WHAT IS SUPPLY CHAIN GOVERNANCE, AND WHY DOES IT MATTER?
The first part of this topic appears to be a self-explanatory question because everybody who has spent any time with boards of directors lives and breathes corporate governance.
Corporate Governance is the Primary Focus of Boards
Most boards pay significant attention to the issues of corporate governance. With a limited number of board meetings every year and a limited number of hours in every meeting, the entire process is designed and run with almost military precision to give effect to the legislative requirements and commercial exigencies.
Boards Do A Wonderful Job in Corporate Governance
With this kind of focused attention of some of the best people in the corporate world and budget, it should not come as a surprise that when it comes to the governance of what falls within the four walls of the company itself, every company does a remarkable job almost all the time.
So, the natural question is why then such a lot of hoopla in the press about corporate governance. Where does it fail for the 3Ps (the press, the politicians, and the preachers from the NGOs) to make such a lot of noise about it? This question merits a little deeper exploration because almost all failures of corporate governance lie elsewhere.
We address this issue in our book UNCHAIN YOUR CORPORATION.
After visiting with numerous boards and having spent countless hours past midnight preparing board presentations, papers and submissions, we have become convinced that lack of corporate governance is not the real culprit in most cases. That infamy lies at the behest of supply chain governance.
Corporate Governance vs Supply Chain Governance
Imagine you are in charge of insulating a freestanding house against cold and heat. You work diligently to block every square inch of the roof thoroughly with thick insulation material. Likewise, every square inch of the floor is covered with thick plush carpet to insulate against the weather. You are able to do the same thing with all the walls that do not have a window or door to the outside world.
But when it comes to those walls that have a door or a window to the outside world, you are unable to devise a way to insulate the doors and windows, and around them. So you decide to leave those walls alone.
This type of insulation might work if your house has hardly any windows and just one door. But, if it is a modern open plan house with several large and airy windows and glass doors all over, eventually you will have to devise a plan to insulate the doors, the windows and the walls that incorporate those doors and windows.
More open plan the house is, more vital it will become to make this evolution in your insulation practice.
Supply Chain Governance Falls Short In Most Companies
Just like modern open plan houses, modern corporations have evolved into broad and deep networks of business entities joined together by mutual interest. Over the last three decades, supply chains of most companies have grown wider – regionally, nationally and internationally, as well as deeper – both upwards and downwards.
Yet, supply chain governance has not kept up. How many companies do you know that have a supply chain committee as part of the board of directors? How many companies have a supply chain board that reports directly to the board of directors? In fact, how many companies have any real supply chain capability present in the board meeting at all?
We Face Extra Ordinary Times
Government handouts are becoming the norm post-COVID-19. Businesses and their executives have been reduced to hankering for corporate welfare payments by the circumstances. Many jobs survive today only because of the largess of the respective governments.
Massive supply chain disruptions around the globe have demonstrated to all and sundry that these things take an extraordinary knack to put together, and even more expertise to keep them humming smoothly.
Stories Of Supply Chain Failures Abound
The resilience of supply chains is being called into question across the business world. I can give numerous examples from the current events but desist because those stories have not played out in full yet.
Here is a story from our book THE 5-STAR BUSINESS NETWORK which played out a while back but is still entirely relevant to demonstrate what is happening on a much larger scale today in one industry after another.
Mobile Phone Market Story
Two stalwarts in the mobile phone industry in March 2000 were equally impacted by the same event - a lightning fire in the chip manufacturing plant of their common supplier, Philips, in New Mexico.
Both Nokia and Ericsson experienced business disruption to an equal extent as a result. Fire damage to the stocks was extensive.
More importantly, the manufacturing capacity was damaged, and it wasn't easy to estimate the time for repairs.
Nokia had invested months, if not years, in creating and perfecting a robust and responsive supply chain, while Ericsson's supply chain was relatively a middle-of-the-line affair that worked well when things were good.
After the fire, Nokia was able to see the full impact of the chip shortage on its own business, as well as the entire industry with a lot more clarity than Ericsson, and even Philips.
Moving quickly, it activated other parts of its supply chain to shore up supplies, to redesign some of the chips to manufacture them in other plants, and to take pre-emptive steps in the business network.
Ericsson let the situation evolve at its own pace and made decisions more re-actively.
The resulting gain in profitability and market share for Nokia and the loss of these for Ericsson tipped the balance of the industry to an extent where within a few years Nokia pulled far ahead of the Ericsson which never caught up with its erstwhile equal rival.
Of course, the very same supply chain let Nokia down in its rivalry with Blackberry and iPhone, who managed its supply chain much more adroitly for leading innovation that any other company ever did. But that is a different story, also told in the same book.
Supply Chain Missteps
Day in and day out companies are let down by their supply chains and continue to accept those minor debacles with a shrug of the shoulders. Most of these debacles do not make it to the press, or even to the board room discussions, simply because they are buried under the carpets of the shop floors forever.
The stories that are too big to be buried would make the press.
Sadly, most boards first hear of any of their company's supply chain missteps only just before they are about to feel the full brunt of legislative and public indignation.
What Could Go Wrong?
The stories of food tampering, contamination, child labour, prison labour, factory fires and deaths in a third world country, data breaches, IP stealing, and a thousand other types of significant supply chain debacles, are too big to be buried by even the best public relations crew, and show up in the press.
The reality is that what happens within the confines of four walls of your business is a lot easier to know, manage and control. What happens outside of those walls, in your supply chain, is much harder. It can only be guessed, risk-managed and governed. That requires supply chain mastery.
Is Your Supply Chain Up To The Challenge?
And, most companies do it very badly for the simple reason that their mastery of their own supply chain is inadequate.
In most cases, supply chain executives have origins from within logistics, purchasing, freight forwarding, or production planning. They may get certificates, but do not acquire adequate world-class supply chain skills to bolster their capabilities, as they enter roles pertaining to supply chain management. Instead, they spend a lot of time convincing others that their part of the skill set is all there is to good supply chain management. And, none in the senior management team or the board is any wiser.
Worse still, that becomes the accepted norm within the company. To come back to the question at hand - why does supply chain governance matter?
Because, your suppliers, transporters and warehousers are bleeding your business in a thousand small ways every day and no one is your business is any wiser. Each time, it hurts your profitability in a small way. Over a large number of transactions, it aggregates into a significant amount, and that is why your profit falls short at the end of the quarter, despite a healthy revenue.
What Can You Do?
If this were all there was to it this might not be a board-level problem. It is the significant events that your business should be prepared for, or that your business should adequately react to, and does not - that will eventually kill your business - just like Ericsson lost its mobile phone business to Nokia, and Nokia lost its mobile phone business to Blackberry, and Blackberry lost its business to iPhone.
Losing the business matters to every board. Sooner or later, without adequate supply chain governance, every business will be at the mercy of its supply chain. That is why good supply chain governance matters.