A plan for building a new supply chain: accelerating globalization in the future is going to demand more than just a casual tweak to your current operation. To remain competitive, supply chains may need to be redesigned from the ground up. Here is a guide to what to expect and how to cope.
Supply chain management is today considered a core function for every global corporation. The discipline has migrated from being a source of cost reduction to an enabler of high quality earnings as well as increased revenue.
However, certain global macro economic factors have emerged in recent years that are forcing many corporations with well-defined and extended supply chains to rethink the construct of the core supply chain building blocks and operating model. These structural and economic changes include:
* Rapid globalization and convergence of the end customer/ consumer channel with the supply base.
* Higher than normal escalation in commodity prices with shifting global supply.
* The advent of multiple capable and operationally excellent geographies with well defined inbound and outbound logistics routes.
* Global availability of supply chain skills coupled with renewed focus on process standardization.
* Emphasis on the need to focus on one or two aspects of supply chain excellence to ensure global competitive advantage.
Core supply chain processes have often been described under the mega process umbrella of Plan, Source, Make, Deliver, and Return. This is part of the Supply Chain Operations Reference model (SCOR), developed by the Supply Chain Council. These mega processes will always constitute the building blocks of taking a product or service and delivering it to the end consumer. However, the method by which a corporation defines the operating model and core process end state is what constitutes supply chain excellence.
I call the suggested method for defining the end state for the New Norm the "Five-S" Model. The five S's are Structure (physical and operating model); Scope (depth and breadth); Span (extent of the supply chain); Scale (degree of verticalization vs. virtualization) and Skills (availability and impact).
Companies need to rethink the core processes across five dimensions to create a road map that will allow them to continue the journey of supply chain excellence. The article presents a structured way for companies to rethink and align their supply chains to the shifting dynamics in the global marketplace. Many companies are proceeding in the journey. But from our perspective no one has achieved steady state or is even close to the final design. It's not that supply chain executives have been resting on their laurels and have chosen to ignore the warning signs. Rather, it's more the speed and magnitude of the changes taking place.
The Structural Changes
Let's take a closer look at each of these structural changes:
Rapid globalization and convergence of the end customer channel with the supply base.
For at least 10 years now, the corporate world has been feeling the impacts of globalization. Most corporations have developed or are in the process of developing growth strategies that are focused on serving the consumption and procurement power in the RIC (Russia, India and China) markets and other emerging regions. These markets have very different consumption patterns and brand dynamics than those in the U. S. Buyers in these emerging markets tend to be more loyal to global brands and less focused on immediate gratification. Rapid globalization for top line growth has brought with it many supply chain issues surrounding the order to delivery (OTD) process. It is no longer adequate to treat the international business as an export activity, nor is it optimal to set up a completely self-contained OTD construct to serve the global markets.
As globalization has accelerated, there's been a convergence of the end customer with the upstream and original equipment manufacturers. This development is forcing all major companies to evaluate the impact on value added services and private label brands on the gross margins as well as on their go-to-market strategies. Most retail and wholesale partners have launched their own private label strategies, which are requiring a shift in behavior from a focus on merchandizing to one balanced with the traditional supply and demand management issues that are faced by manufacturers.
This is coupled with the ever-increasing desire for post sales and value added services. On a recent tour of a few national retail chains, it was quite enlightening to see the huge emphasis being placed on value added services (for instance, Firedog from Circuit City) as well as the shifting mix of personnel skills that were needed to support these services.
Customer satisfaction is also a factor in this convergence. The early days of customer satisfaction scores tended to focus on the customer as the channel partner. With the advent of various means of service transparency (such as Web sites, blogs, and message boards) it is just not enough to focus only on the "end of chain plus one" (where "ship to" is the end of supply chain), but to also focus on the end point of product takeaway. However, many industries and global corporations still view the customer and consumer as two separate entities and offer varying degrees of service to both (as opposed to providing the optimal service to the point of product takeaway).
