Rethinking Supply Chains
October 28, 2010
I’ve written a number of posts over the past few years about the importance of breaking down silos of activity and information that inevitably emerge in large organizations. Breaking down silos requires better sharing of information and better alignment of intra-division goals. According to Lora Cecere, this kind of horizontal thinking also needs to be applied to the supply chain [“Make Money. Turn your Supply Chain on its Ear. Go HORIZONTAL!” Supply Chain Shaman, 21 July 2010]. Before telling readers how they can think horizontally about their supply chain operations, she reminds them why they must start to think differently. She writes:
“Need money? The common answer is to squeeze supply. For many companies, the supply chain is the de facto bank for the company. Through functional excellence and continuous improvement programs, companies generated cash to fuel growth. Supply chain became the place to go get cash. However, after years of harvesting the low-hanging fruit, the savings are getting tougher. For many, the well is effectively dry. Yes, companies can still wring pennies from their functional excellence programs; but they want bigger savings. To gain these, they need a new approach. They need to turn the supply chain over, lay it horizontally, and ask a different set of questions.”
Lora is repeating what I’ve heard from a lot of supply chain gurus, squeezing more money out of the supply chain is getting tougher. So what does Lora mean when she says that companies need to turn their supply chain on its ear? “The advice,” she writes, “is counter-intuitive. For many, it is illogical; but it works.” She recommends four steps. The first step is thinking about the supply chain using a different perspective. She explains:
“Start by turning the Supply Chain on its Ear: … Focus on the design of horizontal processes from the outside-in. Horizontal processes include margin management, contract management, demand shaping programs, working capital management, Sales and Operations Planning (S&OP), supplier development, and new product launch. Ask how to align these processes cross-functionally to gain greater value in the value chain. Ask what is possible? How many value chains there are, and what drives value in each?”
Long-time readers of this blog know that I’m a fan of cross-sectoral approaches to problem-solving. Getting people not normally concerned with supply chain matters involved in a more significant way can help shift a company’s perspective. It also helps when implementing Lora’s second recommendation.
“Align goals: The next step is to step back and align metrics. Ask yourself the question … ‘If we reward sales on volume, marketing on market share, finance on minimal budget variance, manufacturing on asset utilization, and sourcing on the lowest cost of materials, will we ever achieve the lowest total cost?’ The answer is no. Inherently, only 20% of companies measure and make trade-offs on TOTAL costs. Most measure functional costs with little power to trade-off costs across the vertical silos of source, make, deliver and sell. Have a laser focus on total costs, and taking the waste out of horizontal processes. Look at what drives variability and manual intervention in these horizontal processes and look at alignment of goals cross-functionally against what drives value against the business strategy.”
From Lora’s comments, you can see why “silo thinking” develops so easily and how it can be detrimental to a company’s bottom line. For more on this topic, read my post entitled The Curse of Silo Thinking. By applying an integrated approach to supply chain management, silo thinking is avoided and the big picture comes more clearly into view. Lora’s next recommendation is to pay attention to that big picture; because the overall picture is more important than the elements from which it is composed. She writes:
“Train for the Decathlon: In a Decathlon, there are ten events. The winner is judged by total performance, not by a single score in a single event. Because the athlete must do well in the four runs and six field events, he has little opportunity to perfect any one event. A decathlete trying to improve performance in one specific event is likely to deteriorate in another, because the physical demands of the various events are conflicting. His training is necessarily different as he strives to improve all techniques, gain strength without losing speed, and acquire the stamina to perform through a competition that lasts anywhere from 4 to 12 hours per day. In short, he trains to raise performance making trade-offs with the end in mind. A supply chain is like a decathlon. Companies need to do well in source, make, deliver, sell, innovation, customer service, order-to-cash, procure-to-pay, inventory management, and sustainability. The company that can both lower total costs and drive innovation is good at trade-offs. They understand that to win the race, that they may score 2nd or 3rd in these individual competitions to win the total score. And, that they will lose if they try to be the best in every event. As an analyst, I have participated in over 50 benchmarking exercises which taught me first hand that the company that tries to be the lowest cost in all functions ends up with higher total costs. (I know that this is counter-intuitive, but it is true.) Like the decathalon, the supply chain scoreboard is arbitrary. It must be determined. With a focus on horizontal processes, teams find that they must better define the goal. They need a scoreboard that rewards trade-offs. This raises the issue of ‘What is supply chain excellence?’ What drives value in our value chain? The answer is not so facile.”
