The Growing Demand for Supply Chain Management
These days, it's hard to find a copy of The Wall Street Journal that doesn't have the phrase supply chain somewhere on the first page. This chapter covers why supply chain management has become so important and explains the process for building best-in-class supply chain management into your company.
In This Chapter
What you will learn
- Understanding complex business challenges
- Focusing on supply chain tasks
- Understanding supply chain management principles
- Getting started with the new supply chain agenda
Defining Supply Chain Management
What it is, why it matters, and where it came from
In spite of the current hype, supply chains aren't really that new. Entrepreneurs have been buying things from suppliers and selling products to customers for almost as long as people have inhabited the earth. However, supply chain management is new. In fact, the basic principles of supply chain management only began to take shape in the 1980s, at about the same time that personal computers came onto the business scene. You can see the trend clearly by using Google's N-Gram Viewer, which shows how often the term "supply chain" has been used in book titles.
Supply chain management is the planning and coordination of all of the people, processes, and technology involved in creating value for a company. Managing a supply chain effectively involves coordinating all of the work inside of your company with the things that are happening outside of your company. In other words, it means looking at your business as a single link in a long, end-to-end chain that supplies something of value to a customer.
The word "value" shows up a lot when people talk about supply chain management. Basically, value means "money." If a customer is willing to pay for something then it has value.
Negotiating prices, scheduling manufacturing, and managing logistics all impact the value equation for a company, and they are critical to a supply chain, but because they are so interdependent, it's a bad idea to manage them separately, in silos. As companies grow larger, supply chains get longer, and the pace of business gets faster, which means it becomes more important to keep the various functions in a supply chain aligned. Ironically, many of the strategies and metrics that businesses relied on in the past, and that managers have been taught to use, can actually drive the wrong behaviors. For example, a sales rep might hit her quota by landing a huge deal with a customer, but the deal might be unprofitable for the company because of the costs it will drive for the logistics and manufacturing functions. So sales, logistics, manufacturing, procurement, and all of your other functions need to be aligned to ensure that the business is pursuing profitable deals.
The difference between the amount of money your company brings in (revenue) and the amount of money that you spend (costs) is your profit. In other words, your profit is simply the amount of value that you have captured from your supply chain.
On the other hand, companies that do a good job of managing their supply chain are better able to take advantage of value-creation opportunities that their competitors might miss. For example, by implementing lean manufacturing, companies can reduce inventories. By being responsive to customer needs, they can build stronger relationships with their customers and grow their sales. By collaborating closely with their suppliers, they can get access to the materials they need, when they need them, at a reasonable cost.
In most companies today, more than 70 percent of the costs and 100 percent of the revenues are dependent on how the supply chain is managed. So keeping all of the parts of the supply chain aligned is key to running any business successfully. That is why supply chain management has become so important, so quickly.
Supply chain management is about coordinating people, processes, and technology across the entire chain — not just within your own company. More than 70% of costs and 100% of revenues depend on how the supply chain is managed.
Exploring Complex Business Challenges
Scenario planning and the art of sensing & responding
Managing a business is like playing a full-contact sport: So many moving pieces are involved, and so many things can change in an instant, that making long-term plans is virtually impossible. How can you really plan for commodity price swings, natural disasters, and financial meltdowns? You can't. You can't ignore those possibilities, either. Instead, you need to think about them and design your business so that it can function well under a range of scenarios. In other words, you need to think about the many different possibilities that the future holds, try to imagine them as a series of events, and then think about how each of them would affect your business.
To use scenario planning to prepare for the unknown and the unknowable, you need to know three really important things:
- Which scenarios are most important to you.
- What you'll do — and how — in each scenario. (In other words, each scenario calls for a different plan.)
- How you can tell when a scenario is becoming reality. (In other words, as Yossi Sheffi, the Elisha Gray Professor of Engineering Systems at the Massachusetts Institute of Technology says, you need to have "sensors in the ground" to help you decide when to implement which plan. Then the job of supply chain management becomes a process of sensing and responding.)
