Around twenty years ago, I worked for an engineering business that used a lot of specialised electronic components.
Some were tiny. Some were relatively expensive. Many arrived at our warehouse on reels.
We carried out final assembly ourselves, but the circuit boards were sent to a subcontract manufacturer to be populated before coming back to us.
That meant we built the component kits in our own warehouse and sent them out with the boards.
On paper, it was pretty straightforward.
The warehouse received a pick list.
Where possible, we'd pick a complete reel.
But sometimes the same component was required across several different boards and there might only be one reel available.
So we'd cut it.
The correct quantity went into each kit.
Stock allocated.
Kit complete.
Job done.
Except it wasn't.
The subcontract manufacturer's equipment was geared towards receiving reels.
Send them a strip instead and their process became more manual.
It took longer.
Unsurprisingly, they weren't particularly impressed.
Then, once the boards had been populated, we'd often receive remnants of those kits back.
Back into our warehouse.
Back into stock.
Ready, potentially, to be picked and sent out again.
Looking back now, I wonder whether some form of controlled stockholding at the subcontractor would have made more sense.
Maybe it would.
Maybe there were good reasons why it wouldn't.
I can't remember every detail twenty years later.
But I can see something now that I certainly didn't see as clearly then.
Our process worked.
That was the problem.
We'd created something that made sense within our own boundary.
The warehouse had received a requirement.
It had picked the right components.
The kit was complete.
From that perspective, the process had done exactly what it was supposed to do.
But further down the chain, somebody else had to deal with the consequences.
We hadn't necessarily removed the inefficiency.
We'd moved it.
And twenty years later, in a completely different industry, I still see versions of the same thing.
Take sourcing.
Imagine the team has a clear KPI:
Reduce unit cost.
Sounds perfectly reasonable.
Of course it does.
If we're buying something for £10 today and can source the same requirement for £9 tomorrow, that looks like a 10% saving.
Great result.
Except there's another question.
What happens next?
Perhaps the existing supplier delivers.
The new supplier doesn't.
Now the business has to arrange collection.
The unit cost has fallen.
But the logistics cost has increased.
There may be more administration involved.
More coordination.
Perhaps more complexity.
And here's where organisational structures can make things interesting.
The purchase price saving might sit with one team.
The additional logistics cost might sit with another.
One dashboard says:
Cost down.
Another says:
Cost up.
Both can be correct.
But they're describing the same supply chain.
So did the business actually save anything?
This isn't an argument against sourcing teams having cost targets.
They should.
Nor is it an argument against warehouses measuring productivity, manufacturing measuring utilisation or logistics controlling freight costs.
Functions need objectives.
People need to understand what they're responsible for.
But there is a danger when we confuse improving a functional measure with improving the business.
Because the supply chain doesn't stop at the edge of a department.
A decision made in Sourcing can affect Logistics.
A decision made in Procurement can affect Inventory.
A decision made in Planning can affect Manufacturing.
A decision made in Manufacturing can affect Warehousing.
And eventually, any of those decisions can affect the customer.
The product doesn't know which department owns the cost.
The customer certainly doesn't.
The supply chain simply experiences the consequence.
And this is where I think leadership has a responsibility.
If I give a sourcing team a target to reduce unit cost, should I really be surprised when they optimise unit cost?
Probably not.
That's what I've asked them to do.
If I measure a factory heavily on utilisation, should I be surprised when it wants longer runs and fewer changeovers?
Again, probably not.
If I measure a warehouse on picking productivity, it will naturally look for ways to pick more efficiently.
None of that is irrational.
Quite often it's exactly the behaviour we've designed.
Which means the leadership question can't simply be:
Did the KPI improve?
It also has to be:
What happened beyond it?
That's a harder question.
Because it forces us to look beyond the boundary of our own function.
The cheapest unit price might require a larger minimum order quantity.
What happened to inventory?
The longer production run might improve manufacturing efficiency.
What happened to stock?
The cheaper supplier might require us to collect the goods.
What happened to logistics cost?
The warehouse might have completed its pick exactly as requested.
What happened when the kit reached the subcontractor?
None of those consequences automatically makes the original decision wrong.
The cheaper supplier might still be the right supplier.
The larger batch might still make sense.
The warehouse process might still be the best available option.
But we don't know that from the first KPI.
We have to follow the consequence.
Businesses spend enormous amounts of time identifying savings.
Procurement savings.
Sourcing savings.
Productivity savings.
Manufacturing savings.
Logistics savings.
And they matter.
But perhaps every saving deserves another question.
Where did the cost go?
Because if we save money in one part of the organisation and create more cost somewhere else, we haven't necessarily saved anything.
We've changed where the cost appears.
And depending on how budgets, departments and KPIs are structured, that can be surprisingly difficult to see.
One department can celebrate an improvement while another quietly absorbs the consequence.
That isn't necessarily a failure of either department.
It's a leadership problem.
Because individual functions will naturally see the measures they're responsible for.
Leadership has to see beyond them.
There is nothing particularly revolutionary about the concept of total cost.
Supply chain and procurement professionals have discussed it for years.
Purchase price is not total cost.
Neither is freight.
Neither is inventory.
Neither is manufacturing efficiency.
But knowing that and building an organisation that behaves accordingly are two different things.
We still have departments.
Budgets.
Targets.
Scorecards.
And people quite reasonably respond to the measures they're given.
Perhaps that's why leadership has another responsibility.
To connect the measures.
Not by creating one enormous KPI that attempts to capture every possible consequence of every decision.
I'm not sure anyone would want to see that dashboard.
But by making sure somebody is looking beyond the number being celebrated.
Unit cost fell.
What happened to freight?
MOQ increased.
What happened to inventory?
Batch size increased.
What happened to working capital?
Productivity improved.
What happened to the next process?
Simple questions.
But important ones.
I sometimes think back to those reels of electronic components.
Our warehouse wasn't doing anything unreasonable.
They received a requirement.
They picked the stock.
They completed the kit.
They sent it onwards.
The process worked.
Our process worked.
That was the problem.
Because further down the chain, somebody else had to deal with what we'd created.
Around twenty years later, I look at that process differently.
Not because I now know exactly what we should have done.
I don't.
But because I know the question I would ask.
What happens next?
It's remarkably easy to improve one part of a supply chain.
The harder job is understanding what that improvement does to everything connected to it.
And that's where leadership has to look beyond the green KPI.
Beyond the department.
Beyond who owns which budget.
And ask:
Did we actually remove the cost?
Or did we just move it?
Theme
Optimisation
Signal
Functions optimise within their boundaries. Leadership has to see beyond them.
Reflection
Functional targets are necessary.
But supply chains don't operate as a collection of independent departments. Decisions travel through them.
A lower purchase price can increase logistics cost. A larger batch can increase inventory. An improvement in one process can create work in the next.
That doesn't automatically make the original decision wrong.
But leadership needs visibility of the whole consequence before calling the result an improvement.
Because moving a cost isn't the same as removing it.
Question
When your team reports an improvement, who checks what happened beyond the boundary?
The Demand Signal
Lessons from the front line of supply chain.