Building Tomorrow’s Supply Chain, Part 1

Stephen DeAngelis

April 24, 2012

Mark Pearson, managing director at Accenture, writes, “Fickle consumers. Shrinking product life cycles. Product and service characteristics continually influenced by social channels. The needs and buying methods of the modern consumer are both changing and accelerating, and manufacturers are struggling to catch up, let alone get ahead. Mix in geo-political chaos, tumultuous currency markets and natural disasters, and companies are trying to somehow reconcile their supply chains with volatility that is nearly twice as much as anything they have experienced in the past 30 years.” [“The Dynamic Supply Chain,” Industry Week, 8 March 2012] Kelly Thomas, Senior Vice President of Manufacturing at JDA Software, agrees completely. He writes:

“The past few years have brought radical changes to the world of supply chain management. The business climate today is not only more complex, due to shorter product life cycles, increasing service demands from channels, price erosion and global customers with specialized needs but much more uncertain due to supply risks. Manufacturers around the world are grappling with the challenge of meeting fickle market demand in a new economy, without making risky investments in high inventory levels and costly production assets.” [“Building the Supply Chain of the Future,” SupplyChainBrain, 29 march 2012]

Another analyst who agrees with this view of the world is Lora Cecere. She writes:

“Demand cycles are shortening. Supply cycles are lengthening. Commodities are scarce. Volatility abounds. The design of the supply chain needs to change and adapt frequently. … I think that this is the future. The enlightened thinkers know this. The laggards are just beginning this journey. … In my opinion, the opportunity for inventory policy, network design, and adaptive supply chain processes are still ONLY understood by supply chain leaders.” [“My Take: Supply Chain Future,” Supply Chain Shaman, 4 October 2011]

All three of these analysts believe that supply chains must transform in order to meet the challenges they point out. Thomas writes, “The good news is that by synchronizing inventory, production and distribution processes as closely as possible with actual demand levels, manufacturers can make their supply chains both agile and profitable.” He continues:

“The obstacles to a truly agile, synchronized supply chain lie in traditional planning processes, which have largely been siloed, lacking integrated decision making across multiple functional areas, as well as any involvement from supplier and channel partners. Supply chain leaders are overcoming these obstacles by implementing fundamental changes to their planning processes, allowing a single physical supply chain to support multiple channels and different operating models. They are shifting from the push-based approach of the past to a supply chain management model in which actual market ‘pull’ forms the basis for every supply chain decision.”

Readers of this blog know that I’m a big proponent of breaking down corporate silos through the intelligent sharing of information and the integration of data sources so that the entire organization is operating from a single version of the truth. Pearson calls the type of supply chain described by Thomas (i.e., one that breaks down internal silos while integrating supplier and customer data) a “dynamic supply chain.” He asserts that this kind of supply chain “enables businesses to balance opportunities to drive new economic value and growth against the downside risks of any disruptive events that might occur.” Cecere talks about “Market-driven Supply Chains that Sense.” She continues:

“Today’s supply chains respond. They do not sense. Despite the exponential investment in sensing technologies like RFID, 2-D bar codes, temperature sensors, GPS, and QR codes, today’s supply chain focuses on orders and shipments. Traditional applications cannot scale to use the exploding volume of unstructured data and combine it with the output from the number of sensors being installed. Additionally, supply chain latency is accepted and not questioned. We have not conquered the bullwhip effect, and the translation of demand from retail shelf to a manufacturer remains unchanged. … We have built long supply chains that translate, not sense demand. The use of sensor data, market data, temporal data (weather, traffic, etc.) to sense and reduce latency remains an opportunity. Social/ mobile/ digital/ ecommerce convergence is changing the ‘heart’ of the supply chain. Leaders will combine transactional data with unstructured data to sense market to market outside-in with near real-time latency while laggards get squeezed from both ends.”

The three analysts all mention the volatility that has characterized the business environment in recent years. Pearson states that we now in an era “of permanent volatility. And, this constant change that is part and parcel of today’s macros business environment is the ‘new normal.'” Cecere writes, “Volatility abounds.” Thomas asserts that the “volatility of the past several years has only complicated this challenge” of improving supply chains. Thomas continues:

“Adding complexity is the geographically scattered nature of the supply chain in a global business environment. Product cost issues are much more complex now. Manufacturing executives must understand and manage the total landed cost of all goods and services, with its intricate web of offshore suppliers, multiple transportation and distribution nodes, and flexible manufacturing options. While individual facilities used to be managed vertically, the global supply chain extends beyond the four walls of a facility, encompassing a network of trading partners who collaborate closely with one another in serving the end consumer’s needs while also protecting the overall profitability of the supply network.”

