Evolution of supply chain management
Triumph with Digital Supply Networks
Click below to share this post
The story of how the terminology Supply Chain Management came about is not as well-known as the phrase’s universal usage in business. Let us rewind time.
THE BIRTH OF Supply Chain Management
The group of four consultants at Booz Allen & Hamilton, in which Dr. Partsch was the youngest, had been sitting on the brink of inventing something for a while.
They all recognized the problems with the then state of materials movement, and, they also had some ideas on how things should be done. As if that bubble of conceptualization was hanging over their heads, waiting to be burst by a trigger.
Coming from a natural science background, Dr. Partsch brought to the table his scientific clout, aptly encapsulated in his German accent:
“When something happens, let’s say an earthquake, I can measure it hundreds of miles away, where it was, what was the reason, how strong that was.” Wolfgang Partsch
Of course, he was not trying to convert his client projects into a science experiment; rather, he borrowed the idea for its relevance to the issue at hand.
As commonsensical as it may seem to us now, at the time, the idea was still novel: the repercussions of an event do not stay within where it is bound.
“If something happens in sales, it will have an impact on purchasing and vice versa.”
Closely tied to that train of thought was the idea of seeing the entire hosts of separate business processes as a human body. Dr. Partsch’s knowledge of Industrial Dynamics came from Jay Forrester, the creator of system dynamics.
This input led the 4-people group to build on the view that just as different human organs interact with one another, there are a lot of interactions along these processes from purchasing through production, through logistics, through sales, through planning etc.
By this point, they knew they needed to come up with an overarching concept that governed all the dynamics inside a company. Then the project came along. They could see the well-meaning executives struggling within their individual silos where every department on its own was working optimally, and yet somehow the company, as a whole, performed dismally.
On that fateful day, the group was driving through a snow storm to visit the office of the Swiss client, a company that was subsequently acquired by the German industrial giant Siemens. It was when they had to take out the snow chains to plow through the snow that the term supply chain came to their minds, and to life.
Little did they know beforehand that being stuck in the snow could lead to one of the biggest Eureka moments of modern industrial commerce.
Details of that client project along with the use of the term SCM, and its conceptual underpinnings, were later published in German Business Week magazine in 1982. The group of SCM pioneers described the methodology that covered all operational units of a company – considered almost an apostasy in the then division of labor driven management paradigm.
This was also the world’s first usage of the concept of supply chain management in print as we know it today. We have come a long way since then. reminisces Dr. Partsch.
SCM indeed did not simply emerge to be a fashionable jargon. From 1980 onwards, Dr. Partsch has been devoted to developing the art of SCM, engaging in over 500 successful projects. Some of them were very high-impact and bear the hallmarks of SCM as an evolution itself.
When asked “If SCM was such a powerful invention, why aren’t we seeing any symbols such as ® or ™ next to the word SCM?”
Simply, Dr. Partsch and his team members did not patent the term SCM. Instead, they disseminated the knowledge for free. The quest of Dr.Partsch and his team was not to capitalise on a name, but to help businesses capitalise on the concept’s application.
About the Authors
Vivek Sood
Co-Founder
Connect with Vivek
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 on www.globalscgroup.com
Dr Wolfgang PARTSCH
Partner
Partsch was born in Vienna but spent most of his time in Munich. He came from a natural sciences background with a PhD in Physics and also studied Industrial Dynamics from Jay Forrester.
Most of the original thinking, methodologies and terminology of Supply Chain Management (SCM) were developed by Dr. Partsch and his team in the 1980s. There is a saying in the European supply chain circles – “if Wolfgang does not know it – then it is not worth knowing.’
A maven in the world of Malcolm Gladwell’s The Tipping Point, Wolfgang is constantly thinking about the technologies, the economics and the emerging trends in Global Supply Chains. He is now the only active member in the original team of SCM pioneers.
Related Posts
Click the below Text to see related posts.
Part 1
Why the majority of the companies are still struggling?
“At the moment less than 20% of the industrial companies have utilized the art of SCM to a degree where they can really benefit adequately. The remainder, more than 80%, are still struggling. They are just beginning, or have no real clue how to do it, or are still sitting on the fence and watching what happens, says Dr. Partsch.
The very first reason is at the conceptual level, where misconceptions about SCM have been so deeply ingrained in people’s minds that their bottom lines are being hurt. At the same time, the SCM experts also show their empathy for those who have only a vague idea of SCM.
In many cases, CEOs come from areas such as finance, sales, or marketing, and have a very thorough grounding in their respective field of expertise.
