Opportunity And Challenge For Design Makeover
By Thomas Craig
Expert Author
Article Date: 2009-03-27
Supply chain management is a complex responsibility. There are supply chains within supply chain. Supply chains are not linear from one customer to one supplier. They involve multiple customers and multiple suppliers each of whom has a supply chain. Compound that with presence of three different supply chains-product, information and financial.
Balancing and meeting conflicting requirements of customers while minimizing costs and doing so with an extended international supply chain is a challenge that no other part of a company has. Add to it dealing internally with almost every function of the business and with customers and suppliers located across the country and across the globe to broaden the scope of interactions.
Despite the scope and complexity, supply chain management is often not a vital part for many companies. It is viewed more in terms of costs, such as freight. Supply chain executives are not presidents of retailers, wholesalers or manufacturers. Supply chain departments are often positioned somewhere down in an organization, below their importance.
The impact to companies of their treatment of supply chain management has handicapped its effectiveness resulting in:
1) Wasted capital and resources
2) Increased costs to perform activities and transactions
3) Lost customer sales and poor customer service
4) Sacrificed competitive advantage to the point that it has created opportunities. Non-US companies are assessing going Direct to Market by entering the US market to compete directly, which increases the US firm's competition
Supply chain managements biggest challenge and obstacle is internal and begins with the company it is a part of. The reasons for the situation are numerous and include-
• Companies are dominated by a focus or corporate culture such as manufacturing, accounting/financial or sales. These are traditional.
• Supply chain management is not viewed as a core competency. It is viewed as a cost center.
• Organizations are built from the inside out. Despite the attention to customers, companies are not designed from customers and markets back into the firm so as to best serve them. Firms are not truly customer centric.
• Supply chain management is a horizontal process that runs across the organization and outside the organization to include suppliers, logistics service providers and customers. Companies though are vertical. Processes, products and information do not flow smoothly across the vertical barriers created by organization silos. Companies with a strong use of fire-fighting are often a sign of a lack of process.
• Accounting has its roots in manufacturing when companies were vertically integrated and labor costs were large and when variable costs and fixed costs control dominated attention. Now outside suppliers located around the country and around the world, outsourcing, product life management and cycle times are important.
Accounting does not adequately address supply chain management. Freight and warehouse costs are reported monthly on the profit and loss statements. Inventory is viewed as an asset and is reported annually on the balance sheet. This is what is reported to shareholders and stakeholders. Customer service, including lost sales and lost opportunities with discount sales, are not reported on any financial statement.
• Companies recognize global complexity of their business but do not include its impact on overall performance and do not include supply chain management into their strategy. Such businesses are often more tactical, even with a fire-fighting style, in their operations and performance.
• Channels of distribution are dominated by large corporations. Each large firm has different requirements because of each one's internal supply chain restrictions. The difference in size and the differences among firms inhibit real collaboration and the ability to streamline and improve supply chain management. Instead, accommodating to each customer's demands is how supply chain management is performed. The firms do not ask the large customers why they do what they do; nor are they proactive to initiate and collaborate with other approaches that could help customers. Instead, company practices are forced-fitted to accommodate the various customer specifications.
• Company metrics are not cross-company. Instead they are more functional to select areas and are tangential to supply chain management.
• Supply chain management evolved from being traffic to distribution to logistics to supply chain management. Companies failed to recognize the evolution and the meaning of this change.
The above is why much of a firm's supply chain management is cobbled together and contributed to company difficulties in addition to those caused by the severity of the economy.
As a result, programs, such as lean, do not properly address international supply chains and sourcing and the long lead time and the waste created with inventory and time. Lean instead is essentially used for the domestic side of the company. The reality is not totally appreciated with offshore procurement and with its cycle times create significant issues with forecasting accuracy and with good Sales and Operations Planning.
Often, one supply chain approach is used for all products, markets and customers without segmentation or differentiation for risk, complexity, velocity, time, service requirements beyond those demanded by each customer, revenue, and profit contribution. Warehouse networks are not regularly analyzed as to costs, service and flow even though customers, products, suppliers and business demands change. The locations have been static while business has been dynamic as to customer and supplier locations, products and order and delivery requirements.
This conundrum applies to companies regardless of size, regardless of industry and regardless of what country the businesses are located. It is especially difficult for small-medium firms. These firms fight a competitive battle against large companies who have leverage and resource advantages. Less-than-needed supply chain management only compounds the problems for these small-medium companies.
Companies are in a survival mode trying to deal with and get through the global economic crisis and the credit collapse. As firms work through the difficulties, will change come for those companies have not properly performed supply chain management? There will be change because many firms will not make it through the global recession. What other changes will occur?
Will firms try to bully their way through the economy with broad brush approaches with inventory reductions and costs reductions? Will there be change from the revived economies or will companies repeat the mistakes of the past with regards to supply chain management? How will firms deal with the permanent changes that come from the global recession? Will they choose to have lower costs; better customer service; faster capital velocity, for inventory and, in turn, cash; and increased competitiveness, even advantage? Growth, even survival, may depend on the answer.
The answer should be to change and to address issues above. Not changing is to repeat the mistakes of the past and can be considered as lunacy-doing the same thing over and over and expecting different results. Many company business models are outdated; more will join that with the global economy that emerges from the global recession.
Not all changes will be made. Organizations are not going to evolve into a horizontal process. They will remain vertical with the obvious implications of authority. Accounting standards are rules will not be updated quickly to reflect the realities of global business. While there may not be changes to these, companies need to recognize the limitations they impose on supply chain management performance.
Steps, improvements, even transformations, can and should be made, such as:
• Determine and differentiate what the company needs from its supply chain with regards to competitive advantage, market positioning, cycle time, capital required for inventory and other applications, service, revenue, profitability and growth.
• Include and incorporate supply chain management into the company strategy. Recognize the complexities, challenges including green, global scope, risks, impact and requirements into plan achievement. Mitigate risk and complexity, especially where they create waste. Do this for the three supply chains of product, information and financial.
• Segment and assess present supply chain performance and process as to customers, markets, industries, distribution channels and products. Analyze the process based on customer and market requirements and on competition.
Depending on the assessment results, supply chain redesign from the customer and market perspectives is preferable to trying to fix the present operation. Utilize different tactics for higher risk, higher complexity, high volume, fast moving, profitable products, customer and markets than for ones that are marginal.
• Place responsibility for management of the entire supply chain at the "C" level, under one organizational group and staff it with good people. That alignment will improve process flow and internal collaboration, limit organizational barriers and other deal better with other issues. Make supply chain management part of the corporate culture.
• Reflect supply chain management in company-wide efforts. For example, expand lean to include the international side of the business and the suppliers and supply chain to identify and remove waste. Or, use metrics that flow across the company and the across the supply chain.
• Blend operations options. That is consistent with differentiating supply chain approaches to match market and customer segmentation. Analyze a mix of offshore, nearshore and onshore for sourcing that reflects product life cycle, product velocity and profitability. Consider a mix for the type company provided and outside distribution facilities, with some having broad capabilities to ones with limited capabilities such as cross-docking only. Different facilities would be part of the new distribution network. The mix approach can be used for the international activities both for sourcing and manufacturing and for sales.
• Use technology as a process enabler for visibility across the entire supply chain, collaboration, exception and event management and operational control. Supply chain applications and integration with supply chain management are important reasons for company technology.
Supply chain change and redesign is needed for many firms to break the cycle of inefficiency that limits profits, growth and return. Change is difficult, but not impossible. Opportunities will come from the new economy. "Misfortune is the root of good fortune" - Lao Tze
About the Author:
LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad--supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.
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