Predictive Analytics in Supply Chain Operations

Background

The common commercial availability of artificial intelligence (AI) and machine learning (ML) technologies has and will continue to have great impact on any field including commercial endeavors. Although the most popular form of AI is large language models (LLMs) such as ChatGPT or Grok AI, machine learning techniques will most likely have greater impacts. One very promising ML technique is predictive analytics.

Predictive analytics is the use of historical data combined with current information to forecast future conditions. There are several techniques for doing this, including the use of statistical models and regression analysis. Predictive analytics can be applied (Cote, 2021) to forecasting product demand, predicting equipment malfunctions, estimating cash flow, etc.

Potential Consequences of Implementation

For sake of discussion, we limit the examples to predicting equipment failure and forecasting cash flow.

To predict equipment failure, detailed maintenance logs must be maintained, data must be extracted, and from this, valuable information can be determined, most importantly date of last failure and mean times between failures. From this, a schedule for performing preventative maintenance can be established. Doing this ensures that equipment downtime can be minimized.

This is of course beneficial to any company using this equipment since downtime for maintenance can be scheduled for off-hours (when the machine in question is not heavily used) whereas downtime due to failure can happen at the most inconvenient time - and usually will.

There are several problems with using maintenance logs to predict equipment failure (Yadav et al, 2024). First, with companies using modern supply chain methodology, it is quite possible that the equipment in question is not owned but rather leased. Further, the company using the equipment, the equipment manufacturer, and the technicians servicing the equipment may be three separate businesses. These arrangements are possible third-party logistics arrangements (Quigg, 2022, p. 164-169). Who should collect and track maintenance records?

Also, what level of detail should the maintenance records be maintained: the equipment as a whole, subsystems, individual components? 

If the company using the equipment has only one of this type of equipment, there will not be sufficient data to make accurate predictions. The equipment manufacturer may not track their equipment once it is delivered to the customer. Finally, there may be multiple service companies that perform maintenance. Again, who collects the maintenance records and performs the predictive analytics?

The best solution would be to have the equipment manufacturer maintain relationships with the service companies. This often happens, and when it does, the companies providing service are called "authorized" or "certified" service technicians. Thus the equipment manufacturer would collect the data and perform the predictive analytics. The downside is that the company using the equipment must rely on the manufacturer for the predictions - which leaves open the possibility that mean time between failures are artificially shortened thereby inflating maintenance costs.

Unlike the prediction of equipment failure, the prediction of cash flows is very straightforward: there are only two possible places where data can be collected. The responsibility of collecting records of revenues and expenses lies either with the company itself, or with an external accounting firm. With the external accountants, no additional trust needs to be earned in order to perform cash flow forecasts (Quigg, 2022, p. 301-302).

Proposed Response

When considering whether to adopt predictive analytics, or any other technology, a company must consider the profit and loss associated with applying that technology.

By using predictive analytics to forecast cash flow, there really are no costs since all tools used for accounting and finance are capable of some form of predictive analytics. For example, Excel has the "Data Analysis ToolPak" for performing linear regression. The benefits of predicting cash flows is that this prediction allows for early business actions - it is not necessary to allow business savings to accumulate before purchasing an item (Wach et al, 2021).

The decision whether to use predictive analytics for anticipating equipment failures is not so clear. As indicated above, the primary company may not have access to the historical data needed to make such forecasts. Servicing companies can collect the data, but may not have complete data if the equipment manufacturer retains multiple servicing companies. The only company for which it is even possible to predict maintenance requirements is the equipment manufacturer, assuming qualified service companies send reports to that manufacturer. For the manufacturer, it does indeed make sense since the maintenance records can be used to improve product quality and can be touted as a benefit to using their machines. This benefit then carries over to authorized service providers and the company that uses the equipment and service technicians since it allows them to better anticipate operating costs.

