IBM Recommends New Rules for Supply Chain Management

Stephen DeAngelis

August 18, 2011

IBM analyst Karen Butner writes, “The complexities of today’s economic environment and ever-expanding global supply chains mandate new guidelines for peak performance. Volatile global market conditions and customer demand variability require optimal supply chain configurations to synchronize supply and demand. But lack of visibility into the myriad information sources inhibits supply chain response to these unpredictable swings. Those companies looking to outperform their peers in the hyper-competitive marketplace will need to adopt new guidelines to restore supply chain stability and create enterprise value.” [“New rules for a new decade,” IBM Institute for Business Value, November 2010] You have to admit that Butner packed a lot terms into a very small space — terms like: peak performance; customer demand variability; optimal supply chain configurations; synchronization; and visibility. Her purpose was not to overwhelm us with jargon but to underscore the complexity found in today’s business landscape.

Butner indicates that new rules are needed to master this landscape. She claims that such rules will “restore supply stability and create enterprise value.” That may be true; however, what new rules really need to do is help make sense of the complexity (i.e., allow technology to help simplify the complexity so that leaders can make better-informed decisions). Butner identifies three challenges that could be called “The Big Three Vs”: Visibility, Volatility, and Value. Of the first, she writes:

“Volatility: Fluctuation in customer demand has been the leading challenge confronted by supply chain executives. Added to demand variances are increasing customer requirements for sustainable products and services, as well as heightened expectations for responsiveness, uncompromising quality and low cost. At the same time, though, supply chain managers are encountering poor quality and reliability performance from suppliers, which, along with logistics constraints and bottlenecks, hampers delivery performance and customer service levels. And, as more companies continue to globalize their operations and enter emerging markets, these issues may have no quick solution, as operations will become increasingly dependent upon a growing number of customers, suppliers, regulators and markets.”

Volatility is a big problem. Customer demand volatility can result in the Bullwhip Effect that exacerbates the problem (for more on this subject, read my post entitled You Can Almost Hear the Bullwhip Effect Cracking). One source of volatility that Butner didn’t mention was commodity price volatility. Prices of everything from oil to sugar are creating challenges for supply chain professionals. Concerning visibility, Butner writes:

Visibility: As the number of supply chain partners increases, the need for accurate, time-sensitive information becomes more acute. But lack of collaboration and integration between supply chain and product development partners continues to be a major concern. Product lifecycle traceability in consumer products, pharmaceuticals and other industries is a growing requirement. Yet, despite continued technological enhancements, lack of visibility to worldwide, timely information to make in-stream decisions remains a significant issue. The bottom line is that the requirements for increased visibility require the dexterity to make fast decisions in response to constantly changing market conditions.”

Everyone seems to agree that visibility and collaboration are going to be increasingly important differentiators for the best companies. As visibility and collaboration increase, so does complexity. Reservoirs of data become oceans of data. All that data is worthless if it can’t be analyzed, assessed, and turned into actionable knowledge. That gets back to my point about the importance of technology in helping reduce complexity. Of course, actionable intelligence is no good if you don’t have the capability to act upon it. That is why corporate alignment, synchronization, and demand-driven capabilities are also receiving more attention nowadays. Concerning value Butner writes:

Value: There is, and seemingly always has been, constant pressure for supply chain management and operations to create enterprise value. End-to-end supply chain cost and pipeline inventory optimization are predominant challenges, as well as the means for protecting margin and decreasing working capital. Securing and deploying the right talent and skills for global operations remains a critical concern. The talent vacuum is most acutely felt in emerging markets, with nearly nine out of ten executives citing this as a challenge. The business risks associated with insufficient leadership talent is exposed in decreased cost efficiencies, inventory deployment, and in managing regional and local operations with partners. Managing risks and disruptions with global partners at each node is increasingly important. As supply chains become more complex and interdependent, managers must find a way to offset growing complexity with increased flexibility.”

It appears that Butner agrees with Karin L. Bursa, Vice President of Marketing at Logility, who insists that companies need to give equal attention to people, process and technology. [“A Foundation for Successful S&OP,” Supply Chain Digest, 10 February 2011]. She writes, “This trio of people, process and technology, is the foundation for success.” Butner offers up three new rules she believes help address the three challenges discussed above. Those rules are:

“1. Know the customer as well as yourself. Smooth volatility with predictive demand. Predict demand and be in a position to react to demand variability with rapid response and allocation of all global resources.

“2. See what others do not. Unveil visibility with collaborative insight. Collaborate with visibility to events, with suppliers, service providers and customers in an open, action-oriented environment.

“3. Exploit global efficiencies. Enhance value with dynamic optimization. Optimize pipeline inventory, the global supply chain network and cost structures. Create cost-efficient sustainable products and practices while hedging risks with partners.”

