ABC Supply Chain Transformation
All successful Supply Chain Transformations have three things in elements – Alignment, Balance and Continual Improvement.
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All successful Supply Chain Transformation have three things in elements – Alignment,
Balance and Continual Improvement. Case study, after case study, has revealed that companies ignore these cardinal rules to their peril.
Supply Chain Transformations are again in fashion. In the late 90s, they were being driven
by aggressive supply chain systems vendors; now they are driven by simplistic academic theorists. Both groups have little if any, real-life experience in supply chain management.
Leading Supply Chain Management academics today contend that every supply chain in the world should be the same -Agile, Adaptable, and Aligned. We believe this is arrogant. It is like saying every woman in the world should wear a size 7 dress – it sounds sexy but is impractical.
ABC in Supply Chain Transformations
Despite huge advances in supply chain decision support tools, the dream of mass customization is still out of our grasp today. Consequently, efficiency and agility remain diametrically opposite poles on the same continuum. However, that does not mean that every organization, no matter what industry or strategy, should congregate to the holy grail of agility. In fact, on the other end of the continuum, there is a substantial concentration
of industrial investment, where the business imperative is to drive the last fraction of cent out of
costs. A supertanker of 350,000 Metric Tonnes, when fully loaded, does not leave much room for agility; and a large amount of today’s crude oil is still being carried by such tankers.
The number of examples is just as numerous (perhaps more) than those quoted by the academics – ranging from natural gas to petroleum to ores, coals, and mines – where the entry ticket to economic activity is so high that subsequent supply chain systems leave
room for neither agility nor adaptability.
We believe that the supply chain of each organization should be aligned with its business. Whether it is agile or adaptable should depend entirely on the requirements of the business. Some businesses, driven by customer sentiments, innovation, or short product lifecycles need agility
and adaptability in their supply chains. However, other businesses depend on efficiency to deliver the lowest costs that their customers demand. Agile supply chains would leave these businesses extremely exposed to much higher costs than their competitors – and perhaps the first ones to fold under cost pressures. For example, shipping crude oil in 10 tankers of 35,000 MT would certainly make the supply chain more agile – however, the costs would go up by 50% to 200%. Whether that agility is worth anything to the end customer, with huge investment in tankage in the discharge ports, is still a big question.
Let us start from the basics. To maximize profitability, organizations need to give the customers what they want, when and where they want it at the best price that can be achieved. To enable this to happen, they need to be able to have the product ready, having spent a minimum amount in doing so. The basis of competition differs between different
industries, and even within the same industry over time. Hence the supply chain imperatives will vary accordingly.
For this reason, A B C of Supply Chain Transformations is crucial. This means Alignment (between business strategy and supply chain strategy), Balance (between competing supply chain alternatives), and Continual improvement. The first two are a matter of getting the
supply chain strategy right, and the last is a matter of tactical short-term improvements on an ongoing basis.
What is alignment?
One of our clients had a robust business built over several decades. Our client’s products and services have always been a small part of the customers’ overall spending. However, the business impact of poor quality service is significantly out of proportion. Consequently, the customers used to appreciate high-quality service, and traditionally paid handsomely for it.
Due to competitive dynamics, regulatory changes, and new entrants, gradually the market was commoditized. The purchasing was being increasingly centralized, driven by head office cost pressures. The customers were no longer willing to pay for extra services. While the
users on the ground appreciated all the traditional services, they were in no position to influence the price or purchase decisions anymore. Our clients were still following a high cost/high service level supply chain strategy, while the business strategy had moved to sell commodity products at commodity prices.
In numerous companies, supply chain strategy and business strategy are out of alignment with each other. This can happen as a result of a one-off event such as mergers, acquisitions, divestitures, product line revamp, major strategic initiatives, LBO/MBO, etc., or as a result of the gradual drift of markets. This could even happen when supply chain transformations are
being guided by fads.
As a start, it is paramount that the supply chain strategies are matched to he current and future business strategies. This is such a fundamental requirement of any supply chain transformation that all other effort is useless without it. Key fundamental questions need to be answered to achieve a shared understanding of supply chain objectives: Who are the customers? What are their key requirements? How do we plan to meet their needs and wants?
How do we interact with the customers? What margin are we planning to achieve? In return for what service level? What cost targets are justified? What supply chain KPIs are most appropriate? What are the target levels for these KPIs? How to monitor these KPIs in an ongoing manner?
In our experience most major supply chain transformations which fail to ask for these fundamental questions at the outset either visibly stall just a few weeks into the implementation when differences of opinion between various organizational functions start surfacing or do not produce meaningful results.
Top management ownership of supply chain transformation efforts, a conscious search for symptoms of misalignment between business and supply chain strategies, and alertness at the times of major structural changes to the business are some of the other means of achieving alignment.
