Scaredy Cats Cause Supply Chain Inefficiencies

Wars, earthquakes, labor disputes, outbreaks of disease, investment bubbles all affect the supply chain. And as with the stock market, so with the supply chain: In many if not most cases, it’s human psychology that causes aberrations in behavior. Loss of confidence in a supply chain can lead to such activities as highly disruptive hoarding on a large scale, according to a recent paper by Hau Lee, Thoma Professor of Operations, Information, and Technology at the Stanford Graduate School of Business, and marketing and logistics professor Martin Christopher of Cranfield University in the U.K.

At the company level, according to Lee and Christopher, concern about possible delays in shipments—related to natural and to human-created disasters—frequently lead to companies stockpiling inventory or even building warehouses, extending delivery times, or even using lower-quality, but nearer (read “domestic”), suppliers.

One example cited by Lee is Cisco Systems, which was stuck with $2 billion in excess inventory in 2001 when market demand died down after years during which elements Cisco’s supply chain tried to keep up with demand for network infrastructure products by the unhealthy expedient placing extra orders.

Lee’s solution for avoiding costs on that scale is supply chain visibility, in the sense that all partners in all channels need to communicate honestly with each other in real time. And companies should also be sure to have on hand—Plan B, just in case things get out of hand despite all possible transparency. Ironically, these measures still ultimately rely, of course, on the good will and cooperation of the humans involved as partners in a supply chain.

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