Higher than normal increase in commodity prices and the shifting nature of global supply.
In earnings announcements from CEOs and CFOs it's common to hear about increases in commodity prices impacting the quality of earnings or in many cases causing shortfall in net margin. Arguably, some of these companies use this as a crutch to mask sub-par top line growth. Yet there's a large element of truth regarding the increases in major commodity pricing over the last seven years. Some of this has been driven by the mismatch between demand and supply and by the rapid consolidation (and in some cases elimination) of alternate sources of supply. Corporations that have adopted best practices in procurement optimization and global sourcing are benefiting from favorable variances in key commodity prices.
Additionally, we are witnessing new supply sources opening up in the Middle East and Asia/Pacific. This is coupled with increased availability of dependable logistics routes from these geographies, which makes the sourcing and manufacturing somewhat predictable with in specified OTD lead times. However, as is often the case with leading edge innovation, Moore's law (which states that the industry standard integrated circuit doubles in complexity every two years), is being demonstrated by the global corporate ecosystem.
Advent of multiple capable and operationally excellent geographies with well defined inbound and outbound logistics routes.
Recently, I had an extensive engagement in the Middle East for one of the region's largest retail chains. It was eye-opening to observe the product variations that were available from most of the major consumer products good companies there.
Operational excellence programs are also increasing in Asia and the Middle East, reflecting the Western influence. It is commonplace to hear about advanced concepts like category management, rapid replenishment, and dynamic pricing being applied within somewhat constrained or government controlled retail environments. Large scale ERP projects are underway across many of the large corporations in these regions as companies gear up to adapt their dated infrastructures (people, process, and technology) to the new growth scale.
Global availability of supply chain skills coupled with renewed focus on process standardization.
North American companies long have maintained a heavy emphasis on supply chain management as they pursue the global growth agenda. In a similar fashion, European--and Asian-based companies have begun rapidly scaling their efficiency and operational effectiveness programs. "Globalizing our product development processes and system was critical to our strategy of delivering on our brand promise," said Steve Raack, senior director of process improvement and global operations technology for Herbalife, Inc., a nutrition and direct-selling company. "In other words, failure was not an option." This has created pools of supply chain core skills and talent in various parts of the globe. In fact, Nestle is driving one of the largest global efficiency programs ever seen. Named GLOBE, the program utilizes global skills and standardized process across the various operating units. (1)
With the advent of globally available skills coupled with widespread availability of established supply chain training programs, supply chain tasks are now routinely performed across the various SCOR dimensions in a truly distributed environment. In this way, traditionally mundane tasks such as data administration, analysis preparation, and post execution assessment can be performed with a high degree of quality across the globe. Additionally, analytically focused tasks such as planning and supply chain intelligence can be distributed worldwide to ensure multiple points of business continuity as well as rapid assimilation and dispersion of best practices.
Emphasis on the need to focus on one or two aspects of supply chain excellence to ensure global competitive advantage.
In the book Myth of Excellence the authors suggest that a company needs to be world class along select dimensions based on their core value proposition. (2) It is almost cost prohibitive and virtually unnecessary to excel along all dimensions of the supply chain. I have always argued that every supply chain process should be subject to the "right sigma" as opposed to a blanket Six Sigma. Companies need to think about more virtual supply chain models including potential "co-opetitive" partnerships. It is no longer cost effective or necessary to have an asset ownership model that involves complete control. Rather, the emphasis needs to shift to "virtual control."
All of the factors discussed above culminate in the need to reexamine the basic blueprint that underpins global supply chain models. And, as often happens, when the rules of the game change, we are faced with one of three choices:
1. Adapt the current model to the new realities.
2. Rethink the operating model to respond to the new realities.
3. Do nothing and see if the structural shifts are temporal or permanent.
The remainder of this article focuses on ways in which to implement the first choice, to build a new supply chain model that leverages the Five S's (structure, scope, span, skill and scale as depicted in Exhibit 1) and effectively uses the appropriate combination to transform and deliver a new supply chain.