You need to determine how your business will sense what is happening and how it will respond. Your sensors help you recognize which scenario is unfolding so that you can implement the proper plan.
Scenario-Planning Model: Each sensor monitors real-world signals, triggering the appropriate pre-planned response — Scenario #1 → Plan #1 | Scenario #2 → Plan #2 | Scenario #3 → Plan #3.
Here are a few practical examples:
You run a manufacturing company that imports products from overseas, so you need to consider what you'd do if one of your inbound shipments is lost at sea, impounded by customs, captured by pirates, or caught in a port strike. Options might include shutting down your factory until the issue is resolved. You might also consider placing a new order with a different supplier so that you don't have to close the factory. In an extreme case, you might even declare force majeure and tell your customers that you won't be able fulfill your commitments to them.
Force majeure is a legal concept that is used in contracts to justify why someone is unable to meet their obligations. Basically, it means that there was a problem that they could not have predicted, prepared for, or prevented.
You work for a wholesaler that has been selling a product at a steady rate for months, and one month, the company sells twice as much as normal. You don't have enough inventory to fill all your customer orders, and now you also have back orders to fill. You may even be at risk of losing some big sales and big customers. You might decide to place bigger orders in the future and keep more inventory on hand. That means you'll be investing more working capital into inventory. If sales drop off in the future, you'll have to figure out what to do with that extra inventory.
You work for a transportation company. The company's customers pay you to deliver their products around the world, and they count on your deliveries to help them meet their commitments to their own customers, so your ability to deliver on time is essential to them. Suddenly, a volcano in a distant part of the world spews ash far into the sky, making it dangerous for airplanes to fly on a heavily traveled flight path. You could reroute your planes, but this is an expensive process that involves developing flight plans, scheduling airplanes, and finding available crews. Alternatively, you could tell your customers that their deliveries are on hold until normal operations can resume.
Thousands of companies have had to face every one of these scenarios in the past few years. In every case, making the right decision about how to respond requires understanding supply chains and supply chain management.
Some supply chain management professionals are generalists and others are specialists. Supply chain experts who are generalists look at the big picture, whereas the specialists focus on a particular step in the supply chain. A good way for you to start learning about supply chain management is to take a look at some of the general principles.
Scenario planning turns uncertainty into preparedness. By identifying your key scenarios, designing a plan for each, and building sensors to detect which one is unfolding, your supply chain can sense and respond rather than react in panic.
Operating Under Supply Chain Management Principles
Ten principles that define the essence of supply chain management
Many people try to describe supply chain management by talking about what they do, which is a bit like describing a cake by giving someone a recipe. A different approach is to describe what supply chain management actually creates. To continue the cake example, that means describing how the finished cake tastes and what it looks like.
The ten principles below do a good job of describing supply chain management.
Customer Focus
Supply chain management starts with understanding who your customers are and why they're buying your product or service. Any time customers buy your stuff, they're solving a problem or filling a need. Supply chain managers must understand the customer's problem or need and make sure that their companies can satisfy it better, faster, and cheaper than any competitors can.
Systems Thinking
Supply chain management requires an understanding of the end-to-end system — the combination of people, processes, and technologies — that must work together so that you can provide your product or service. Systems thinking involves an appreciation for the series of cause-and-effect relationships that occur within a supply chain. Because they are complex systems, supply chains often behave in unpredictable ways, and small changes in one part of the system can have major effects somewhere else.
Bimodal Innovation
Supply chains need continuous process improvement, or sustaining innovation, to keep pace with competitors. Lean, Six Sigma, and the Theory of Constraints are process improvement methods that can help. Continuous process improvement isn't sufficient, though, because new technologies can disrupt industries. This effect is called disruptive innovation. When a new solution for a customer's needs emerges and becomes accepted, this solution becomes the new dominant paradigm.
