Corporate Silos: Obstacles to Supply Chain Transformation

Stephen DeAngelis

November 16, 2012

“Supply chains are driving fundamental and transformational changes in today’s organizations,” writes Pat McLagan, CEO, GoalStreams LLC. “More than that, supply chains challenge the very mental models and core processes that guide most of what people do at work.” [“Supply Chain Transformation Hits a Brick Wall …,” SupplyChainBrain, 24 October 2012] McLagan’s primary objective for writing his article is to convince the reader that, in order to truly transform supply chains, overall organizational designs and structures are going to have to change. According to McLagan, “the prevailing organization paradigm” doesn’t offer a path for transformation; rather, it is an obstacle that can prevent change from happening. The organization of the future, he writes, will require “significantly more focus on customers, horizontal relationships, integrative thinking, and dynamic and continuous adaptation.” He continues:

“These values are difficult to consistently reinforce and support in siloed structures and can’t be changed by sophisticated technology alone. Thus, all the promise of supply chain transformation hits an inevitable brick wall!”

Over the years, I have written numerous posts about the drawbacks associated with siloed organizations (see, for example, Silos in the Supply Chain, The Curse of Silo Thinking, Breaking
Down Silos
, and Big Data Analytics Help Break Down Silos). McLagan continues:

“In the traditional organization, decisions and actions are heavily influenced by internal (vs. customer) requirements, vertical (vs. horizontal) relationships, functional (vs. integrative) thinking, and static/periodic (vs. dynamic) management processes. While internal, vertical, functional, and periodic ways of thinking continue to play a role, the balance must shift in order for the real benefit of end-to-end supply chains – the ability to operate as a high value network – to be realized.”

McLagan isn’t alone in preaching that there needs to be more horizontal thinking, collaboration, integration, and alignment in organizations. Lora Cecere, for example, has insisted for some time that more horizontal processes need to be implemented. She writes:

“It is worth noting that the processes of the last decade were vertical supporting the strong silos of make, source and deliver. To build the end-to-end supply chain from the customer’s customer to the supplier’s supplier these strong vertical silos need to be connected by horizontal processes. The most common are revenue management, sales and operations planning, supplier development and Corporate Social Responsibility. Without strong horizontal processes, you cannot achieve balance or drive agility.” [“I do Believe Bricks Matter. Do you?” Supply Chain Shaman, 25 July 2012]

Trevor Miles agrees that organizations need to “design the appropriate supply chains to the company goals, customer objectives, and supply capabilities.” He also agrees that “there needs to be a coordination role, a horizontal structure cutting across functions/Bus/Geographies for each of the internal supply chains.” [“Dynamic supply chain alignment: A theory ready for practical application,” The 21st Century Supply Chain, 26 June 2012] McLagan insists that when you are transforming organizations (and associated supply chains) processes, technologies, and people must all be involved. He explains:

“Technology and new supply chain structures and processes can help organizations to become more able to operate across boundaries within and between organizations. But this is not enough: the way people everywhere in the organization think and the mental models that guide their day to day actions must also be recast.”

McLagan assumes that the most difficult thing to change is people. “We must influence the structures inside people’s minds,” he writes, “as well as the structures and processes of organizations themselves.” He offers up a few hypothetical situations to show how current thinking and business cultures can negatively impact the bottom line:

“• A purchasing specialist is working on a problem related to stockouts at the end of the supply chain. Her manager asks her to launch a study related to cost reduction for a series of parts. She can’t meet the deadlines for both. Without thinking, she drops her work on the stockout problem and scurries to do her boss’s bidding even though she thinks it is less important in the bigger picture. The vertical allegiance has won out – without questioning or a tradeoff discussion about the larger business impact.

“• A manufacturing manager accelerates production of a product to meet end-of-month production goals even though he has early warning information that customer needs are shifting. His performance review is heavily weighted on the production measure, so he ignores the other signals.

“• A product engineer misses several meetings of a cross-functional task team to investigate shifts in consumer usage patterns because he knows that participating won’t increase his potential for promotion to the product manager job he desires.

“• A customer calls the retail store to complain about the performance of a product. The service agent says, ‘that isn’t our problem; call the manufacturer.’

“• A leadership team has identified five strategies that require cross-organization cooperation. The leaders articulate the strategies and then delegate in functional pieces down the vertical chain of command with no strong accountability links across the silos.

“• A production worker notices indicators of a problem with his line. He covers up the problem fearing a backlash and hoping that it will be resolved before the quarterly production numbers are in. The problem results in defective products that are only noticed at the customer end and after a period of usage time.”

In previous posts about corporate culture, I’ve noted that as long as personnel are assessed and promoted based on divisional (i.e., siloed) metrics rather than overall corporate performance you will run into situations like those described above. To read more about the importance of corporate alignment, read my post entitled Supply Chain Transformation: Start with a Holistic View. McLagan notes that in all of his examples, “the person – regardless of level or function – has opted to favor internal over customer, vertical over horizontal, silo-focused vs. integrative, and static vs. dynamic actions. The structures in their minds dictated actions that sub-optimized the supply chain – the value network.” In other words, siloed organizations and silo thinking undermine rather than promote corporate objectives. McLagan then asks, “What to do about the structures in people’s minds – their mental models?” He offers a few suggestions about how executives can help people to view the organization more holistically. You can change:

“• the way you visually depict the organization and how it works (show the network)

“• the stories about great performance (emphasize the horizontal, including impact on customers)

“• the rewards you provide (for cooperation and winning with customers)

“• the organization’s accountability management/goal management processes (horizontal as well as vertical)

“• the organization’s way of managing strategies and changes into the business, and beyond that, into the value network with customers, partners and suppliers”

McLagan concludes, “If you want an organization/value network that is customer focused, horizontally oriented, thinks integratively, and is dynamically adaptable – then the place to begin and end is with the mental models of the people whose day-to-day decisions and actions comprise your REAL strategy – the strategy that actually gets done!”

In an earlier post discussing supply chain transformation, I cited Roddy Martin, senior vice president of CCI, who told the folks at SupplyChainBrain that “there’s a big difference between actual supply-chain transformation and simply making incremental improvements.” [“Supply Chain Transformation: What Does It Really Mean?,” 30 September 2011] Martin agrees with McLagan that “transformation entails fundamental change in the organization.” The article went to state:

“[Transformation] calls for much more than making small improvements within traditional corporate ‘silos.’ ‘Transformation is when the business from the top down thinks and behaves differently,’ says Martin. ‘It’s disappointing when companies misuse the term. It’s consulting-speak all over again.’ The effort requires a clear mission set forth by upper management, and strict alignment of processes throughout the organization in order to ensure proper execution.”

In that short paragraph, Martin hits most of the buttons that are critical to transformation. First, he mentioned the old nemesis of business integration — traditional corporate silos. The first thing that true transformation will do is help break down the walls between those traditional silos. Second, he mentioned that supply chain transformation involves the entire company, not just those involved with logistics. Third, he points out that transformation requires the commitment of upper management. The reason that most companies fail to truly transform is that supply chain processes are still viewed in the boardroom as peripheral to the company’s “real” business. Finally, Martin talks about alignment. Don’t let anyone fool you into thinking that transformation is easy. Reaching the highest level of supply chain maturity takes years of hard work, but it can be reached a step at a time.