References

Cote, C. (2021). "What is predictive analytics? 5 examples." Harvard Business School Online. Retrieved 3 October 2024 from https://online.hbs.edu/blog/post/predictive-analytics

Quigg, B. (2022). Supply Chain Management (1st ed). McGraw-Hill Create. https://bookshelf.vitalsource.com/books/9781307866025

Wach, M. & Chomiak-Osra, I." (2021). "The application of predictive analysis in decision-making processes on the example of mining company’s investment projects." Procedia Computer Science 192. https://doi.org/10.1016/j.procs.2021.09.284

Yadav, D., Kaushik, A., Yadav, N. (2024). "Predicting machine failures using machine learning and deep learning algorithms." Sustainable Manufacturing and Service Economics 3. https://doi.org/10.1016/j.smse.2024.100029

Review of "SCM and Business Strategy"

Abstract

In this review of “Supply chain management: Some reflections to improve its influence in business strategy” (Arrendondo & Alfaro Tanco, 2021) we briefly recount the history of operations management and supply chain management provided therein. We then examine some ways supply chain management (specifically, outsourcing and quality control) are relevant. Next, the qualifications Arrendondo and Alfaro Tanco list as the job requirements of supply chain managers are examined. Finally the organizational structure they recommend is criticized.

Article Summary

In “Supply chain management: Some reflections to improve its influence in business strategy”, Arredondo and Alfaro Tanco trace the evolution of the discipline of supply chain management (SCM) starting from its beginnings in operations management (OM) all the way to SCM as a business management philosophy. In recounting this history, the authors attempt to isolate when SCM became independent of OM.

In doing this they briefly examine the relationship between logistics and SCM, and propose four perspectives for looking at this relationship: traditionalist (SCM is part of logistics), re-labeling (SCM replaces logistics), unionist (logistics is part of SCM), and intersectional (SCM and logistics are related and share certain aspects). They assert that the intersectional perspective is the correct way of viewing this relationship and leads to SCM being of strategic importance to a business. They claim that SCM strategy is a crucial part of business strategy or that they may even be identical.

Because of the importance of SCM to a business, supply chain managers play a particularly vital role in the business. The authors describe what SC managers should do in order to make multi-partner supply chains work. The paper concludes with a description of the personality SC managers should have in order to make this happen, and the business organization that best allows SCM to provide value to a company.

Authors’ Purpose

Arredondo and Alfaro Tanco claim that supply chain management (SCM) plays a pivotal and underappreciated role in business operations. To prove this, they cover the history of operations management (OM) starting from before the industrial revolution up to today, focusing on how SCM emerged as an independent field from OM. Unlike Bayraktar et al (2007), they approach this from a pure business perspective. They also discuss how SCM differentiated itself as an academic discipline from logistics, and caution that equating SCM with logistics weakens the strategic advantages that good SCM can bring to a company. They conclude with a discussion of the characteristics that supply chain managers should possess as well as the ideal organization a company should have in order to benefit the most from good SCM.

Historical Background

Evolution of Operations Management
From Arredondo & Alfaro Tanco (2021)

The authors begin their history of operations management (OM) by claiming that prior to the middle of the 1500s, production was limited to mining, agriculture, and livestock. This changed in 1556 with Georgius Agricola’s “De re metallica” which detailed the processes of mining, refining, and smelting metals. The authors consider this to be the first OM textbook. Fast forward to the industrial revolution, where factory management was the primary concern of business owners.

This changed with Frederick Taylor’s publication of “The Principles of Scientific Management,” where attention shifted from machinery to work and began the phase of industrial management – as well as worker micromanagement. This period included Henry Ford’s moving assembly line.

With the start of World War II, industrial management was replaced by production management. Production management continued to be the predominant theory of business management until it was replaced by operations management and operations research, which was initiated in the late 1950s by a series of academic papers by Holt, Modigliani, Muth, and Simon (HMMS). These papers focused on production planning and forecasting (Singhal & Singhai, 2006) and involved what is today called discrete mathematics.