Collaboration
Supply chain management can't be done in a vacuum. People need to work across silos inside an organization, and they need to work with suppliers and customers outside the organization. A "me, me, me" mentality leads to transactional relationships where people focus on short-term opportunities while ignoring the long-term results. An environment in which people trust one another and collaborate for shared success is much more profitable for everyone than an environment in which each person is concerned only with his or her own success.
Flexibility
Because surprises happen, supply chains need to be flexible. Flexibility is a measurement of how quickly your supply chain can respond to changes, such as an increase or decrease in sales or a disruption in supplies. This flexibility often comes in the form of extra capacity, multiple sources of supply, and alternative forms of transportation. Usually, flexibility costs money, but it also has value. The key is understanding when the cost of flexibility is a good investment.
Technology
The rapid evolution of technology, for moving physical products and for processing information, has transformed the way that supply chains work. A few years ago, we ordered things from a catalog, mailed in checks, and waited for our packages to be delivered. Today, we order products on our phones, pay for them with credit cards, and expect real-time updates until those packages are delivered to our doorsteps. Supply chain management requires understanding how technologies work and how to use them to create value at each step in the supply chain.
Global Perspective
The ability to share information instantly and to move products around the world cheaply means that every company today operates in a global marketplace. No matter what product or service you provide, your company is global. As a supply chain manager, you must recognize how your business depends on global factors to supply inputs and drive demand for outputs. You also need to think globally about the competition.
Risk Management
When you combine high performance requirements with complicated technologies and dependence on global customers and suppliers, you have a recipe for chaos. Even a small disturbance, like a shipment that gets delayed, can lead to a series of problems further down the supply chain, such as stockouts, shutdowns, and penalties. Supply chain management means being aware of risks and implementing processes to detect and mitigate threats. Done well, risk management can provide opportunities to capture value during times of uncertainty.
Visibility
You can't manage what you can't see, so supply chain management makes visibility a priority. Knowing what's happening in real time (or close to real time) lets you make better decisions faster. Visibility comes at a cost, however: You have to build your supply chain in a way that lets you capture data about key steps in the process. Having better visibility into supply and demand allows you to optimize the amount of inventory that you hold throughout the supply chain.
Value Creation
Supply chain management is about creating value — meeting your customers' needs in the right place, at the right time, at the right level of quality, for the lowest cost. This value is the heart of supply chain management. If I had to pick just one principle to describe the whole process of supply chain management, it would be value creation.
Think of the extra cost that you pay to a second supplier as a kind of insurance policy. You're paying more up front to have that insurance policy, but in return, you're increasing the flexibility of your supply chain.
The ten principles — from Customer Focus to Value Creation — are not independent ideas. They work together as a system. Master all ten and you have a complete picture of what great supply chain management looks like in practice.
Introducing Five Supply Chain Tasks
The job description for a supply chain manager, per James B. Ayers
James B. Ayers is a well-known supply chain management expert who works with manufacturers, service companies, and government agencies. In Handbook of Supply Chain Management, 2nd Edition (Auerbach Publications, 2006), Ayers says that supply chain management should concentrate on five tasks:
Designing Supply Chains for Strategic Advantage
Consider how your supply chain can help you create value. You want to plan to operate your supply chain better, faster, and cheaper than your competitors. You need to think beyond just lowering costs. Also consider ways in which your supply chain can help you grow revenue, innovate your products, and even create new markets.
Implementing Collaborative Relationships
Consider how you can get teams to work together toward a common goal rather than competing for conflicting goals. If your sales team is trying to improve customer service by making sure that you have plenty of inventory available, for example, and your logistics team is trying to reduce inventory to lower costs, both teams are probably going to waste a lot of energy without achieving their goals. Supply chain management can help them align their objectives.
Forging Supply Chain Partnerships
Consider how you can build and sustain strong relationships with customers and suppliers. When companies understand that they depend on one another for their success — and perhaps their survival — working well together becomes a priority. Companies that don't do a good job of forming and sustaining supply chain partnerships end up at a competitive disadvantage.
