Supply Chain Management and the Future
August 21, 2013
“Supply chain management, as a practice in commercial operations,” writes Lora Cecere, “is now thirty years old.” [“Why?” Supply Chain Shaman, 19 June 2013] As she looks back over the past three decades, she finds the following:
- “We have made Improvements in Productivity. Due to improvements in connectivity, 90% of industries have made improvements in productivity (revenue/employee). The chemical and consumer electronics industries have made the most progress.
- “Balance Remains an Issue. Companies are stalled on improving customer service and forecast accuracy.
- “Complexity has Grown. It comes in many flavors – increase in inventory, changes in sales policies, new product lines – all add to the complexity. Supply chains have not morphed to manage the complexity at the same cost, quality and level of customer service.
- “Cycle Management is Stalled. The only industry that has made progress in inventory management is consumer electronics.”
Fifteen years ago, Andrew Cox and Richard Lamming also noted that some aspects of the supply chain (like purchasing) had changed very little over the decades even though manufacturing had seen a number of dramatic changes. [“Managing supply in the firm of the future,” European Journal of Purchasing & Supply Management, June 1997] The abstract for their article noted:
“A fundamental, imminent change is taking place in the way firms approach the management of relationships with other firms and within themselves, and that this challenge is being faced by managers with one hand tied behind the back—there appears to be a lack of conceptual understanding. Building this understanding into practice requires the dismantling of traditional and existing perspectives about managing supply.”
Daniel Dumke reports that in Cox’s and Lamming’s paper, “four key themes emerged in the conceptual development of the management of ‘supply chains’.” [“Managing supply in the firm of the future,” Supply Chain Risk Management, 27 August 2012] Those themes were: It is necessary to take a total supply chain view; the chain is an unsatisfactory metaphor: the firm is part of a network; the firm concentrates on its core competencies and outsources everything else; and the firm is an unsatisfactory unit of analysis. Dumke goes on to provide key insights he was able to draw about the first theme (i.e., it is necessary to take a total supply chain view). They were:
- “‘The consumer is perceived to be at the end of a supply chain—a series of value-adding events and activities that leads to the provision of a desirable—valuable—product or service.’
- “‘Supply chain management is […] a process of realignment of activities, from each firm’s point of view, in order to reduce value losses, so that the output from the total chain satisfies the consumer and results in the success of all parties to the chain.’
- “‘Within the [value] stream are barriers—interfaces between companies. The management imperative is thus to design those interfaces with minimum impediment, to allow value to flow.'”
Fifteen years on analysts like Cecere believe that an even broader view of the supply chain needs to be taken — one that encompasses a company’s supplier’s supplier to its customer’s customer. Analysts with this broader view of the supply chain also recommend that the best way to break down barriers between companies is to foster collaboration.
Next, Dumke identifies the key insights from the second theme (i.e., the chain is an unsatisfactory metaphor: the firm is part of a network). They were:
- “‘The so-called “chains” often contain looped relationships (where the customer is also a supplier to the supplier), lateral links (where the supplier is a supplier to both the customer and another supplier), dependencies (where the performance of one supplier is intrinsically linked to that of another) and other non-linear facets which deny the convenience of thinking in simple terms.’
- “‘Adopting a network perspective can lead to perceiving supplier relationships as indistinguishable from customer relationships.’
- “The contribution of the network metaphor to understanding the matter to managing value comes from its method of grappling with complexity.’
As noted above, supply chains have grown even more complex over the past decade and a half and it is no longer necessary to point out to most people that supply chains are really networks. Although the metaphor of a chain has survived, analysts have tried to stress the importance of supply chain management by talking more about value chains rather than supply chains. For example, Cecere writes:
“My definition [of supply chain management] is wide. In my mind, the processes of supply chain cross over and overlap at the ends of the supply chain. Yes, I believe that supply chain overlays on top of the sales and marketing organizations and the procurement function. I feel that these organizations have defined their roles too narrowly. Too few are focused on the role of the organization in driving value networks to improve value-based outcomes. Most lack the understanding and they are just not incented to build value networks. The focus has to be market to market. I believe that the supply chain team can make a difference, but it requires reschooling. It is about much more than trucks and sheds. Or pumps and valves. Or contracts and negotiations. In my mind, it is the end-to-end process: from the customer’s customer to the supplier’s supplier. [“Yes, I Am a Zealot. I Sill Believe. Do You?” Supply Chain Shaman, 28 September 2012]
Key insights that Dumke drew from Cox’s and Lamming’s paper about their third theme (i.e., the firm concentrates on its core competencies and outsources everything else) are:
- “‘Managers have, for some time, been encouraged to view their firms as a combination of “core” competencies – those which it is deemed essential to own in order to compete in a market – and, by process of elimination, “non-core” competencies.’
- “‘[…] the issue of whether to “make or buy” is not straightforward; it is always a problematic issue for the firm which may be resolved either through vertical integration or through outsourcing. The key strategic decision for the firm is to decide what the boundaries should be between the two extremes of internal or external contract.'”
I daresay that the jury remains out on this topic. The debate about what is a “core competency” and what can be outsourced remains active.
Finally, Dumke draws insights from Cox’s and Lamming’s paper on their final theme (i.e., the firm is an unsatisfactory unit of analysis: the flow of value takes place in a loosely aligned array of assets and competencies over which no one commercial organization has ultimate control). They are:
- “‘The further away from the core competencies of the firm, the less there is a need for medium asset specific skills to be vertically integrated, and thus the more support may be expected for outsourcing the activity.’
- “‘[…] firms are best viewed as a “nexus of contracts”. The importance of this interpretation is that it forces us to see firms not as fixed entities, existing as objects within a static market structure, but as potentially fluid and flexible constructs whose internal structures and external boundaries may change as circumstances dictate and opportunities require.'”
Although Cox and Lamming may have been correct that the firm is an unsatisfactory unit of analysis, today most analysts discuss the importance of corporate alignment. For example, Cecere writes:
“Companies have focused on vertical processes. There is a need for cross-functional alignment through horizontal processes. Companies with strong horizontal processes of revenue management, new product launch, Sales and Operations Planning (S&OP), Supplier Development and Corporate Social Responsibility have higher performance. … By and large, organizations are not aligned to drive cross-functional performance. Based on recent research, we find that companies that have invested in Supply Chain Centers of Excellence … rate themselves higher on cross-functional alignment. The presence of these centers is relatively new. Without them, the gaps are large.”
In other words, even though there are numerous parts of the supply chain that may need to be measured, the disparate parts of corporation must be aligned to achieve maximum performance and profitability. Rich Sherman and Bob Sabath, discipline experts in supply chain management with Trissential, believe that in order to make quicker progress in the field of supply chain management rules must be broken. [“Breaking the Rules of Supply-Chain Management,” SupplyChainBrain, 25 July 2013] The article explains:
“Sherman says innovation isn’t possible without a certain amount of rule-breaking. ‘It’s all about doing things differently – creating new and disruptive technology, processes and ways of doing business.’ … How can companies determine which rules need breaking? ‘If it’s something that everybody does, and people can move from company to company and plug in how it’s done, often it’s worthwhile to sit back and say, “Do we ever have to do that?”‘ says Sabath. Every procedure should be subjected to a rigorous cost-benefit analysis, he adds.”
Cecere agrees that each company must look at its circumstances, its value chain, and it practices and determine how policies, procedures, processes, and practices should be adapted to fit. “I strongly feel that we have evolving practices,” she writes. “I have seen too many companies adopt practices that were not a good fit because they were recommended as best practices.” The bottom line is that the topic of supply chain management is large and there is plenty of room under the tent for adaptation and experimentation.