As the concept of supply chain management became increasingly popular in the mid 2000's or so, many companies renamed their transportation departments as supply chain management 'department'.
This happened without understanding the difference between the two activities - where transportation department carries out an essential function role while the supply chain team carries out the cross functional integration role.
Having renamed the transportation (or logistics) department as supply chain, the roles, functions and expectations from the personnel did not change much.
In fact they were never upskilled in any significant manner. Most companies still expect them to perform essentially logistics management or transportation management functional role, and most of these people expect and do so.
That is the reason why so many people confuse between supply chain management and transportation cost optimisation.
But what are the broader implications of this confusion?
Looks at the figure below:
Your company will have SCM 0.0 level of sophistication if the skill sets have not been upgraded along with the name upgrade. It is called THE SILOS for a reason. There will be no integration even between the basic components of a rudimentary supply chain - the production, the procurement, logistics and inventory management.
Here are the symptoms you will notice as a result:
This title came up only because we frequently run across companies who have done exactly that. Then they wonder aloud why their supply chains are not performing.
Here is a case study from our 2015 book UNCHAIN YOUR CORPORATION illustrating the symptoms shown in the table above:
When you are so close to the business, the real problem is often difficult to discern
Frank had been recently appointed the chief supply chain officer in his business. He had been the chief information officer for about five years before the role of information technology in the business started to decline. His boss had suddenly come to realize how unsophisticated their supply chain really was.
The second equally important realization was that their entire business was really just a supply chain business. They were in the business of buying, storing and selling products, which is not very different from lot of other businesses around the world these days. As manufacturing has moved to China, India, Vietnam, Bangladesh or other foreign locations, many businesses in Europe, United States, Australia or other developed countries have effectively become supply chain businesses where they buy products from these manufacturers. They store those products and sometimes do minor value addition during storage in their premises before weaving in a service offering to finally provide customer delight at the point of delivery.
Frank understood the importance of supply chain but he was grappling with a very important issue. The supply chain manager had been a logistics consultant before coming into his business and rated his own supply chain capabilities very highly. This man had built a team of very loyal logisticians inside the company. Every time there was any discussion on supply chain, he would roll out key performance indicators related to logistic operations showing clearly how good the logistic operation was.
Frank was at a loss to understand why the profitability of the business was so low when all the key performance indicators shown by his supply chain manager painted such a positive picture. On top of it, other individuals in his business including a financial analyst in the accounting department and some other people in the procurement department had very different opinion about the logistics operation than the supply chain manager.
In fact, everybody in the business had very different opinions of what supply chain was and how it should be run. Tradition-bound people said: “All we do is bring in the product, store it and sell it. We will sell it to anybody where we make the money for the same price”. Sophisticated marketers had segmented the market place very carefully, differentiating prices based on customers’ ability to pay as well as their willingness to pay for extra service that came with the product.
This is not very different from the fact that you pay a far lower price for a can of coke in a supermarket than you pay for the same can of coke at Bondi Beach in Sydney.
Back to Frank’s business - on one hand, there were very sophisticated market segmentation exercises with a well-articulated service promise; on the other, a very rudimentary supply chain where the same supply chain model was servicing every customer segment in exactly the same way. So you would get the same kind of warm coke whether you went to supermarket or to the beach shack in the middle of a summer heat wave despite the price differential between the two places.
Needless to say, customers who were paying much higher prices, were very dissatisfied with the service as well as the product. In their perception, the company did not deserve to charge the high price, whereas, those who were paying the basic price were delighted because they were getting services which they were not getting anywhere else.
Exacerbating this external customer reality was the internal reality of different supply chain sophistication levels within Frank’s company.
The logisticians were very efficient operators, cutting every possible penny. On the other hand, the marketing team were very sophisticated, contending that for high value customers, we should not be watching pennies. They are paying much higher price and we should be looking at reconfiguring a different supply chain for those customers.
At the same time, financial analysts held a view of the traditional supply chain (SCM 1.0), with clear silos within the company moving towards low cost country sourcing. This diversity of opinions created a massive confusion within the company.
On his appointment as Chief Supply Chain Officer, Frank asked us to help clear the confusion and, simply because we were detached from the emotionality inherent in the internal debate, we could easily recognize the chains that were slowing down his company’s growth.
Excessive division of labour can create bureaucracies with deeply entrenched silos mentality
This is when every department becomes a highly segmented work place and each department keeps fighting turf battles with other departments within the company. In such a situation you will notice the typical symptoms of massive waste - in terms of excess capacity in production, in labour force, in inventory, in storage and in all the other operations within the business.
Because there is no supply chain mechanism to cut across the silos and there is no supply chain planning, so whenever the business runs against capacity constraint the knee-jerk response is always to go out and buy more capacity whether it is a warehouse space, or trucking space, or manufacturing capacity or something else. The emphasis is not on planning but to reduce the incidents of running out of capacity. Emphasis is on getting more and more resources and capacity just in case there is a need. Most hospitals for example are run on this basis.
