There is a large equipment manufacturer. Just the time it takes for the demand to be transmitted from the customer to the supplier takes more than a week. As shown in Figure 1, after the company receives the customer order, it takes 1 to 3 days to connect with sales and customer service to confirm the demand and review contract. After reviewing, it needs to be entered into ERP to drive production, which requires approval. After approval process is completed, another two or three days have passed. After entering it into the ERP and converting it into a purchase order to supplier, another day is gone. It costs money, and purchase order needs to be approved again, which takes another 1 to 3 days. After finally getting on the e-commerce platform, supplier is not there all the time. If you miss the time when the supplier goes online to download, this day is lost again.
Figure 1: The lengthy “process” increases the system’s turnover cycle
In this way, it can take a week or even longer for demand signals to be delivered from customers to suppliers. From suppliers to sub-suppliers, and then to the next sub-suppliers, the process begins again.
The longer the supply chain, the more complex the process. The longer it takes for demand information to reach the final supplier, often taking weeks. This means increased turnaround times and, consequently, increased inventory. Now you understand why adding a piece of equipment to a production line can often lead to supplier lead times of one or two quarters.
The process we’re talking about here doesn’t add value from a customer’s perspective, but because it involves organizations, processes, and information systems, streamlining them is incredibly difficult. Especially for big company, processes become like inventory. Originally added to address various risks, it was justified. Even if the corresponding risk factors become negligible or even non-existent as the business grows, few are willing to take the risk of removing them. Therefore, processes only make sense to expand, not to streamline. As a result, processes become increasingly bloated and lengthy, becoming a common ailment of large companies, naturally increasing turnover times and inventory.
What’s the main purpose of following process? Approval. Why is approval necessary? Why should superiors approve subordinates, rather than the other way around? Approval isn’t about showing leadership but ensuring the quality of decisions: superiors typically have more years of experience and are therefore more likely to make higher-quality decisions. In other words, the fundamental reason for approval is information asymmetry . Superiors often have more information than their subordinates, partly due to their position: higher-level officials are exposed to more information. More importantly, due to imperfect information systems, data can’t be stored in the system, so it must reside in people’s minds. And higher-level officials are generally older and more experienced.
So, a major solution to reduce and simplify approvals is to use informatization to make information symmetrical.
For example, when I was working on planning, I had over thirty planners scattered around the world. They were spending money every day to build inventory, and any amount exceeding a certain limit required my approval. Just imagine, with so many planners, how much approval would that entail every day! So I explained to the planners how I approved things, such as what information I pulled from the information system, what formulas I used, what kind of analysis I performed, and what criteria I met for approval. As long as they followed the same approach to decision-making, I wouldn’t need to approve things upfront, but instead would approve them after the fact. This saved time in the approval process.
The reason I can do this is that the information system is quite complete. All kinds of data needed to calculate inventory levels can be found in the information system, which objectively reduces the requirements for experience: as long as we use the same data and the same analysis methods, we can get the same conclusions and make equally good inventory planning decisions.
The more extensive the management, the lower the level of informatization is generally, the more approvals are required, and the higher the level of approvals is.