Defining the Five S's
The Five S framework extends the functional view of supply chain models like SCOR by factoring in the "how" (the executional aspect) to achieve necessary levels of excellence across all the functional dimensions. This framework is not intended to present a competing view of traditional supply chain functions, but assumes that most companies have adopted a variation of some supply chain process view that describes all aspects of the Design to Delivery (including reverse logistics) so that the various facets that merges the product, consumer, and informational elements of a supply chain can be tracked and traced (not necessarily optimized).
Structure (the fifth S) is the governing facet for the entire model that is built around the remaining four S's. Scope, span, scale and skill should be considered the foundational pillars of the executional strategy governed by structure.
While one could argue that the structural changes noted above have direct impact on every aspect of the Five S's, not all impacts have the same level of relevance on the restructuring of the supply chains. However, it is clear that the impacts will not remain static over a period of a time and will vary greatly by industry and associated product and growth strategies of a company.
The global scope of the supply chain is rapidly shifting focus from order-to-delivery to design-to-delivery. The walls between R&D for design and innovation, and customer service for pricing and returns are coming down.
It is no longer acceptable to have process touch points that serve as handoffs between the functions with metrics that serve to optimize the individual processes. Companies that have heavy channel concentration within a type of channel, such as do-it-yourself, mass merchant, wholesale, or B2B, are rapidly reworking their supply chain constructs to focus on the end customer or customer back as opposed to product forward. This requires supply chain total landed cost metrics by customer and channel rather than by product only. Channel specific decisions can then be driven to the right type of global supply chain--that is, one that has a cost and service metric that can be traded off to deliver consistent financial performance. This reflects the type of new thinking that will transform the supply chains from being horizontally focused to being globally driven by channel and customer metrics.
Supply chains have evolved over the years from plant centric to product centric, and more recently to channel centric. In most cases, however, the channel is a "bolt on" or afterthought addition to the supply chain. Very few companies have recast their supply chain to be customer back or "shelf back," where the shelf is the final point of product takeaway.
Given the global convergence of channels coupled with information availability and visibility due to availability of content, it is becoming an unacceptable and expensive value proposition to view any channel as just a store front for pre-designed products. Channel-specific products and promotions, along with the need for continued packaging innovation to maintain channel freshness, is forcing predominantly vertical supply chains to become more horizontally or channel aligned to respond to increased market demand.
In addition to the physical span being enlarged, the functional scope of the supply chain needs to expand from being focused on order to delivery to design to service. Key activities here might include the supply chain's close integration and active engagement with product commercialization and assimilation of the customer service function as a major supply chain process.
A common problem that has come up during many of my recent discussions with smaller companies that lack the production volume and scale is their need to execute with the same levels of supply chain sophistication as the companies that possess the needed critical mass. Here, our definition of scale deals with three aspects:
* Vertical and virtual models that are comprehensive across all assets including the view that a business process is an asset.
* The degree of virtuality that is appropriate to enable the corporation to maintain control over the relevant levers that are used as competitive differentiators.
* The type of virtuality that can be used to provide relevant scale even in a co-opetitive environment across the various supply chain processes and functions.
The best strategies can often fail because of poor execution. Further, over 50 percent of execution involves a high degree of human touch. The touches are executed by people of various skills--ranging from the execution-oriented supply chain skills needed across all the major CM processes to the right level of analytical, strategic, proactive, and reactive thinking. Just as we would manage a product portfolio, we now have to focus on managing and optimizing a people and skills portfolio that can be deployed globally and be used to drive seamless business process excellence across processes and countries. In a recent survey that we conducted among a dozen heads of global supply chains, skill attraction, retention, globalization, and training were singled out as the highest priority agenda items on the performance dashboards.