In our experience, most executives typically underestimate the amount of waste within their companies. If you even remotely suspect that some of labour time, or warehouse capacity or manufacturing capacity, of raw material, or inventory is being wasted in your company – most likely situation is far worse that you think it is. Well, at least it is worth doing a small internal investigation of the supply chain planning process. And, while doing that – do not just look at the planning process, but also look at the results of the process. You can do rudimentary planning yourself to compare your results with the results of the entrenched process. More times than not, we were able to discern significant flaws in a perfect looking supply chain planning software driven process by using this method.
Organizational silos tend to hamper transformations and make businesses unprofitable. Yet, a less obvious fact is that these organizational silos were created for a purpose. The original purpose was division of labor - to organize the workforce in such a way that each individual specialized in what he or she knew best. Then, afterwards, it could all be integrated in a cohesive manner which resulted in much better product quality and much cheaper price. This was one of the biggest gifts of the industrial age to humanity.
For example, instead of each man in a furniture factory producing a chair individually, the furniture factory would be organized in such a way that one man would specialize in producing the legs, another person would be specialized in making the backs and the third would be making the seats, and fourth person would knock them altogether into a chair with a net result that chairs were better in quality and cheaper in price, because they were produced at a much faster rate, even if the technology was the same.
Thanks to the learning curve, over time, the person producing the legs would become really good in producing the legs; he would make them much faster with much better quality than if he was making the whole chair. The same logic applies to every other person. What a wonderful concept division of labor was.
However, by the 70s, this had been carried too far, to the extent that the person who was producing the legs, would pretend he had nothing to do with the person producing the seats.
When information hoarding becomes rife, collaboration stops
To give you an example, I was working in a business transformation project in a mid-sized airlines. I was sitting in the office of a person in charge of aircraft maintenance planning and he was telling me all his problems over the last several decades. At one point in the conversation, he dug out an e-mail exchanged with his colleague from across the room. This e-mail exchange had carried on over a period of 18 months to discuss a trivial matter, which could have been solved by just walking across the room, and in an authentic spirit of give-and-take, collaborating across the silos. Yet, this person felt it necessary to waste several thousand dollars on his time and my time to explain his view and its validity to me.
Undoubtedly, the person on the other side of the silo had a full copy of these hundreds of e-mails flowing back and forth between the two parties and, a very different point of view attached to this exchange. From an outsider’s perspective, people in both silos had entrenched themselves into such a position where no action could be taken. Decision-making was extremely slow, people were pointing fingers at each other constantly for lack of efficiency and cost-effectiveness as well as for failures in aircraft maintenance.
This is not unusual, or restricted to aircraft maintenance. In fact, every organization we have seen, to some extent or other, suffers from this silos mentality. In elementary supply chain, silos are so deep-rooted and result in such bureaucratic organizations that each department becomes a pyramid with a department head sitting on top and communicating with the head of another departments. Any information which needs to be passed from one department to another would have to be escalated right up to the top, from where it would then be passed to the head of second department, who will circulate the information all the way down to the right person in his department. This zigzag pattern could go back and forth for as long as it would take to resolve more complex matters.
Imagine the time wasted in the process, and also imagine the potential for information distortion. It require a lot of extra work, and it does create a number of checks and balances along the way. However, it seriously hampers efficiency and effectiveness because it kills the spirit of collaboration. Information hoarding becomes rife, selective information sharing is the norm, blame is the name of the game.
No wonder productivity as well as profitability is a major casualty and transformation efforts are brought to a stalemate. Small fiefdoms are created all across the organization which are run by petty tyrants, reveling in the power that bits of information give them. In this situation, company data and information is used as a strategic weapon to fight political turf battles between these fiefdoms, even at the lowest clerical levels.
Small information, such as when a particular customer’s order needs to be shipped, will not be given to the person responsible for shipping the order in enough time for them to be able to do their job properly.
Customers are the last thought on anybody’s mind. Some of these companies, which have a technically superior product due to past research and development or some other privileged position, might carry on like this for a number of decades before reality hits them in the face. Many others struggle with one business transformation after another without addressing the root cause of information hoarding and silos.
Communication bottlenecks and information hoarding lead to lot of confusion, blame and anxiety because of the organization silos. There have been cases including in Frank’s company mentioned earlier, where just the data for strategic analysis we were conducting was not made available for as much as three weeks after the project started. And even then the data was made available only very strategically, sporadically and partially. That defeats the entire purpose of investing huge sums of money and significant amount of organization time in ERP systems. After all the entire purpose of installing these systems was to make the data readily available.