However, they tend not to have the operational know-how which allows them to understand what exactly an end-to-end SCM is. With that lack of understanding or ignorance, they then fall back on the ‘default’ construct that the supply chain is the same as procurement or logistics since these are the most visible activities in the SCM context.
Having heard countless stories of companies being “cheated” by those claiming to fix supply chain problems, especially the IT providers or logistics outsourcers, Sood fervently expresses his frustration: Unfortunately lots of logistics companies push this concept, and they will blur the boundaries to an extent where the two terminologies – logistics and SCM – become interchangeable.
On the other hand, Supply Chain IT companies have garnered a patchy track record over the past 25 years due to overzealous sales staff who have a hammer for everything that might remotely look like a nail.
Nonetheless, the consulting industry must be doing something right to be growing 15 – 25% per year consistently for the last 30-40 years. As a trusted management consultant who has helped some of the biggest brands on earth like Mercedes Engines, and, global industrial leaders such as Orica, Sood believes credibility is something that a consultant must earn before any signature is placed on paper.
If you don’t enjoy your work, it is difficult to stay in this profession just for money. I thought I would work as a top-tier consultant for a few years – sort of a finishing school for MBAs. But I enjoyed the diversity of the challenges so much that I am still doing this after more than 25 years.
Dr Partsch asks critical questions that get to the core of many executive-level headache nowadays.
“Do employees really understand what the real effective boundaries of their company’s supply chain are and what role they play within it? Is there a dodge of responsibilities because of unclear yet implicit routines? Are competitors quietly chipping away your profits because people in your company are busy arguing with each other?” asks Dr Partsch.
overall supply chain maturity
Global data
Source: Global supply chain group
A misconception of SCM can lead to a never-ending blame war between the logistics, sales, marketing, finance, and other departments. Since people often mistake the supply chain for logistics only, it is of little surprise that the logistics people carry the heaviest burden of criticism even if the failure actually lies elsewhere in the supply chain processes.
Dr. Partsch also points out a common misleading notion that SCM is a cost-reduction tool. It is more about customer service improvement – a combination of methodologies and art with a very close connection to overall costs.
“When you do your processes perfectly by having transparency and managing the processes holistically, the costs will come down automatically” says Dr Partsch.
Moreover, there are three problems at the operational level which often result in SCM failures. SCM is not used as an end-to-end improvement tool, and silos are the key focus for management. Sood comments: Top management may have an overall feel, but when you talk to a manufacturing manager, he does not care very much about purchasing, planning or sales, he is looking only at his factory.
Dr. Partsch warns of another issue potentially arising from the way people work – in silos, in closed cubicles. He places his hand over a computer screen and exclaims: That’s what people want others to see. Nothing. Or maybe just a glimpse of it.
The point Dr. Partsch is trying to convey is that a lack of overall transparency and visibility can kill productivity.
Companies are still struggling with scattered systems and islands of information. Questions such as Where could I find this information?, Why is this data entered three times?, Who is responsible for updating these figures? often hinder a smooth working process. Thus, IT integration has become a pressing need to move data along supply chain networks.
The story of Procter & Gamble and Wal-Mart in the States serves as a model that companies should aspire to. They implemented real time information management so that any sales in Wal-Mart stores was sent to the logistics and supply chain people in Procter & Gamble, who could see how fast their products were moving and where.
Such real time information and maximum transparency made it possible for the supplier to manage their own inventories, while the retailer focused on customer service.
Finally, a chain breaks at the weakest link. Risk management and supply chain security, unfortunately, has not been as well established as they should.
Dr. Partsch cites an example: “If you remember the Toyota problems after the tsunami and the earthquakes in Japan, they had to shut down the factories, they had no reserve, and they had no alternatives on the market. This is a classic story of putting all your eggs in one basket.”
While many suppliers have learned to consider their clients as just one of the balls in their opaque lottery bowl, the attachment felt on the company’s part is somewhat more “dysfunctional”. Sood’s eyes light up as he says: “But it doesn’t have to be that way!”
Part 2
Supply Chain 3.0
The fact that many businesses are stumbling their way toward profitability is that they are stuck at the lower stage of supply chain evolution. We are at Supply Chain 3.0 now, says Sood. Knowing the first reaction of people on hearing that term would be a skeptical squint or raised eyebrows, the two SCM experts leave a little gap to utter What is that? and delve right into the explanation.
The first generation of supply chain in the 80s saw everything within the walls of a company, from purchasing through shipment of products to the customer.
The first contribution that SCM made, in Sood’s words, was: Instead of doing your job in isolation and giving the result to somebody else, why don’t you actually work with that somebody else in a collaborative manner so that both of you can jointly come to a much better solution for the company?