Operations research gave operations management a theoretical bent, and industrial engineers moved from engineering schools to business schools. OM theorists produced system-wide studies. Material resource planning (MRP) and enterprise resource planning (ERP) became important. Innovative approaches to OM came from Japan where MRP (a push system) was replaced by JIT, which used a pull system. (Arredondo & Alfaro Tanco, 2021, p. 10).

By the 1990s, theoretical OR started to be replaced by empirical studies involving direct observations of business processes. Operations management was still the predominant business management philosophy. The authors end their discussion of OM history there.

When and how did SCM emerge from OM? The authors trace the start of SCM to the HMMS works, noting how they studied integrated systems of managing production. The emergence of SCM was triggered sometime between 1980 and 1990 by the recognition of the importance of the extended supply chain, and that a holistic approach to various management systems – including organizational structure, planning, management control, communications and information, and evaluations and rewards – was needed. Logistics was also extended to issues such as inventories, supply, and distribution.

SCM thus grew to include OM as well as other business concerns (Arredondo & Alfaro Tanco, 2021, p. 13) including finance, marketing, purchasing, research and development, and IT. All this is codified in the 1994 definition of supply chain management supplied by the International Center for Competitive Excellence: “Supply chain management is the integration of business processes from end user through original suppliers that provides products, services and information that add value for customers.”

The strategic importance of SCM doesn’t lie in business operation or in logistics. SCM is really about value chains or value networks, the authors claim.

Application of Relevant SCM Theory

Producing quality goods and services is certainly desirable and becomes particularly important with businesses using the extended supply chain because of the tight integration of customers into SCM. The extended supply chain can both increase and threaten quality (especially product and design quality). Because a business outsources the production of component parts, the quality of those parts is no longer in control of the business. Compensating for this is the possibility of outsourcing the production of component parts to multiple suppliers – if one supplier delivers substandard components, another supplier can be used. This also allows for competition amongst the suppliers.

The production of quality goods is crucial for maintaining customer satisfaction, customer loyalty, and brand reputation. When faulty or substandard products reach the customer, the business incurs external failure costs from product returns, complaint settlements, repairs. (Quigg, 2022, p. 306, 337-338)

Even before reaching the customer, though, the business bears costs related to quality control. Internal failure costs (Quigg, 2022, p. 337) result from having to scrap, salvage, or rework products found to be defective. Determining whether a product is indeed defective entails appraisal costs. Prevention costs (Quigg, 2022, p. 337) are incurred when low quality parts require finding another supplier or even redesigning the product to compensate for the low-quality component parts. (Quigg, 2022, p. 306 – 307).

The ultimate solution to quality control problems is total quality management (TQM). TQM requires a cultural change not only within a business but extends to suppliers and other supply chain partners (Quigg, 2022, p. 340). By the end of this change, businesses should be involved in continuous improvement (Quigg, 2022, p. 340 – 341) as well as statistical analysis of defects (Quigg, 2022, p. 342 – 346).

Managerial Implications

The paper is quite explicit about the characteristics a good supply chain manager should have and the role he or she should play within a company. It also makes some specific recommendations about company organization.

Given the central role that SCM should play in business strategy, SC managers should be given significant roles in business operations. The SC manager is described as the nexus between the business and the stakeholders, and the authors describe the SC manager’s role as akin to the conductor of an orchestra. Overall, the SC manager is “the enabler that makes things happen.” (Arredondo & Alfaro Tanco, 2021, p. 16)

As such, SC managers should hold a staff position within the organization and should have "soft skills instead of hard ones." (Arredondo & Alfaro Tanco, 2021, p. 15). According to this paper, an SC manager should have human management skills plus a holistic view of the entire business, in other words a “systems” view. Technical skills are made secondary. These soft skills should include multicultural knowledge, change management, conflict resolution, interpersonal and communication skills, and ethical awareness. (Arredondo & Alfaro Tanco, 2021, p. 15)

SC managers should be cross-functional, process-oriented, and be included in managing interactions with customers and suppliers. Again, hard skills are not required.