Managing Supply Chain Information
Consider how you can make sure that information is shared with others in the supply chain in ways that create value for everyone. When retailers share sales data with their upstream partners, the manufacturers and distributors do a better job of scheduling production and managing inventory. When manufacturers share data about commodity prices and capacity constraints with their downstream supply chain partners, the retailers do a better job of managing pricing and promotions. Sharing the right information up and down the supply chain helps everyone create more value.
Making Money from the Supply Chain
Consider how you can leverage your supply chain design, relationships, partnerships, and information to capture value for your company. At the end of the day, businesses are sustainable only if they're able to capture value and generate a profit. In supply chains, a process change for one part often creates value for someone else. Find ways to share this value so that everyone has an incentive to work toward optimizing the value of the entire supply chain and ensuring that all the participants make a profit along the way.
The five supply chain tasks define the job of a supply chain manager: design strategically, collaborate internally, forge external partnerships, manage information, and make the whole chain profitable for everyone involved.
Implementing the New Supply Chain Agenda
A five-step system from Slone, Dittmann & Mentzer
One of my favorite books about supply chain management is The New Supply Chain Agenda, by Reuben E. Slone, J. Paul Dittmann, and John T. Mentzer (Harvard Business Review Press, 2010). It's a business book — the kind that you'd find in an airport bookstore — that breaks down the challenge of supply chain management in a way that focuses on senior executives. The authors talk about working capital and liquidity, strategy, and alignment, and they lay out a five-step system for making a company better at supply chain management.
Step 1 — Placing the Right People in the Right Jobs
Implementing supply chain management requires understanding how your job affects other people inside your company, as well as the people up and down the supply chain. If people don't understand the true effect of the jobs that they do, they need to learn so that they can do their jobs better. If someone is unable to learn or doesn't want to learn, he or she isn't the right person for that job. Getting the right people in the right jobs is the first step in implementing an effective supply chain strategy.
Step 2 — Putting the Right Technology in Place
Supply chains depend on technology. The technology may be something simple, such as a whiteboard with sticky notes that gets updated daily, or it may be something as complicated as an enterprise resource planning system. Each business, and each function within each business, has different technology needs. Figuring out how technology can enable your supply chain to create and capture value and then implementing the right technologies at the right time is the second step in the New Supply Chain Agenda.
Step 3 — Focusing on Internal Collaboration
When you look at a company's organization chart, it's easy to see how traditional business structures create silos within a company, with divisions competing for limited resources and often working toward conflicting goals. Managing from a supply chain perspective helps you break down the silos that keep the divisions within a company from working together effectively. By changing the focus from the performance of the separate divisions to looking instead at the performance of the company's supply chain, each division becomes more dependent on the others for their own success. Sales teams need to collaborate with operations teams. Logistics teams need to collaborate with procurement teams. Everyone needs to understand the company's strategy and work toward common goals that support that strategy.
Step 4 — Directing External Collaboration
Traditional business relationships are transactional and often self-centered. Buyers and suppliers approach each deal as a win-lose game: The suppliers are trying to inflate their profits, and the buyers are trying to squeeze them on price. Over the long run, this approach can damage both parties because it destroys value rather than creating it. To build sustainable supply chain relationships, each partner needs to look for opportunities to contribute value to the relationship. In return for their contributions, buyers and suppliers develop systems for sharing the value in sustainable ways. The goal is for every partner in the supply chain to be successful over the long term and to maximize total value.
Step 5 — Applying Project Management
Supply chains are dynamic. Companies respond to changes with projects, so the last step in the New Supply Chain Agenda is implementing strong project management capabilities. Teaching people how to manage projects well and having professional project managers involved are the keys to ensuring that your supply chain evolves as your customers, suppliers, and company change.
The New Supply Chain Agenda gives you a clear roadmap: start with people, enable them with technology, break down internal silos, build external partnerships, and manage everything as a project. In that order.
Chapter 1 Quiz
Test your understanding before moving on to Chapter 2
Answer all 10 questions drawn from the chapter content. You need at least 7 correct answers (70%) to pass. Review the sections above before starting if you need to.