Why is Supply Chain Governance Difficult & Missteps
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.
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 press.
That is when the value of supply chain governance is brought home to the board of directors, but alas, it is too late in so many cases.
Business Governance Recovery
As the post-COVID-19 businesses try to get back on feet, it is becoming increasingly clear that more marketing, or more finance, or even more sales effort may not lead a recovery in long term profitability.
In this scenario, two strategies are becoming increasingly popular.
The novices are trying to reduce the headcount or salary expense, in an already thin headcount.
On the other hand, those CEOs who are consummate professionals are focusing on taking their supply chains to the next level.
After all, in today's market, gaining 1% extra market share is a lot costlier and harder than gaining 1% on compression of the supply chain cost/performance curve. And, the bottom-line impact is a lot bigger too.
I have written several articles on how to move your supply chains to the next level. Taking your supply chain to its best form is our regular job, day in and day out for the last 24 years.
There are more than 300 articles on macro level and micro level tips on this website. Feel free to search and explore the articles repository for precisely what is your problem.
In this article, I want to focus on another trend – supply chain governance, and answer the question why is supply chain governance so tricky?
As the focus of many boards is shifting to supply chain governance for precisely the reasons stated above, this question is becoming paramount in their minds.
The first question that comes to mind is this" what is supply chain governance and Why does it matter?" I have talked about this question in some detail here.
For board members and chairpersons who are engaged in corporate governance issues on a day in and day out basis, an associated issue is "what is the difference between supply chain governance and corporate governance?"
I have addressed this intriguing question in an article here.
Another confusion that needs to be clarified is this – "what is the difference between supply chain management and supply chain governance?"
Again, the answer will be too long to form part of this article, and I will need to write a separate blog on this topic. I will come back and provide a link here once I write that blog.
Let us focus and keep our sights on the topic of this article – why is supply chain governance so difficult?
Multiple Governance Reasons
As I sat down to write down all the reasons, I realised there were many more reasons than I initially thought.
And, some of those reasons require a reasonably detailed discussion of their own, which would make this article far too long.
Where this is the case, I will provide an abridged version of the reasoning here, and write a separate blog post on that topic to do full justice to it.
The foremost reason is the need for supply chain mastery at the board level. You cannot govern something which you have not mastered.
business transformation – Ladder of Sophistication
What Exactly Is Supply Chain Mastery?
The answer is straightforward - without supply chain mastery, everything you do in business transformation entails making promises dreamed up by your marketing gurus. To fulfil those promises, in reality, you will need supply chain mastery. Otherwise, your commitments might remain just empty boasts.
There are five components of supply chain mastery and seven levels of mastery. To know more about these, take a look at this page.
Why Do Boards Lack Supply Chain Mastery?
Only the boards can answer that question. Perhaps they do not feel the need for it.
However, the most likely answer is that most board directors and their chairpersons lack interest in supply chains.
Board directors do not feel the need to know the difference between what is logistics, what is procurement and what is supply chain management, and the confusion frequently prevails between these three.
After all, supply chain came into its own in organisation only recently, when most of today's directors had finished their management tenures.
If they could do without supply chain management in their businesses at that time, then they could do without knowing much about it now.
With misunderstanding about such fundamental definitions, it is any surprise that supply chain governance never surfaces on the board agenda until it is too late.
Only when a serious supply chain misstep is about to drown the quarter, the year, or the company, do the boards deliberate on issues related to supply chain governance.
Out Of Sight, Out Of Mind
The focus of corporate governance tends to be on what happens within the four walls of the business.
What occurs outside those four walls, is an afterthought, left to contract administrators, vague assurances from the suppliers, or audits by understaffed and under-qualified auditors in third world countries to where the manufacturing is outsourced.
The truth is that what happens outside those four walls of your business could kill your business in an instant.
The main reason it does not happen is that most of your suppliers are content to bleed your business in a thousand small ways daily rather than kill the golden goose.
Supply chain governance is difficult because it requires oversight of what happens out of sight, outside the four walls, and cannot be verified easily, and as a result, cannot be easily managed.
ERP Systems Aiding Corporate Governance Were NEVER Designed For Modern Supply Chain Management
How can you govern, what you cannot even manage well. The ERP systems which entailed investments of tens of billions of dollars of the corporate world over the last three decades were configured for manufacturing companies operating in local business environments.
I have written extensively on the deficiencies of these systems for modern supply networks; you can read this article if you want to explore why most corporate IT systems are inadequate for supply chain governance.
