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How good is your supply chain optimisation?

System demos are tedious things at best. The developers are trying to showcase the best aspects of their baby in best possible light. They have spent months, sometimes years, thinking about and developing functionality. It is really a big ask to show off the usefulness of it all, in half an hour or so.

But I sat through this system demo, as I do with many others, because I make it my business to always know what is the latest and greatest in supply chain management.

They called it a revenue optimisation system and it was already being used at one of the customers who had a need for it. I was being asked to assess the commercialisation potential. Because I am not really an expert in commercialisation of new software, I only agreed to provide my opinion on supply chain applicability of the software.

Most developers lack Steve Jobs’ slick user interfaces and presentation skills. It took sometime to understand what the software did, and how. The main reason it was worth doing it was because there was already a live customer, a fortune 500 company – and if one company had a problem that this software solved then surely others would have it too.

My expectations of revenue optimisation included modelling of price elasticity, behavioural scoring to determine optimum pricing, yield management, and perhaps even bundled offerings to upsell and cross sell products and services. On the revenue management side, I expected a smooth workflow of the entire customer order, fulfilment and delivery process to manage price discounts, enable revenue recognition at the right time, and prevent revenue leakages which are so common in many large companies.

When I managed to understand the crux of what this system did, I realised it only helped in recognising the revenue at the right time in the customer order fulfillment cycle. This was necessary for compliance with the accounting conventions, and a very useful function.

However, to call this set of functionality revenue optimisation system, or revenue management system was a gross over-stretch.  This is yet just the most blatant and recent example of system hype that I have encountered.

Optimisation has become the holy grail of supply chain management by now. Everyone talks about optimisation and how well they are doing it. Yet, most people do not have full realisation of the limitations of their optimisation systems.

In my book ‘Unchain Your Corporation’ I recount a story where a supply chain optimisation system with very complex algorithms, and which was installed in a company after spending over $300 Million over 2 years could not compete with simple Excel based manual optimisation system when same inputs were used. This was not an isolated story either. In fact, every system based optimisation must be tested first by common sense, and then by comparison.

In defence of the system, sometimes near enough IS really good enough. Also, sometimes speed of answer is more important than the quality of the optimisation.

Yet, when people use these algorithms to make long term multi-billion dollar supply chain infrastructure investment decisions without realising the limitations of the optimisation itself, they are doing no better than what wall street does when assessing risks of toxic assets using flawed Value-at-risk models based on unrealistic assumptions. Another lesson from this analogy is never to rely on the brand name of the service provider, because you carry the risk of flawed modelling, not them.

Test everything – and understand the limitations of the system you are installing, because there no ideal systems, and every system has some use. You just have to find the right system for the problem you are trying to solve. And, do not seriously look at a system until you are truly clear about what problem you are trying to solve.

 

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