Encouraging executives (who have been trained to maximize the metrics in their own areas of expertise) to begin thinking in terms of trade-offs may be the most difficult hurdle to jump (to continue Lora’s track and field analogy). Their fear will be that their personal performance will continue to be judged by old metrics and not by the company’s improved overall performance. CEOs must not only motivate individuals to think differently they must convince them that learning to make trade-offs will bring personal rewards. Finally, Lora recommends that a company begin the process of thinking horizontally by asking a lot of questions. She explains:
“Ask the Right Questions: As companies move from a laser focus on functional excellence to value chain management, there is a radical shift in what matters. Traditionally, the supply chain has been focused on:
- Right product, right place, right time
- On-time and in-full shipments
- The integrated end-to-end supply chain
- Lowest costs
“As companies design horizontal systems, they find that these are not sufficient. These focus areas need to be redefined based on answering a higher-set of questions:
- What does global mean? What should be global and what should be regional in source, make, deliver, and sell processes?
- How many supply chains are there? And, what defines value for each?
- What does customer service mean? How do we define it to best support value-based outcomes?
- How do we best sense, shape and orchestrate demand? And, minimize the bullwhip affect?
“Ask the tough questions. Put your supply chain on its ear. Change the focus from vertical to horizontal processes. I have seen the evidence, but I now feel even more strongly that there is gold there. Go get it! There are just TOO few ways to prime the pump to drive break through ideas these days.”
When Lora writes that she has “seen the evidence,” she means that she has watched companies follow her advice and significantly improve their bottom lines. One company followed her advice and saved “[$]1 million on an operating budget of [$]15 million.” Another company “designed horizontal processes from the outside-in [and] … saved 18% of their operating budget.” It’s always a good idea to start any change process by asking a number of pointed questions — including questions about the assumptions that have been used to make decisions in the past. Steve Banker also recommends asking questions before implementing supply chain solutions [“Questions You Should Ask Before Implementing a Supply Chain Solution“, Logistics Viewpoints, 26 July 2010]. He writes:
“Before you implement a supply chain planning or execution solution, you should talk to other companies that have implemented the solution (ideally, about 20 companies), as well as consultants and analysts familiar with the technology. If you are a busy executive and don’t have the time to conduct these interviews, someone on your staff can execute this research or you can hire an outside firm like ARC to do it.
“The specific questions you should ask depend partly on the type of solution you are implementing. But in general, here are some of the questions that I ask when I conduct these kinds of projects:
- SCOPE: What was the scope of the implementation? For example, if this was a warehouse management system implementation, how many facilities did you implement? If not all warehouses, which warehouses and why? How complex are your warehouses?
- PROCESS: What was your process before you implemented? How did your processes change after the implementation?
- PARTNERS: Which software vendor did you select? Which consulting or implementation partner? Why did you select them? Who else did you consider? Were you happy with these partners? Why or why not? If things went badly, was it partially your fault? Is there anyone on the vendor’s or consultant’s implementation team you would specifically recommend?
- COSTS: What did the software cost? The associated hardware? The cost of the implementation? Other costs?
- BENEFITS: What financial and nonfinancial benefits did you receive? Were there any unexpected benefits? How long did it take to implement? After going live, what was your payback period?
- PEOPLE: Does the solution require super users or users with special training? What kinds of background/training make for the best users? Are you going to need to let some people go and hire others better suited to use this application? What sorts of change management issues did you experience? Were there any cross functional issues?
- ADVICE: What would you do differently if you were to do the implementation over again? What advice would you give to others considering this kind of implementation? How can someone get the most out of a system like this on an ongoing basis?
“Implementing a supply chain system is a lot like boating. There can be hidden shoals; conducting interviews with those in the know is how you build your depth chart.”
In answering those and similar questions, take Lora’s advice and involve individuals from across the organization. Think horizontally and eliminate silos. In closing, I’d like to congratulate Conair Corporation for receiving an Outstanding Achievement Award in Supply Chain Excellence at the annual Consumer Goods Technology (CGT) Business & Technology Leadership Conference held earlier this week. This prestigious award is presented annually to three consumer goods firms that demonstrate outstanding achievement in executing supply chain improvements. Conair received the runner-up award and was honored for its participation in the development and implementation of the Enterra Supply Chain Assurance Platform™ (ESCAPE™). In his acceptance speech, Jon Harding, Conair’s Global CIO, stated:
“We at Conair are honored to accept this award and certainly to be recognized in this category. It would be remiss of me not to point out all of the team members who supported this effort. John Mayorek, people from our compliance management team, and, most importantly, our software development partners Enterra Solutions. This system is considered innovative because Enterra Solutions has this proprietary, rules-based technology that senses changes in data, applies rules, and identifies conflicts with our supply chain partners. It is definitely helping us partner with our retailer customers as well as improving our productivity. This is the first of a series of predictive, analytic products that we are working on with Enterra. Finally, the good news is that these applications are actually available to all consumer goods manufacturers. Enterra Solutions is selling these as software-as-a-service offerings – so please see Enterra Solutions.”
I am grateful for Jon’s kind words and Enterra Solutions continue to work with Conair to expand the ESCAPE suite in order to help clients optimize their supply chains.