Rule number one — knowing your customer as well as yourself — is much easier said than done. Even with the mountains of point of sale data that is now available manufacturers and retailers still find themselves second guessing and sometimes making terrible forecasting mistakes. In my post on the Bullwhip Effect mentioned above, I cited an observation from a Financial Times report that stated:

“Producers of almost everything were left stranded when the global downturn took hold and retailers ran down inventories. On the way back up, the restocking of goods was so dramatic that most economists excluded the effect from their analysis, lest it skew the results. … Such violent swings encourage the ‘bullwhip effect’. This frustrating phenomenon occurs when falling customer demand prompts retailers to under-order so as to reduce their inventories. In turn, wholesalers under-order even further to reduce theirs and the effect amplifies up the supply chain until suppliers experience stock-outs – and then over-order in response. The effect can ripple up and down the supply chain many times. The whip may now be cracking on the downside.” [“Inventories: the bullwhip effect,” 31 July 2011]

Whether your customer is a retailer or the ultimate consumer, it appears that getting to know them remains a daunting challenge. That is why Butner’s second new rule that involves collaboration is so important. Peter Knapp, president of international logistics services at Jacobson Companies, told staffers at SupplyChainBrain that “collaboration means creating cooperation by working with customers in an open manner and sharing information in a proactive way.” [“How Collaboration Drives Supply Chain Reliability,” 24 June 2011] This kind of collaboration “leads to operational excellence and reliability … because when both providers and customers understand supply chain events, they are able to work together to achieve the best possible results.” The article continues:

“‘In a collaborative and reliable environment, customers never have to ask about what is going on in the supply chain,’ Knapp says. ‘They always have information and updates available.’ Equally important, he says, is ensuring that employees view the customer as a collaborative partner and understand that they are not offering a commodity service. ‘We believe that the future of our business is in open and true collaboration with our customers, and our customers appreciate that,’ he says. A robust technology platform is essential to support this approach, Knapp says. ‘Collaborative and reliable supply chains require optimization on a continual basis to be able to deliver at the right time,’ he says. Jacobson also uses optimization to help determine the best mode for each shipment. ‘With oil getting more expensive, industry is striving for this kind of optimized solution, but it is actually quite a hard task. An ability to manage information is key and creates the efficiency and reliability we are looking to provide.’ … ‘Acquiring even the best software is not enough,’ he says. ‘You need to have the capacity and knowledge to manage the software and to tailor it for customers.'”

Butner’s third rule — exploiting global efficiencies — is also not as easy as it sounds. A recent article in the McKinsey Quarterly indicates companies pay a price for globalizing. It concludes: “Strong multinationals seem less healthy than successful companies that stick closer to home.” [“Understanding your ‘globalization penalty’,” by Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, July 2011] That’s a topic worthy of a separate post. Although there are efficiencies to be found in the global supply chain, many analysts have pointed out that the longer the supply chain is the more complexities it involves. If reducing supply chain complexity is important, shortening supply chains is one way to do it.

Butner rightfully points out that companies vary in their abilities to implement these new rules. She breaks companies down into three groups (based on 664 supply chain organizations that participated in an IBM survey). Those groups are: operators, planners, and visionaries. She defines “operators” this way:

Operators: Representing 187 companies, Operators’ strategies reflect ‘back to the basics’ with investments in warehouse management, transportation management, manufacturing execution systems and data management. They concentrate on cost reduction initiatives, process improvements and information linkages with key suppliers and logistics providers.”

Although she doesn’t vilify operators, Butner doesn’t praise them either. Her underlying concern seems to be that operators are concerned with supply chain efficiencies and are setting themselves up for future supply chain disruptions because they are not future-focused. They live in the here and now. The next group — planners — does a bit better. Butner writes:

Planners: Planners represented the largest group, 417, across a wide range of industries, geographies and company sizes. Their strategies and initiatives characterize planning (network analysis, enterprise sales and operations planning (S&OP), partner integration, performance scorecards) and operational efficiencies (outsourcing non-core functions, cost containment/reduction programs and inventory optimization at critical control points).”

You can tell that Butner believes that planners do better than operators; but, she saves her most glowing description for the visionaries. She writes:

Visionaries: Only 60 companies fall into this elite group, representing high technology/ electronics, telecommunications, consumer products, life sciences/pharmaceuticals, retail and industrial manufacturing. These enterprises operate in multiple regions of the world, with well over half having sales of more than US$10 billion. Their focused strategies and initiatives include supply chain visibility with partner collaboration, business intelligence and analytics, risk management, optimization of networks, cost structures and inventory, and customer demand management with networked S&OP.”

I would venture to guess that IBM’s CEO Sam Palmisano would call these visionary companies “globally integrated enterprises” — a term he introduced half a decade ago. As a company advances from operator to visionary, Butner believes that visibility improves, volatility decreases, and value is enhanced. Moving up that chain is neither easy nor inexpensive. Butner obviously believes, however, that the rewards waiting at the end of the journey are worth the effort and cost.