SCM took off in the mid-80s with the invention of personal computers and Apple. These technological breakthroughs made it possible to collect information along the supply chain and send them to a central supply chain information pool. Before this advancement, only rich companies could really afford SCM projects with some IT support.
“This is an era of what I call 5-star business networks, where everything you do, whether it is product development, research and development or even marketing - everything is done with the final customer in mind” says Vivek Sood.
In the 90s came the second generation of the supply chain. This second wave was about getting out of the four walls and going international. Immediately, people were talking about production in Korea, Taiwan, China, and Europe and customers in North America. People started talking about collaboration with customers and suppliers. Sood notes: In that sense, the same concept was applied sporadically and somewhat successfully.
This period also saw the progress of IT. Companies such as SAP started to make big moves, as well as supply chain management software companies such as Manugistics.
The third wave happened with the Internet boom, where the new medium started to have a revolutionary impact on trade and businesses. We moved from international supply chains to global networks.
This is an era of what I call 5-star business networks, where everything you do, whether it is product development, research, and development, or even marketing everything is done with the final customer in mind and you work very closely with your final customers to create the products that are in demand in the market place, says Sood.
The idea of supply chain 3.0 is closely linked to a super networked business model, which breaks from the linear manner that businesses used to relate to each other. In the old model, for instance, company A produces goods that are then procured by company B, which then produces services that are procured by company C and so on. We would end up having stacks, or multi-layers of companies that are related in a very hierarchical manner.
Why is this bad? Because it is inflexible, formulaic, and innovation-stifling and puts the end consumer almost out of context.
With supply chain 3.0, R&D teams of two or more organizations work together, just as their marketing teams; while other departments cooperate to produce, store and move the products before finally selling them to the customer. In his book The 5-Star Business Network, Sood also details the benefits of getting to the third generation of the supply chain.
The end customers see products released very quickly, fine-tuned over some time. Then multiple generations of products are created in a systematic manner to optimize the profitability and get the cash to cash cycle to an extent where companies can predict accurately how much cash they will generate out of each generation of product.
Just try and imagine that, during the financial crisis of 2008, consumers who sometimes did not have money to pay the rent, would somehow scrounge together enough to purchase Apple’s iPhones. Why were they doing it? Because they had fallen in love with the product, and with the company which had designed a product so much around their particular needs, they would find creative ways of putting together money to go and buy that product.
At the same time, on the back end, Apple had worked out a very tightly knit supply chain that not only minimized the cost of producing iPhones but also helped the company invent new products in half the time of others.
Sood appears to ease people’s mental denial (but we’re not Apple) by adding: I’m not saying everyone should have fanatical consumers like Apple to be successful. All I’m pointing out is that the more intimately you meet your consumers’ wants, the more rewards you will reap for longer periods. You need your own 5-STAR Business Network to work with you to do this.”
Adds Sood, when I wrote the book “The 5-STAR Business Network”, our team did a 6-year longitudinal study of the top 1200 corporations around the world. It is interesting to note that 62 companies out of the entire starting sample of the top 1200 companies in the world scored 20 points out of 25, which is our cut-off for Supply Chain 3.0.
Also, interesting to note is that Apple – the darling of the supply chain crowd – is only ranked #60 in the rankings. And, due to its low margins, Amazon – just missed the cut. Figure 3, which is reproduced from the above book with permission, gives the top 35 of these 62 companies and shows the diversity of where excellence resides.
When asked about the rest of the 1200 companies, Sood refers to his blog, or book both of which have full detail of the study and data. In a similar vein, Dr. Partsch stresses the fact that no matter how you measure, and how to analyze, and determine the cut-offs, only less than 20% of companies have manifested advanced supply chain in any form; the rest range from “we tried”, to “we are a little bit good” and “we missed the boat”.
Supply chain success
Part 3
Moving up the chains
With the increasing complexity of these new supply chain networks, we need education and expertise, and we need technology to improve the processes. The founding father of SCM says the trio “people-process-technology” helps move companies forward, but cautions against putting “technology” at the forefront
Back in the 90s, the SCM terminology was misused by many IT companies, who said software tools by themselves could solve common supply chain problems. That is nowhere near the truth and Dr. Partsch quotes a common refrain which is a bit of cliché, but yet it is true “If you have only a hammer, every problem looks like a nail.”
People, I would say, account for 40%, processes normally about 40%, and 20% is the technology of the investments, he adds.
Every company is unique, hence, they move, transform or evolve towards a higher level of the supply chain in different manners too. Devising a complete and detailed road map could easily be done by someone such as Dr. Partsch or Vivek Sood.
