Imagine this. Your job is to keep the right amount of money in each of your two bank accounts. The first bank account is your savings account, and it earns you interest. The second bank account is your checking account. From this account, you pay the bills you’ve incurred.
Your goal is to maximize the money kept in the Saving’s account. And therefore, minimize the money in your Checking account. But don’t let the checking balance drop below zero.
Now, many of us have lived this scenario. Back when interest on Savings meant something, there was a tangible value to managing the balance of each account. We know that if we run out of money in our checking account, we get a non-sufficient funds penalty (significant).
Seems easy enough, right? Keep most of your money in your savings and transfer from there into your checking just as close as possible to when payments are due.
To make the analogy more like today’s supply chain replenishment environment, we’re going to change one thing. You can’t move the money instantly. You must schedule the transfer six weeks ahead of when the money needs to be moved to the checking account.
And we’re going to make the penalty clear as well. At the end of each month, if you have one dollar more than your target of zero in your checking account, you’ll be penalized by your bank (loss of interest earned in the savings account). And if you have one dollar less than your target of zero in your checking account, you’ll be penalized by your bank (NSF penalty).
Thus, you have almost no chance of not being penalized. Therefore, just like our supply chain buyers and planners, you must choose which penalty you would rather incur. Because at least some of your costs are incurred randomly and your payment schedule is only known four weeks in advance.
That gap between the time you must schedule the transfer (six weeks) and the time your payment schedule is known (four weeks) creates a requirement of guessing precisely, without the benefit of precise knowledge. And the larger the gap, the worse the situation.
So, the situation is this: You don’t know the amount (how much) and you don’t know the timing (when). And these are the only two things (amount and timing) needed to successfully complete your task.
Somebody, please, tell me how this makes sense in our supply chain thinking. Or perhaps you’ll realize that it doesn’t.
John Melbye, DDPP, DDLP, CSCP
Become Demand Driven