Without transparency, clear workflows, and information sharing everybody is at a loss about the expectations from their role, how well they are performing their job, and how they can do their job better. As a result, almost everybody is living under constant fear of the next round of massive redundancies as the organization lurches from one bad quarter to the next. If you think I am exaggerating the situation – all you have to do is pick up a copy of Wall Street Journal or Financial Times and turn to the section on news about companies. I am only briefly stating the inside story of many of those companies.
When you notice everyone is ‘too busy’ and ‘constantly fighting fires’ be sure to examine the planning process
Another set of symptoms is really how busy the executives and staff in these companies are. There is constant firefighting; everybody is too busy with activity trap yet there is no profit to show for all the meetings galore. When there is no supply chain integration between various functions such as production, logistics, purchasing, sales and finance, most of the activities are carried out in isolation within the departmental walls and of course, there is massive duplication and ad-hoc coordination between these activities.
The situation is not very dissimilar to a car running in first gear and trying to race against the fastest four-wheeler. Obviously, it is burning a lot of fuel but really not going anywhere fast because the gearing ratio is very high.
Unfortunately for Frank, most of his company’s operations were stuck in an elementary supply chain. In that case, sales and marketing was quite sophisticated, which kept the company afloat despite a very poor supply chain. It is pointless assigning fault in a situation such as these. People have just grown in organizations where everybody was too busy and constantly fighting fires, to the extent they believe that is the only the way to run a business. A lone ranger from more sophisticated milieu would find themselves talking an entirely different language, unless they have very high energy level and commitment to excellence.
Here is another example from a different field. At one stage, I was doing a consulting project in a very large mining company. One day, I was having a discussion with the person in charge of maintaining capital equipment worth nearly one billion dollars. This included drag-lines (giant cranes with arms of more than 150 meters in length) and huge mining trucks, each capable of carrying 350 tons and similar large machinery. To give you some idea of the scale of this equipment, just the tires of each of these mining trucks were higher than an average person’s height.
While the operational spending in the mine was extremely high, productivity was too low was because of constant equipment breakdown. The key question was: “Why couldn’t maintenance be carried out in such a way that equipment would not break down?”
In other words, why could the mine not move from a breakdown-maintenance mode to a planned-maintenance mode or even a predictive-maintenance mode?
During the discussion, I discovered that the head of maintenance had nearly three decades of experience in mining equipment maintenance and he had always worked in a breakdown-maintenance mode. In his own words: “Vivek, you cannot imagine the buzz my team gets, when they know that they have to repair this equipment before the next shift starts. They will do anything, start work at any time, day or night, and work as hard as they need to; to make sure that the equipment is repaired before the next shift comes in.”
Thus, not only was this a cultural issue, where a culture of breakdown-maintenance had been passed on from one generation to another, but also an issue of maintenance staff getting a feeling of self-importance and worth when the equipment broke down and they succeeded in repairing it in the shortest period of time. Obviously, in such a situation, moving to planned maintenance would be totally against the norms and culture of the business. The maintenance staff would not get that buzz from completing their quest to repair broken down equipment before the next shift comes in. Add to that the fact that even their monetary interest was aligned to the breakdown mode due to significant overtime payment, was it a wonder that all the past attempts to reduce breakdowns had failed.
Similarly, I have seen many supply chains which do not have any planning or might have some rudimentary manual planning in place. Because of this lack of planning, supply chain is almost always out of control. The majority of people in the business, whether in sales, customer service, logistics, warehousing, manufacturing, or procurement are constantly scrambling to carry out the very basic tasks. A smallest external disturbance in the demand signal would create utter chaos and confusion in the business.
Where there is rudimentary, manual planning that does not go past basic scheduling, everybody in the business will constantly blame others, while customers will shout at the business representatives, who dare to cross their path. If you encounter any of the signs mentioned up till now, be sure to ask some basic questions about supply chain planning and control, and make your own judgment.
Listen to your losses - they speak for themselves
The third, and probably the most obvious symptom, is really losses, or propensity to losses due to enormous inventories, and very unhappy customers. In the absence of supply chain planning and scheduling, a business is not as efficient as it can be.
However, this business is also under the pressure to keep up with competitors’ prices, as competitors lower their prices in response to their own productivity improvement.
As a result, this business is almost constantly fighting a losing battle to remain profitable.
And every time the business is unable to make a profit, there is massive panic because of the rumors and expectations of another mass firing. In many cases, the mass redundancies are not carried out in a systematic manner to get rid of the dead wood. They become political in nature, which only worsens the situation.
There is no contingency planning which links the sales and operations plans with the budgets, and due to the razor thin margins, the company is merely lurching from one bad quarter to next.
Of course, there will be temporary periods of lull where the economic climate is good enough for them to avoid redundancies for several quarters in a row. However, without transforming the supply chain and business model to a higher level of sophistication, the lack of planning will expose the business at the earliest possible economic pressure.
If you notice any of the symptoms discussed above, you can be sure that your SCM is at SCM 0.0 level and needs a big upgrade to 2.0 or above quickly. That is the time to call whatever help you have available.