Specific notes are also made about the ideal organization of the company: instead of a functional organization, a matrix-like structure that allows specific skills to flow between teams, thus eliminating “silos.” Not mentioned, however, is that employees in matrix-like structures have more than one manager. The overall business organization should focus on meeting customers’ requirements. The authors recommend “mandatory coordination” (Arredondo & Alfaro Tanco, 2021, p. 16) to make all this happen. This has implications for compensations and incentives as well.

The authors do not specify how the SC manager should fit within this matrix organization. Given the emphasis placed on soft skills, multicultural knowledge, conflict resolution, etc., it is not clear how much responsibility and accountability should be expected from SC managers.

Working across multiple companies – as is stipulated by modern SCM practices – entails a “power differential”: one company would have more “power” over another. This requires not only cooperation and a certain level of trust. The authors believe that a fundamental sense of partnership should be in place. This is the authors’ primary motivation for requiring all the above-listed soft skills.

Conclusion

The authors’ purpose is to highlight the strategic importance of supply chain management in contemporary businesses. They do this by explaining the history of operations management and how SCM evolved from that. They claim that SCM is not about logistics but rater value chains. The argument for the strategic importance of SCM is weakened, however, by the overly-broad conception of that they use: according to them, SCM should encompass all operational aspects of business operation.

References

Arredondo, C. & Alfaro Tanco, J. (2021). “Supply chain management: Some reflections to improve its influence in business strategy.” Innovar 31(81), 7-20. https://doi.org/10.15446/innovar.v31n81.95568

Bayraktar, E., Jothishankar, M., Tatoglu, E. & We, T. (2007). “Evolution of operations management: past, present and future.” Management Research News, ISSN: 0140-9174

Quigg, B. (2022). Supply Chain Management (1st ed). McGraw-Hill Create. https://bookshelf.vitalsource.com/books/9781307866025

Singhal, J. & Singhai, K. (2006). “Holt, Modigliani, Muth, and Simon's work and its role in the renaissance and evolution of operations management.” Journal of Operations Management 25(2), 300-309. https://doi.org/10.1016/j.jom.2006.06.003

Review of “The Impact of SCM Practices on Supply Chain Agility"

Abstract

In this review of Saa’da et al's 2022 paper “The impact of supply chain management practices on supply chain agility – Empirical study in medical sector”, we define the fundamental concepts used in their paper. Next, we examine some of the ways supply chain management theory is relevant to this topic, focusing on the concepts of postponement and make-to-order production. After that, the managerial applications of that paper are examined. The hypotheses that the authors use to validate their conceptual model are listed, and their most interesting finding is stated. Finally, a problem in their conceptual model is indicated.

Summary of the Paper

Saa’da et al (2022) examines the impact that five supply chain management practices – supplier integration, internal integration, customer integration, information sharing, and postponement - have on a company’s competitive capability, and how that capability influences supply chain agility. Their research is done by analyzing survey responses from 315 employees in Jordan’s medical sector.

The authors investigate the relationship between certain supply chain management (SCM) practices, competitive capability, and supply chain agility. They attempt to demonstrate that the SCM practices being investigated significantly benefit supply chain performance. They show that three types of supply chain integration (supplier, internal, and consumer) is moderated by competitive strength. Supply chain efficiency (or “effectiveness efficiency” as they call it) is caused by internal integration, customer integration, and postponement, but supplier integration and information sharing do not positively impact supply chain effectiveness. Finally, information sharing, customer integration, and supply chain efficiency is moderated by competitive capability.

In order to do all this, they evaluate and confirm the following hypotheses:

H₁ Supply Chain Management Practices are positively related to Competitive Capability.
H_1a Supplier Integration is positively related to Competitive Capability.
H_1b Internal Integration is positively related to Competitive Capability.
H_1c Customer Integration is positively related to Competitive Capability.
H_1d Information Sharing is positively related to Competitive Capability.
H_1e Postponement is positively related to Competitive Capability.
H₂ Competitive Capability is positively related to Supply Chain Agility.
H₃ Environmental Uncertainty mediates the relationship between Competitive Capability and Supply Chain Agility. (Saa’da et al, 2002, pp. 6-7)

From this, they validate a conceptual model where the five SCM practices positively impact competitive capability, where competitive capability positively impacts supply chain agility, and where environmental uncertainty mediates the relationship between competitive capability and supply chain agility.

