initially, today’s firms see that Lean and Six Sigma do not compete against but rather complement each other and provide for dovetailing of continuous improvement activities.Although logistics does involve internal operations and stretches to up- and downstream trading partners in the supply chain, it is fair to say that any definition of logistics will need to involve the management of inventory, whether it is in the form of hard goods (materials, people) or soft goods (information). If there is no inventory to move around, there is no need for logistics.

The concept of variation reduction is paramount to the logistician :

The concept of variation reduction is paramount to the logistician. As stated above, logistics is about managing inventory, and managing inventory is about managing variance.* If we look at the different types of inventory, we will plainly see why variation plays such a vital role in how we manage inventories throughout the business and the supply chain.

For example, safety or “buffer” stocks are inventories that we need to hedge against unknowns (i.e., the variations from the norm). That is, we maintain safety stocks because of variation in supplier quality, transportation reliability, manufacturing process capability, and customer demand patterns. In other words, if we can understand and control variation in our processes from supplier to customer, then we will be able to reduce our reliance on the buffers dramatically.

In this regard, logisticians need to think of themselves as actuaries, like those who develop rates for automobile insurance. Actuaries look at key variables — the age of drivers, gender of the drivers, types of vehicle driven, measures of past behavior (e.g., speeding tickets and accidents) — and then they determine insurance rates that reflect the variability in the data. This is precisely why the sixteen-year-old male who drives a sports car will have the highest insurance rates!

Logisticians are no different than the actuaries in this analogy. For demographics and sports cars, the logistician substitutes supplier competence, transportation reliability, and demand fluctuation. Then the logistician determines the “insurance rate,” using inventory as the unit of currency. The problem here, though, is that too many logisticians are treating their companies like teenage drivers when, in fact, the company performance is more like a middle-aged soccer parent who drives a minivan. A down-to-earth example of this is when a manufacturer has leveled demand from a supplier who is an hour down the road from the plant, yet the manufacturer continues to carry twelve days worth of that supplier’s parts in inventory! Why? Most likely the answer is twofold. The first reason is that the leveled flow (and therefore low variability of demand) is not understood; the second reason is more emotional. The emotional part of the equation is simply that industry is addicted to inventory. Make no mistake about it — industry has an addiction to inventory. and as with any addiction, inventory is something that most companies cannot imagine living without.

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