The culmination of the other four S's results in the final structure of the new supply chain. This structure needs to encompass the physical, functional and informational view of the supply chain so that tradeoffs can be made while designing the "right Five S model" that is based on product and growth strategies. This is also the dimension that determines the level of investments and retooling that is necessary to gain the right amount of traction and excellence that is required to adapt and flourish based on the relevance of the shifts. Exhibit 2 summarizes the various aspects and dimensions of the Five S's as we have outlined above
Designing the Future Model
There is no silver bullet that a company can use to design its future-state global supply chain. What is needed is a structured process rooted in the right mix of strategic guidance coupled with hard core analytics and blended with the right level of scenario modeling. Reorienting the supply chain is a strategic shift and should be vetted through a process that is closely aligned to the strategic planning processes followed in most large global corporations. We recommend the use of a structured process that employs five tasks: Analyze, Map, Align, Educate, and Develop. Following this approach will help achieve the desired goal of creating a robust and sustainable future state operating model.
Analyze. It is always necessary to define the "universe" of factors needed to understand the dynamics of the industry and the speed of shift that can occur. One of the major factors that should be considered is the basic economic equation that governs every company:
Channel Price (CP) = Gross Profit (GP) + Total Landed Cost (TLC)
We find that very few companies have a good grasp of the various components that make up CP or TLC. The debate often rages between the actual CP vs. the listed CP with the difference primarily being driven by the trade allowances, discounts and other SG&A related factors that are often hard to allocate back at the product and SKU level.
Similarly, many global corporations have yet to unravel the exact numbers behind TLC. Costs are often grouped under major categories such as material, logistics, and property. But the level of granular detail required to understand product and channel costs is lacking. It is extremely important to gain as much granular cost and pricing details so that informed trending analysis can be performed to enable fact-based decision making.
All economic analysis should be conducted as close as possible to the lowest common denominator. This is necessary to understand the basic cost and profit drivers that are being impacted by globalization as opposed to the cost/profit drivers that are internally sub-optimized.
Additionally, it is just as important to study the economics of the closest competitors as it is to understand the economics of adjacent products and brands, especially for the retail channel-focused corporations. Shelf space is the key constraint that all companies are fighting over, and the retail channel tends to perform their category profitability based on the entire set of products that serves the category. Store visits are a good way of understanding the category dynamics in retail placements of products that are in the same aisle or within close proximity of the aisle. Company managers who get wrapped around the axle of their own product categories often forget that retail gross margin return on inventory investment is extremely space-dependent.
The final variable in the analysis task relates to better understanding the efforts being pursued by the upstream and downstream channel partners (multiple tier suppliers and downstream finished goods processors or carriers). Cost and profit innovation is often occurring at the very ends of the consumption or the creation value chain since these companies are either closest to the consumption patterns or are the originators of innovation that creates the processed product value.
Map. The logical follow-on is to map the major industry and adjacency drivers to the global structural changes discussed earlier in the article. Any additional changes can easily be added. This exercise provides the detailed relevance matrix for the corporation that can be used to understand the emphasis areas across the Five S's.
Align. The next big task is to determine the most likely and least likely industry disruptive situations that could occur across the dimensions and their associated impact across the Five S's. This will allow the corporation to create sustainable business plans that factor in the ends of the spectrum. Recently, there have been many instances of large global corporations facing product recalls (such as Mattel and Bausch and Lomb) based on a variety of factors. Corporations need to understand what their industry dynamics would be in extreme events (such as lost markets or lost partners), and the associated impact that would need to occur along the Five S's. For example, is the event such that the new scale would necessitate some long term structural decisions or skill redeployment? These are just meant to be illustrative examples of shifts that will trigger global supply chain redesigns.
Educate. Over the years, I've observed that the best designed strategies do not make it to execution due to the lack of education both up and down the organizational ladder. Many corporations tend to minimize the amount of change management and communication planning that is required to effectively execute strategic and structural supply chain shifts. I cannot overemphasize the need and importance of such activities. However, I would also caution against turning these efforts into a "change management circus" that attempts to educate and achieve consensus among every single person in the organization. It is probably sufficient to focus on the top 20 percent of the highest influencers and the naysayers. Then allow for information seepage and dissemination that occurs as a result of the halo effect from that 20 percent.