Conceptual Model of SCM Practices
Figure 1 from Saa’da et al, 2022. - maybe needs correction?

There are several interesting findings, the most important being that consumer integration and knowledge exchange have an outsized benefit to competitive capability. (Saa’da et al, 2022, p. 12). As such, visibility into supply chain integration results not only in increased competitive capability but also improved supply chain agility.

Background

To understand this paper, it is necessary to define the terms being used: supplier integration, internal integration, customer integration, information sharing, postponement, supply chain agility, competitive capability, and environmental uncertainty.

Supplier integration is an SCM strategy that involves a company collaborating with its suppliers to improve the flow of data and communication between them. This gives the company visibility into the ability of the supplier to fulfill orders, and it gives the supplier insight into the company’s expected demands.

Internal integration, also called horizontal integration, is the process of connecting different departments within a company. This allows for collaboration and results in the elimination of duplicative efforts and “silos.”

Customer integration is the process of involving customers into the supply chain for purposes of gathering quality information, helping the company to better understand customer preferences.

Information sharing is the “comprehensive incorporation of all business procedures within and outside the organization so as to enable the exchange of information, as well as movement of products, money, and services” (Saa’da et al, 2022, p. 4). This allows stakeholders to view the entire business, not just the supply chain.

Postponement is a "deliberate action through which the final manufacturing or distribution of products or services are delayed until the receipt of customer’s order" (Saa’da et al, 2022, p. 4). This reduces risk by preventing wrong manufacturing or incorrect inventory deployment (Saa’da et al, 2022, pp. 4-5). Postponement, if not already in place, can involve significant reconfiguration of the supply chain, but can be considered valuable in some circumstances (Van Hoek et al, 1998, pp. 33-35).

Supply chain agility is the capability of a company to effectively respond rapidly to changes in consumer demand as well as market changes.

Competitive capability is a company’s ability to satisfy customer expectations relative to its competitors.

Environmental uncertainty is the degree of unpredictability of a company’s external environment relevant to that company’s operations. The causes of environmental uncertainties include unpredictable actions by competitors, changing customer preferences, and technological advancements.

Application of Relevant Supply Chain Management Theory

The authors discuss postponement as a supply chain management principle and present it as an unlimited good. Postponement is a strategy where certain final decisions are made as late as possible. In terms of manufacturing, this means delaying final assembly or customization of a product until the last possible moment. The obvious benefit is that companies are responsive to changing customer demands. According to Quigg (2022, p. 122), "risk is minimized because customized packaging is not performed in anticipation of customer orders or to accommodate a forecast." A second benefit described by Quigg (2022, p. 122) is that "total inventory can be reduced by using inventory of the base product to aggregate demand across multiple customers’ requirements." This second benefit is both debatable as well as ambiguous.

Quigg is assuming the company in question purely performs final inventory or customization. In this idealized model, the company maintains absolutely no inventory of component parts to assemble or generic items to customize. Are there any companies that operate in this manner?

There is an ambiguity in the statement that total inventory is reduced: reduced for whom? Even if a company exclusively performs final inventory or customization, stock must be maintained by suppliers and distributors must also keep some level of stock. In that situation, inventory and the associated costs are merely shuffled around.

Postponement is somewhat similar to make-to-order (MTO): both are production strategies that are highly responsive to customer demand. MTO is triggered only in response to customer orders and allows for extreme levels of customization (Quigg, 2022, p. 60). Postponement requires that products be kept generic until the last possible moment. All of this contrasts with make-to-stock (MTS) production, where levels of production are determined by estimated customer demands (Quigg, 2022, pp. 60-63).