Supply Chain Skills Deficiency
Without IT systems, people would have to step up and provide the capability to create ad-hoc systems for supply chain governance, but, more often than not, supply chain staff is not up to the job either.
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, even where the world class skills are present within the organisation, they face an upward battle to get recognition and space to create an adequate supply chain governance model within the company.
Without sponsorship from the boards or senior management, those world class skills would atrophy and gradually die down, or move to a better organisation.
Institutional Frameworks For Supply Chain Governance Are Absent
If the IT systems lack functionality, and people lack the capability or sponsorship, surely the board should create institutional frameworks to assure supply chain governance.
That happens only when companies have already been hit by one of the supply chain debacles mentioned at the start of this article.
And, even then it is a half-hearted effort to stem the bleeding rather than to prevent grievous injury in future.
I am sure you will find this hard to believe, but look around yourself and see how many boards have a supply chain committee. They all do have a remunerations committee, an audit committee and budget committee.
Almost the entire focus of the board is on accounting and finance, as if the rest of the business will take care of itself.
Even the risk management committees, where they exist, focus primarily on financial risk management. Yet, everyone with maturity knows that it the performance risk that kills all relationships.
Alright, if not a supply chain committee of the board, then a supply chain board within the company that reports directly to the board of directors might do the job.
Well, at the very least, one director with supply chain mastery ought to be appointed to ensure supply chain governance.
However, we find that the boards continue to be over-represented with ex accountants, lawyers and finance professionals at a time when the companies are actually hurting from lack of supply chain mastery and not the absence of these other skills.
Consequences Are Costly
Is there any surprise that your outsourced manufacturers in China, or other countries, smile and drive a hard bargain every time you sit across the table.
To add insult to the injury, subsequently they cheat in almost every imaginable way – stealing your IP, changing the production schedules, changing the shipping schedules, and even compromising the product and raw material specifications to suit themselves.
In the end, the only entity that suffers from all these small on-going supply chain missteps is your organisation.
You could blame the cultural and language differences for some of these missteps, but when they happen over and over again, you will have to think of other hypotheses.
The fact is that your cost is directly their revenue, and they will do whatever it takes to boost their revenues and cut their costs.
It is for your company to take steps to put in place supply chain governance protocols that would detect and prevent any transgressions well in time.
Unrealistic Expectations Of Sales And Marketing Only Serve To Perpetuate The Confusion
I will write a full blog on this topic later, but here let me just paint the picture of a typical senior executive team meeting that I have attended scores of times.
CEO is the obvious boss in the meeting, and CFO is sitting by his right side. There are multiple sales and marketing people in the room, either as the regional heads, or as the functional heads.
There is just one (sometimes two) supply chain personnel in the room and their position is that of a errant school boy called in for a reprimand by the principal.
I am only exaggerating a little when I say that almost all the power in the room sits with the sale and marketing, just as almost all the power in the board meeting sits with finance.
That would not be a problem if the expectations of sales and marketing were not so unrealistic. In their eyes the only difficult work is to win orders and craft the marketing messages.
What most of them do not realise is that 1% compression in cost-performance frontier is lot more beneficial to bottom line than gaining 1% market share on net terms.
In fact, most sales and marketing executives would not even know what is the cost performance frontier itself.
They expect the goods to make and deliver themselves - for next to nothing. At 100% delivery performance. "How hard can it be?" - that is what I have heard from sales and marketing executives alomst all the time.
These unrealistic expectations when repeated often enough at board level become accepted truism within the organisation, stifling fact based discussion of the company's current cost-performance frontier, and efforts to move the needle on it, as well as to compress the curve itself.
Without fact based decision making, vodoo management takes over the day and silver bullets are often sought and bought.
Only adequate supply chain governance can put a stop to this waste of resources by balancing the power between the two warring sides.
A Stitch In Time
I have touched on many reasons why supply chain governance is difficult. Many of these reasons need to explored in a lot more details to get a handle on them and to address them.
However, as a first step, it is essential to raise awareness of the boards that their supply chains can make or break their businesses and a lot more needs to done to address the gaps.
In one way the supply chain disruptions, across the globe, caused by COVID-19 lock-downs have served as a wake-up call to the corporations and their boards.
Those who do not heed the call now will undoubtedly heed it when the business is heading towards a fire-sale or chapter 11.
And, if Neiman Marcus and General Electric can get there, then any business in the world can too. Ironically, both of those businesses got there due to their supply chain governance lapses - but that is a topic for another blog.