Pearson reports that “70% of executives who responded to a recent Accenture survey expressed concern about their inability to predict future performance, and more than 80% worried about the overall resilience of their supply chains in the face of unrelenting market challenges.” The characteristic that Pearson believes is most damaging to today’s supply chains is rigidity. He writes:

“‘Supply chain integration’ — the mantra of the recent past — helped globalizing organizations secure key relationships across extended supply lines by tying the operations of critical partners together. The downside of this structure is that the slowest supplier defines a company’s ability to respond to market changes. Today, companies with such rigid supply chains are unable to keep pace with the current pace of change, which also impacts the dexterity with which they can deliver new products to market.”

I’m not sure that “integration” is the concept that leads to the rigidity that concerns him. Integration is normally a good thing because it makes alignment easier to achieve. Rigidity is often the result of adopting lean principles and just-in-time processes. If that is what Pearson means by “integration,” then I agree with him. I believe that Thomas would agree with me that “integration” is probably not the right descriptor for the challenge that Pearson is trying to describe. Thomas, it appears, believes that more, not less, integration is necessary. He explains:

“Supply chain leaders are implementing powerful closed-loop planning processes which synchronize all core activities, including demand planning, inventory planning, master planning, factory scheduling and supplier collaboration. Via this closed-loop process, actual performance is continuously monitored against planned results, and adjustments are quickly made to reflect the new reality. When a deviation occurs in one area – for example, when a supplier fails to deliver, a customer cancels an order, or labor costs rise in an offshore facility – there is a synchronized, consistent impact felt across the entire network. Plans across the supply chain are immediately adjusted to reflect this event. This closed-loop process ensures that, even when the unexpected occurs, the end-to-end value chain can be re-set with speed and agility to continue its support of top-level operational and profitability goals. Processes are orchestrated across the end-to-end global supply chain, so that the end result is a synchronized, highly effective response to changing business conditions.”

Clearly, Thomas is describing the same kind of dynamic supply chain as Pearson, but it seems to me like Thomas believes that integration is the key to achieving it rather than the obstacle that prevents it. Pearson writes:

“Moving from the ‘integrated’ to ‘dynamic’ supply chain model enables companies to view their supply chains as adaptable ecosystems of processes, people, capital assets, technology and data. They strive for flexibility where it matters and focus their efforts on operational agility that drives profits, and not just short-term efficiencies.”

If you insert “rigid” in place of “integrated” in that paragraph, you can see that Pearson and Thomas are really talking about the same thing. Their approaches for achieving a dynamic supply chain are also complementary. Thomas stresses the use of “powerful planning processes and linked technology solutions … to sense demand shifts and automatically balance a number of priorities, including costs, customer service levels, supply risks, production constraints and environmental targets, to achieve the best possible outcome.” Pearson discusses “three initial steps that any company can take to jumpstart the process” of implementing a dynamic supply chain. They are:

Think ‘portfolio of supply chains.’ A company should first define the supply chains within its organization. This is done by aligning with overall business strategy, then segmenting supply chains based on product, customer and geography. Each chain is then evaluated by functional area to define which characteristics are considered unique and which are standard.

Define the dynamic operating model. There are four key capabilities within a dynamic supply chain, which when executed simultaneously, form a model that enables the right level of flexibility, adaptability and responsiveness.

Sense, Shape and Respond: Is the company equipped to translate data into insights that can be shared instantly with decision-makers across your company?”

Thomas and Pearson do have a slight disagreement on one point. Pearson, like many other supply chain analysts, recommends segmenting supply chains (i.e., think ‘portfolio of supply chains), while Thomas earlier recommended “a single physical supply chain to support multiple channels and different operating models.” I believe their differences lie more in language than in philosophy. Tomorrow I will discuss the six core areas that Thomas believes must be aligned in order to achieve a dynamic supply chain and some of things that Cecere believes “we need to do to put flexibility back into the supply chain.” She also addresses the topic of sensing, shaping, and responding.