Supply Chain Transformation: Start with a Holistic View

Stephen DeAngelis

June 18, 2012

Lou Arace, a partner at Logistics Resources International (LRI), told the staff at SupplyChainBrain that when sectors of the supply chain are optimized separately the inevitable result is “pockets of sub-optimization.” To ensure that doesn’t happen, he recommends using the “RightChain supply chain model” which “is designed to look holistically at the entire supply chain.” [“What The RightChain Model Does for the Supply Chain,” 15 December 2011] There are two competing trends that make looking at the supply chain holistically a difficult task. First, supply chains are becoming increasingly complex. Second, to address supply chain complexity, many analysts recommend segmenting supply chains. Despite those challenges, I agree with Arace that the more holistically a supply chain can be dealt with the better. Not only do sector-focused optimizations result in pockets of sub-optimization but they often result in siloed information. Almost every supply chain analyst agrees that integrated data and corporate alignment are going to characterize the best supply chains in the decades ahead. Arace told the SCB staff that “the RightChain model is based on the work of Dr. Ed Frazelle, president of LRI, director of the RightChain Institute and founding director of The Logistics Institute at Georgia Tech University.” The article continued:

“Arace briefly describes a number of the model’s process steps. The first step focuses on the customer and on formally stating customer service policies. ‘When companies look at this they typically find that they are making money on only a third of their customers and losing money on a third, with the remaining third being about break-even,’ Arace says. ‘Companies need to clearly understand which companies are in each category.’ The second step is implementing a balanced, holistic scorecard that measures key performance indicators for the total supply chain. The third step is to optimize the forecast. ‘A lot of companies have multiple forecasts throughout the organization but they usually are not aligned,’ says Arace. ‘Good raw data is very important in this process.’ The fourth step focuses on procurement or RightBuys. A key question here is whether inventory strategy is optimizing the financial performance of the entire supply chain, Arace says. This is followed by inventory optimization, or making sure that inventory is deployed correctly. Last, but not least, the model requires companies to closely examine their team of workers. ‘The point of all these steps is to make sure that the best strategies are in place all along the supply chain, but if you don’t have people who can implement the strategies, they are not worth the paper they’re printed on,’ says Arace.”

From that brief description, LRI’s RightChain model recommends doing what other analysts also recommend: focus on people, processes, and technology in order to achieve corporate alignment. Although Arace talks about “good raw data” being important, I’m sure he didn’t mean to stop there. Raw data isn’t very useful — whether it’s good or not. What decision makers need is actionable intelligence. The better the data that is analyzed the better the intelligence that results. Arun Kumar, a Principal Consultant for Enterprise Solutions at Infosys Limited, agrees with Arace that supply chain transformations should be untaken holistically. He writes, “Enterprise-wide supply chain transformations begin with a clear articulation of business objectives that the program is expected to achieve. They expand into an analysis of revenue-accruing & cost-optimizing functions, and result in the identification of capabilities that the organization aspires to develop or enhance.” [“A New Lens for Supply Chain Roadmaps,” Supply Chain Management, 8 February 2012] Kumar continues:

“Even though we acknowledge that today’s supply chains are more integrated than ever, there is a tendency to view supply chain problems primarily through the prism of organizational functions. Interconnectedness gets missed when such problems are analyzed within organizational silos and not from an end to end perspective. … The result is usually a supply chain roadmap that is more functional than operational, and aligned to ‘getting quick wins’ and ‘plucking low hanging fruit’.”

Kumar recommends using “a cross-functional team” when designing a road map to transform your supply chain. Long time readers of this blog know that I’m a big fan of cross-functional teams. The more perspectives from which a challenge can be viewed the better. By using a cross-functional team, Kumar asserts that the resulting plan will result in “a broader solution set” that includes: “Master Data Management, Demand Planning, Replenishment Management, Web Analytics, Order Capture, Warehouse Management Systems, and Transportation Management Systems.” He concludes:

“Enterprise transformations are a multi-year exercise in the making. While it is perfectly understandable to be itching for the actual implementation to begin after months of meetings and conferences, it may be equally worthwhile to use the right lens early in the process to validate that supply chain roadmaps remain multi-disciplinary. After all, execution is not the only culprit in less-impactful supply chain transformations.”