“I think it is not enough to just give people a map and tell them to climb to the peak by themselves. We want to and we always climb the mountain with them,” says Dr Partsch.
Sood gazes towards the picture of a Sherpa alongside a climber on the Himalayan range and says: We tend to work with executives with very strong capability sets, generally those who will be CEOs very soon. They do not need very large teams for very long periods.
People generally self-select the consultants that suit them. Large brand name consultants deploy larger teams for a much longer time and tend to work with a different group of managers who need a lot of hand-holding. the ethos is to push aside client team and replicate all their work for several months. The freshly minted worker-bee consultants learn the business enough to be able to make a meaningful contribution.
Drivers of supply chain success
Part 4
Supply Chain as a litmus Test
Management buy-in is a critical factor in successful supply chain transformation projects. As Peter Drucker said: Only three things happen naturally in organizations: Friction, confusion, and underperformance. Everything else requires leadership. It links to the human element out of the trio mentioned by Dr. Partsch earlier. He says: If you don’t have support from the CEO or CFO nothing will happen. Sood agrees: The leadership of a CEO doubles the success probability of any business transformation.
Therefore, the first role of a company leader is to break down silos, to get different departments to talk to each other. Just as how a music conductor makes sure a concerto is played harmoniously by all the musicians involved, a CEO leads a company towards growth by ensuring everyone in the organization is not trampling on each other’s feet.
Sood cites a common issue in organizational structures, which is a disconnection between finance, sales, and operations. A typical finance department has an annual planning cycle, which involves budgeting. An operation department, on the other hand, usually has a monthly planning cycle, which involves sales and operations planning. As two departments often plan on two different time horizons, 90% of companies do not have the same monthly budgetary updates.
Disconnect between financial planning and supply chain planning
“Sales and operations planning forms a key component of SCM but unfortunately, a lot of companies have made sales and operations planning very formulaic and extremely rigid. It’s all form without substance,” Sood Comments
How does this affect the end customer? Internal bickering and resentment are never good signs. Customers are not too naïve to figure out if a company has failed to launch new products as scheduled, or delayed shipping on more than one occasion.
More than ever, the job of the CEO is to weave the team of all internal C-level people who are extremely competent into a cohesive team that works as one. That is why SCM is a leadership function and cannot be delegated down, emphasizes Dr. Partsch.
An example of how a company can leverage the power of supply chain 3.0 with proper leadership is Zara. They have 18 fashion cycles a year whereas a typical fashion retailer only has two seasons.
“Zara is beating hands down any retailer in the world by a factor of 900% productivity difference in their planning cycle. The owner of Zara is known to be the third richest man on earth and he is a man who grew up in a one-room flat next to the railway lines. How did he create this? By understanding what a good supply chain can do for his business and even in a country that is not known for its innovation or for even being very productive,” Says Sood
The burning question at this point could be: How do people know if they need to move up the supply chain ladder at all? This should not be an exercise to find a needle in a haystack or dig out whatever fault one can find in a company.
Sood speaks in a half-humorous, half-serious voice: If you take that approach, perhaps every college student would want to be a consultant when they graduate to pay off their debts. A more useful thing to do is to look for patterns of unhappy customers or patterns of undesirable numbers on the earnings report.
“We are more and more in the battle of supply chain versus supply chain, and not companies versus companies. You need the best external advisers to win in this game. There may not be more than 10 people like us on the planet who can achieve rapid, beneficial, large-scale business transformations like we do.”
dr. wolfgang partsch
Vivek Sood
The 5 star business network
Many executives may lie in their bed at night, hand on forehead, not knowing their company’s headache is due to a brain tumour. “While I admire these people for their dedication to the organisation they are working for, sometimes the deep underlying causes of these minor headaches slip past their mind,” says Sood. He believes SCM should not be foreign concept in the corporate world, 30 years on from the day it first appeared in print.
“We are more and more in the battle of supply chain versus supply chain, and not companies versus companies,” says Dr. Partsch. “You need the best external advisers to win in this game.
There may not be more than 10 people like us on the planet who can achieve rapid, beneficial, large-scale business transformations like we do.” On being questioned on this he points to fact that while he plays golf as much as millions of others on earth – only a handful of people regularly make more than $10 m per year from the game. “Anyone can talk a good game – look at the results to know the impact.”
The youngest in the original SCM pioneers sounds naturally like a Grimm Brothers’ tales narrator: “I may or may not live to see the next movement of SCM, or supply chain 4.0, but I trust that there are always people like my partner Sood who can help companies get there.”