Supply Chain Governance vs. Corporate Governance
What Is The Difference Between Supply Chain Governance And Corporate Governance?
A Tale Of Two Companies
Both Nokia and Ericsson had experienced business disruption to an equal extent.
The 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. 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 significant energy in creating a resilient and responsive supply chain. On the other hand, like most companies, despite their self-congratulatory culture, Ericsson’s supply chain was relatively a middle-of-the-line affair that worked well when things were good.
After the fire, as the aftermath panned out, Nokia was able to foresee 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, just like most other companies do in similar situations.
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.
Corporate Governance Is Not To Blame
Neither of the companies mentioned above – Nokia, or Ericsson, lacked in corporate governance in any way. Yet, due to seemingly a minor supply chain misstep, one of them nearly lost their entire business.
So the critical question is this – HOW CAN COMPANIES STOP THEIR BUSINESSES FROM MAKING SUPPLY CHAIN MISSTEPS THAT COULD POTENTIALLY LOSE THEM THEIR ENTIRE BUSINESSES?
Another crucial question is this – IF CORPORATE GOVERNANCE CANNOT ADDRESS SUCH CRITICAL ISSUES, THEN WHAT ELSE CAN?
Almost All The So-Called Lapses In Corporate Governance Can Be Attributed Elsewhere
That is why I chose to pen this article and point out the difference between corporate governance and supply chain governance. Most of the corporate governance lapses are in reality due to the absence of supply chain governance.
Supply Chain Governance
If, after reading the above story, you are still doubtful of the possibility of losing your career, or your business, due to a supply chain misstep, just read the daily press and try and go into the depth of the story each time you hear about a business debacle. Later in this article I will give you a specific example from the recent popular press.
In more cases than not, a supply chain misstep would have occurred somewhere in the background perhaps many months, or even years ago, and probably in an entirely different continent.
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 regularly show up in the press.
Today, Extra Ordinary Business Conditions Prevail
Government handouts are becoming the norm post-COVID-19. Businesses and their executives are as much recipients of welfare payments as any other part of the society.
Supply chain disruptions around the globe have demonstrated to all and sundry that supply chains take an extraordinary knack to put together, and even more expertise to keep them humming smoothly.
Supply Chains Are At Their Breaking Points
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. The above example from our book THE 5-STAR BUSINESS NETWORK should suffice.
Even more alarmingly, most businesses are let down by their supply chains almost everyday. They accept these minor debacles with a shrug of the shoulders because they have no other recourse.
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.
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.
On The Other Hand, Companies Have Made Giant Strides In The Arena Of Corporate Governance
For the last two decades, corporate governance has become a big focus for the boards and corporate regulators. As the investors became pro-active about their rights, corporate governance has been systematically codified and taught to upcoming board directors.
All definitions of corporate governance – whether by the Australian Institute of Company Directors (AICD), or by the Australian Securities and Investments Commission (ASIC), or by their UK and USA counterparts have a stream of common elements.
Invariably, corporate governance is said to incorporate the system or set of rules (policies, processes, procedures or guidelines) by which the power in the organisation is distributed and exercised primarily for the stated purpose of the organisation itself.
This clarity around the definition of corporate governance, its boundaries, and its details have been a boom for practitioners of corporate governance – the boards of directors.
No wonder that the Corporate Governance Code (and its counterparts) is so popular. These have been adopted and successfully implemented in almost all companies in their respected jurisdictions.
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 session, 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.
While the 3Ps (Pressure groups, Press and Politicians) continue to hunt for, and gleefully point at minor lapses in corporate governance – the fact remains the almost all boards today take corporate governance very seriously, and take pro-active steps to ensure it is covered.
That is the reason why 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 Cannot Ensure Supply Chain Integrity
If from the preceding paragraph, you have come to the conclusion that corporate governance would not be enough to deter or prevent many of the disasters in supply chain management – you would not be wrong.
In our experience of more than 400 supply chain projects over the last 24 years on almost all continents – our diagnostic revealed that no amount of further due diligence in corporate governance would have been able to reduce the supply chain losses or risks.
In each case, the situation needed a new perspective, a broader and more in-depth look using a different lens.
Just try to go through some of the selected one-page case summaries here and discern what is happening behind the scenes in each case.
Ask yourself this – why corporate governance was unable to detect and diagnose the problem, and then solve it?
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 can 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.
Why Does Supply Chain Governance Fall 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?
Outside The Four Walls
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.