Implied in both Arace’s and Kumar’s comments is the fact that there is not a single path for supply chain transformation that can be followed by every company. As Lora Cecere notes that even though Proctor & Gamble and Apple are recognized supply chain leaders, there is no single company whose supply chain has reached perfection. “Instead,” she writes, “companies are seen as doing pieces of the supply chain well. There are many examples. Toyota is known for lean. Dell is known for working capital management. Wal-Mart is known for Retail Link.” [“In Search of Supply Chain Excellence,” Supply Chain Shaman, 6 January 21012] As Cecere looks forward to the next 30 years of supply chain management, she writes, “I am a strong believer that the reduction of demand latency and the improvement in sensing capabilities is key to supply chain leadership.” You can’t achieve what Cecere indicates needs achieving if you don’t start by taking a holistic view of the supply chain. Transforming a supply chain, however, is a big task and Cecere insists it should be taking in stages. In fact, she says you “have to earn the right to build these higher level capabilities by building the basics.” She has developed a five-stage model of the supply chain. She explains:

“In the early stages of supply chain team development, companies are focused on transactional efficiency. The focus is on basic blocking and tackling. The goal is improving the accuracy of the order-to-cash and procure-to-pay processes and getting the basics right in the areas of inventory management, logistics/delivery, and customer service. At this stage, the supply chain does not have the credibility to discuss anything other than improving reliability of operations and reducing costs.”

Having mastered the basics, a company is then ready to move to next stage which focuses on improving reliability. Cecere writes:

“The next stage of maturity focuses on improving the reliability of operations. In this stage, teams work on delivering the right product at the right place at the right time at the right cost. This is the beginning of cross-functional discussions that become foundational in driving how value chain trade-offs can be made.”

Obviously Cecere agrees with Kumar about the importance of involving cross-functional teams. Cecere’s third stage focuses on resiliency and market sensing. She writes:

“At the next stage of the supply chain (resiliency), processes start to become horizontal and outside in (market sensing). The focus is on risk mitigation, demand sensing and the translation of market signals. At this stage, the organization slowly earns the right to improve the value in customer relationships. In our interviews of supply chain leaders, 80% of companies are working in stages 1 and 2 of the supply chain maturity model and 15% are operating at stage 3.”

In her fourth stage, Cecere discusses one of her favorite topics — outside-in processes. She writes:

“As the supply chain matures, supply chain leaders partner with the commercial teams to design outside-in processes that can better sense and shape demand and use these insights to drive a more profitable response. In our interviews for this report, 5% of companies were at this stage of maturity.”

It is only in Cecere’s fifth stage where companies finally achieve alignment. She writes:

“In the most mature phase, the company aligns the supply chain market to market to become market driven. In this stage the supply chain senses buy and sell-side market shifts and orchestrates trade-offs horizontally in a bi-directional coordinated response. This represents less than 1% of companies interviewed.”

You can tell from the statistics that Cecere quotes that achieving the highest level of supply chain excellence is not easy. She continues:

“In steps 1-2 of the capability model outlined above, the processes were designed [inside-out]: from the enterprise to the network. In this traditional design, the supply chain is insular. The supply chain is blind to what is happening in the market. The only data is internal. Trading partner relationships are transactional. The parties share order-to-cash and procure-to- pay information, but little else. The focus is on transactional efficiency and cost mitigation. Processes are governed by inflexible rules. The organization responds, but it does not sense. In stages 3-5 of the model, the processes become progressively outside-in (from the market into the enterprise). The focus shifts to focus on the use of external data. To maximize value, companies focus on capturing market data with minimal latency, the lowest level of granularity and the highest level of frequency. The volume of data, the disparate data types and the difference in data formats have given rise to data repositories for supply and demand market data. These repositories cleanse, harmonize and synchronize data for enterprise usage. This shift to outside-in processes, the redesign of enterprise processes to sense before responding, is a major change management issue. It can also be painful. Why? In the evolution, companies find that many of the processes and technologies built over the last thirty years are obsolete.”

Although Cecere insists that supply chain transformation is going to be difficult, she clearly believes it is inevitably going to happen. If she’s right, the sooner you get started the better and the best place to start is by taking a holistic view of your supply chain.