While storage costs may not be minimized, obsolescence costs can be reduced. An inventory incurs obsolescence costs when the products in that inventory lose value over time – a good example of that being the change in asking price of a car for this year’s model vs last year’s model. (Mellal, 2020, p. 1-2). By delaying final customization, the risk of dealerships holding undesirable stock is thus reduced.

Even in an idealized world where a company can be devoted exclusively to customization or final assembly, there are disadvantages to postponement. For example, unforeseen logistical bottlenecks caused by strikes, shipping delays, problems in port operations, etc. are more disruptive because there is reduced buffer stock. This results in price increases, delivery delays, or both.

Managerial Implications

Supplier integration, internal integration, customer integration, information sharing, and postponement (in an idealized form) are shown to improve overall supply chain efficiency. This is especially crucial in the medical industry - the context for this study - where the timely supply of goods and services translates into the health and well-being of patients.

As indicated by the authors, organizations and companies no longer operate as isolated entities, but rather fulfill customer demands through supply chains that require multiple organizations working in cooperation. As such, “the core competencies of organizations lie in their ability to design and as well as manage their supply chain process.” (Saa’da et al, 2022, p. 2). Various qualities ascribed to supply chains (resilience, efficiency, reliability, etc.) are thus as important for the survival of a company as is the quality of the products they make or the services they deliver.

In terms of healthcare, supply chain efficiency translates primarily into cost savings, and supply chain resilience translates into ongoing availability of medical services in the event of natural or manmade disasters, radical market changes, pandemics, etc. Thus, a successful company in the healthcare industry must not only be able to produce high-quality goods and services, but it must also be able to deliver them in a way that is made possible through well-operating supply chains.

While postponement does not necessarily minimize inventory, reducing inventory build-up is certainly desirable. In the context of the healthcare industry, large inventories are problematic for products or medications that have an expiration date (such as hemostatic dressings and epinephrine pens) as well as vaccines that are reformulated on an annual basis.

The benefits conferred by well-run supply chains are by no means unique to the healthcare industry: any company can benefit from efficient, reliable, and resilient supply chains. Efficient supply chains streamline operations by eliminating excess inventory, reducing transportation costs, minimizing delivery times, and so on. Reliable supply chains minimize interruptions and “smooth out” cost variations by ensuring that multiple competing suppliers are used. Finally, resilient supply chains ensure continuity of company operations (and continuity of product delivery) against serious disruptions that can happen through any number of causes.

Conclusion

This paper reinforces the importance of good SCM practices to the competitive capability of a company as well as that company’s supply chain agility. As the authors note, “[c]ompetition among firms is no longer considered an issue in the contemporary world but rivalry between supply chains.” (Saa’da et al, 2022, p. 5). It is interesting to note, however, that the authors may have reversed the causal relationship between competitive capability and supply chain agility: their conceptual model implies that competitive capability benefits supply chain agility and not the other way around.

Corrected Conceptual Model of SCM Practices
Based on Figure 1 from Saa’da et al, 2022.

 

References

Mellal, M. (2020). “Obsolescence – A review of the literature.” Technology in Society 63, 1-6. https://doi.org/10.1016/j.techsoc.2020.101347

Quigg, B. (2022). Supply Chain Management (1st ed). McGraw-Hill Create. https://bookshelf.vitalsource.com/books/9781307866025

Saa'da, R.J., Al-Nsour, M., Altarawneh, A., Suifan, T.S., Sweis, R., Akhorshaideh, A., & Al-Lozi, K. (2021). "The impact of supply chain management practices on supply chain agility - Empirical study in medical sector." Academy of Strategic Management Journal, 21(1), 1-15. Retrieved 22 September 2024 from https://www.abacademies.org/articles/The-impact-of-supply-chain-management-practices-on-supply-chain-agility-empirical-study-in-medical-sector-1939-6104-21-1-111.pdf

Van Hoek, R., Commandeur, H., & Vos, B. (1998). “Reconfiguring logistics systems through postponement strategies.” Journal of Business Logistics 19(1), 33-54. Retrieved 22 September 2024 from https://togarsim.tripod.com/post/vanhoek_com.pdf