I am not going to define, codify and detail supply chain governance in this short article. That job is done elsewhere on this website.
The purpose of this article is to contrast supply chain governance with corporate governance.
To some extent, the preceding examples and discussion have already done that job. Below are some salient points:
Objective Of Governance
Corporate governance tends to be a compliance-focused activity, and sometimes ends up degenerating into a tick the box exercise with a lot of checklists. The letter of the law must be upheld in every case, though the spirit of the agreement, or the broader strategic business objective may get ignored in the process.
Supply chain governance has three objectives – supply chain profitability, supply chain sustainability and supply chain integrity (security and resilience).
On the surface, these could also be the objectives for corporate governance. Yet, corporate governance is more focused on the process of distributing power, responsibility and accountability of how the organisation is run smoothly, rather than on achieving the three outcomes above.
Focus Of Governance
Corporate governance primarily focuses on what happens inside the organisation; it leads from inside and goes outside the organisation only sparingly.
The focus of supply chain governance is what happens outside the organisation as it relates to what happens inside the organisation.
To make this point real, and contrast the two approaches to governance – take the example of a typical invoice from a logistics company. Corporate governance would entail auditing the existence of a contract, and application of contractual rates to the logistics activity. The biggest weakness that cannot be covered in this process, but would be covered by supply chain governance is the validation of the actual logistics activity either by direct means, or indirect means.
Multiply this little example by hundreds of thousands or even millions of similar small transactions happening every month inside every company for warehousing, freight forwarding, trucking, contract manufacturing, cleaning services, outsourcing, raw material purchasing, joint ventures, channel partnerships etc, and try and visualise the vast gap between the coverage of these two concepts.
If you still cannot visualise the gap, let me make it more real by an excerpt from this eye-catching story in the press (SMH) – “alleged a sham agreement to secure steel at an attractive price was subsequently “generated and backdated” to “justify” the $US15 million payment to Asian Global Projects. No steel was ever delivered as a result of the agreement.”
Clearly, this one is a complex and unfortunate story.
But, try and visualise how many other supply chain frauds or semi-frauds go undetected just because those who have the knowledge to detect these have no motive or mandate to do so, and those who have the mandate do not have the knowledge.
Timing Of Governance
A product or service that you receive today might have started its journey upstream in the supply chain up to six months earlier. By the rules of corporate governance, you would not bother about it till it comes over the fence inside your company, but by that time it might be too late.
What if the shipment is so large that rejecting it will render one of the only two suppliers in the world bankrupt? Would you still wait for it to be delivered over the fence before rejecting it?
Then, why wait before taking control in many other similar, but not so drastic, situations.
Place Of Governance
If the timing difference is a major contrasting point between corporate governance and supply chain governance, then the spatial differential is an even more significant point of distinction.
All supply chains are global today. Your ability to exercise control halfway across the world is limited by language, culture, practices, legislative regimes, ability to monitor, ability to affect behaviour and many other limitations.
It is not impossible though; otherwise, supply chains would not exist.
Whether it is joint venture partners, or channel partners, or other supply chain partners, your ability to generate profits from the agreements that look good on paper is only as good as your ability to actually govern those deals in practice.
Even though everything might look good from a corporate governance perspective because the letter of the law was precisely followed, the spirit of the agreement may have drifted across the partnership line to significantly favour your partners simply because they exercise greater control (or influence) over the partnership.
Dozens of such examples exist in our case study library if you care to spend some time thinking about the reasons why our services were needed in each case.
Personnel Responsible For Governance
Corporate governance is the forte of those close to the board, mainly as part of the governance committee. Most of the personnel tend to come from within accounting, finance, compliance and legal departments.
Supply chain governance needs a very different set of skills, which go beyond the form of the agreements into the substance of the deals. Significant supply chain experience – equivalent to supply chain mastery is required for this purpose. The company may not have any person with this skill level on its board, or even within the company.
Supply Chain Governance - The Need Of The Hour
The definition, the code and the practice of supply chain governance is a work in progress today.
Most boards do not even recognise the need for a board level supply chain governance committee or expert yet.
As the supply chain disruptions grow in the post COVID19 scramble, and the efforts to unclog global supply chains create new winners and losers in every industry, this needs will become much more visible.
Necessity is the mother of invention.
Prepare for a big boom in supply chain governance and a board room scramble to get supply chain masters on board.
That is the reason I wrote elsewhere that the demand for supply chain experts and masters would grow exponentially after the COVID19 bust.
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