What is balance?
A company we know initiated a major supply chain transformation initiative. All warehouses
were given strict KPIs in terms of RONA (Return on Net Assets) and inventory levels. The expectation was that if all warehouses achieve their RONA targets, the overall supply chain
would be in a much better shape.
However, at the end of 6 months, when the overall supply chain costs were tallied, it appeared that the overall supply chain costs had actually increased.
On further investigations, it appeared that due to strict inventory restrictions on
the warehouses, they were ordering the minimum possible stock, resulting in much more frequent replenishments – sometimes even on LTL (less than full truckload) or expedited shipment basis. So all the savings in inventory reduction was more than eroded by the
increase in transportation costs. Like a half-filled balloon being pressed in one place, the costs would just show up somewhere else – in an area that was not being focussed on temporarily.
This type of partial optimization approach results from a lack of balance in the supply chain transformation efforts.
Supply Chain excellence is all about achieving balance – between costs and service levels, between various elements of the supply chain, and within one element of the supply chain.
At the highest level, clearly, every supply chain service level will have a commensurate cost level attached to it.
Supply chain strategy setting entails a balancing act between achieving the highest possible service level at the lowest possible costs. Further down, trade-offs need to be achieved between warehousing and transportation, between various modes of transportation, between various locations for warehousing, between various possible lot sizes, between carrying spare inventory and carrying spare production capacity, between lost sales and high replenishment costs, and numerous other similar decision criteria.
Generally, a holistic approach to supply chain optimization is needed in order to achieve an overall balance between all these moving parts. This is an area where good decision support tools can prove their worth. However, it is essential to select the right decision support tool, configure it in the right manner, know its limitations, and rely on it only up to the right level.
What is a continual improvement?
No matter how good the supply chain alignment with the overall business, or how good the overall supply chain optimization is, every supply chain needs to be improved every day.
This is because of two reasons. Most supply chain strategy setting and optimization is based on models built to simulate reality. By necessity, for sake of expediency, some details have to be ignored during model building.
However, some of this detail could be important in some instances, and thus needs to be taken into account during implementation at the local level. The tricky question for supply chain strategists is – which details are so important that the supply chain configuration needs to change in response, and to what degree?
Secondly, businesses change continuously. Customers, suppliers, competitors, production processes, technology, raw materials, and personnel all are in a constant state of flux. Many of these changes will require the business to adjust its supply chain in response. With continual improvement, a major transformation effort should not be needed more
than every 4-5 years. However, many organizations seem to launch a major supply chain transformation effort every 1.5-2 years literally one on the back of the other. This is because of failure to achieve alignment, balance, and continual improvement in their supply chain transformation efforts.
5. Proclivity to take the high road
In a story of Honda managers sent to the US to launch the motor bike business in California in 1959 the author described that these people more by accident than by design stumbled on the strategy of selling smaller 50cc motor bikes through non-traditional retail channels.
While their initial intention, and the headquarters’ directive was to sell larger 250 cc or higher bikes through traditional channels, they were flexible enough to grasp the opportunities presented to them and humble enough to learn from the market. Perhaps apocryphally, the author goes on to describe that they lived simply, slept on the floor of their one-bedroom rental apartment, and traveled on small 50 cc motorbikes to and from work – which was the reason these bikes caught on. The rest, as they say, is history. Honda, now, is one of the most respected brands in the United States.
Contrast this approach with the typical culture of most organizations. Very limited time is devoted to understanding the substance of the issues.
Most of the fact-finding is done in air-conditioned offices and 5-star hotels. There is little flexibility in the strategies and no room for humility in the strategists’ minds. Scant regard is paid to the feedback from the implementers – who are seen more as self-centered whining rather than genuinely escalating the emergent issues. Is there any wonder that most strategies fail to achieve the kind of results Honda achieved?
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served dozen of world-wide corporations in nearly 85 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
6.Short term focus
Much has been written about the quarterly culture of wall street and its impact on the businesses. Managing earnings and the expectations of the wall street from quarter to quarter leaves very little room for strategic thinking or its implementation. Short term fire fighting takes precedence over long term socially responsible management for growth and profitability.
Add to that the short average CEO and managerial tenure of 3-4 years, most people now plan their career accordingly. First year in the role is marked by significant new projects and actions while rest of the tenure is spent in creating the results of the initial plans. However, most people know that the full results will not be seen in most cases till they have moved on. Hence they focus only on the short term results of the actions and modulate the actions accordingly.
In conclusion, the supply chain strategies will be good only when they are devised with due deliberation taking into account all the factors that surround the key decisions incorporated into them. At the same time, they will only work when implemented with rigour and flexibility. Corporations can save themselves a lot of time and money by avoiding the errors listed above.
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