Tuesday, June 25, 2013

Intelligent Policy Setting

In his newest white paper, Ed Pound from "Factory Physics" makes a number of excellent points, which I would like to discuss in this blog post. Factory Physics is a book written by Spearman and Hopp and has 'cult status' when it comes to making sense of supply chain behavior. As we SAP supply chain people all know (but too often ignore), it is imperative to make those customization and implementation decisions without a sound understanding of key principles and implications resulting from policy setting and the subsequent behavior of our supply chain (inventories go up - or down, missing - or ample - capacity, service levels).

Ed Pound talks about moving production from China back to Mexico, because the wages aren't that different anymore, and because of shorter lead times one can reduce inventories (or range of cover) and therefore save cost to be more competitive. But he does not just leave it at that. What I really like about his white paper, is that he not only points out the opportunity to use  more effective policy, but also mentions that policy setting is not enough... you also have to execute it! And here is where many fail... sadly so!

Looking at Ed's whitepaper we can see that just by shortening their supply chain, the company that moves from China to Mexico can increase their service levels, while holding the same inventory.

But look at the opportunity to reduce inventory!

As Ed Pound puts it: "The company would be much better off where ever they buy parts by making sure they use the policies currently in their ERP system. As shown by the red diamond (Predicted China) and the blue diamond (Predicted Mexico), the current system policies provide much better performance than is currently being achieved (brown diamond). This is a very common problem and points to the fact that most companies don’t have good control over the use of the ERP systems they already have in place."

I - and probably you too - couldn't agree more. Can you imagine if, not only would you have good control over using the policy that is in your SAP system - but also had a way to determine the perfect policy... even when the situation is changing!

power to the intelligent policy maker!

Ed Pound and Factory Physics have an incredibly useful website and the white paper I am talking about here can be found at


I strongly suggest to sign up with "Factory Physics" and like to thank Ed Pound for his allowance to use his white papers and other intellectual property.