Develop. The final step in designing the future operating model is to develop the capabilities required to execute and sustain the to-be state. The word "capability" is key in this since it implies that these efforts need to encompass plans that should cover impacts to people, process, technology, and associated metrics or measures. The development of capabilities is explained below.
Implementing the Model
Implementing a supply chain redesign is a highly complex task in its own right. And it is further complicated by the inherent change management effort needed to help employees unlearn old habits and processes and learn new ones. One of the largest stumbling blocks is the passive-aggressive behavior that is exhibited by the "middle of the pack" people, not the top or bottom performers. Implementation effort of this type should include detailed design and plans along several dimensions.
The detailed decomposition and realignment of processes that need to be updated, changed or added should be carefully crafted if the execution is to be successful. This applies not only to the core SCOR-related processes that need changing but also the ones that are covered by the second S, Span. Often during implementation, companies forget that they have conditioned the channel partners to enable their inbound/outbound processes to align with the company (remember, span overlap occurs on both sides of the value chain). It is also important to use the 80/20 rule while unraveling the process maps--focus on the 80 percent that is relevant and adds either competitive advantage or is needed for regulatory compliance.
Companies must do rigorous process redesign to ensure that users can apply the analysis and documentation with minimal extra work load. This is essential for the success since resources in general tend to have their work loads optimized based on the current processes.
Most redesign efforts also entail an alignment shift and augmentation of existing skills in the organization. However, given the global shifts we have found that some skill augmentation for analytical rigor is often required to create real-time information from a large quantity of new data. This would include skills such as operations research and advanced statistical analysis as well as lean and Six Sigma capabilities. Additionally, preparing the supply chain organization to migrate from a "batch centric" orientation to a "flow centric" one requires careful thought and implementation.
While technology components should never be at the forefront of a redesign effort, more than 80 percent of such efforts typically require the use of technology and automated enablers to ensure sustainability. The total solution should include the infrastructure and application linkage-related items that are necessary for end-to-end system and process enablement. While systemwide compatibility continues to be an issue, it can be managed with the use of automated tools, Systemwide security and disaster recovery plans often require updating.
My firm belief is that human beings are rational and act as they are measured and incentivised. Hence, in order for the effort to be successful and sustainable the necessary., appropriate measures and incentives must be in place. These would include clear cross-functional accountability, a focus on continuous improvement, and executive ownership of business benefits (cost and revenue). Additionally, we recommend that the change champions in the organization should ensure the appropriate systemwide visibility across the impacted process and functions as necessary.
While there is no magic formula for success, we have found that every implementation involves elements of all of the factors discussed above and should be executed in multiple steps and iterations. It is important to adopt and learn in this process since most companies are charting new dimensions in their operating model. It is not possible to get everything right the first time around via the old "big bang" approach. Or, as one of my colleagues reminded me, we are running a marathon and not a 100-yard dash.
Critical success factors
It is impossible to guarantee success of any initiative. However, are a set of common pitfalls that we will highlight that will enable a greater success rate for the transformational effort. These are along the same dimensions that we used to describe the implementation plan--that is, Process, People, Technology, and Metrics. Process Success Factors
1. Design a process to be lean and yet flexible. Too often we optimize the process to the point where it becomes tough to change and adapt for future shifts
2. Design for the 80--20 rules; i.e. as long as 80 percent of the issues are addressed, the process will adapt over time for the remainder. It becomes unmanageable and overly complex to design for every possible nuance
3. Use the "adopt and go" philosophy. Do not try to plan the implementation in so much detail that it takes forever to gain the desired benefits. Instead focus on the learning aspect from every iteration since many of the variables tend to shift during the process
4. Design for global commonality as much as possible
People Success Factors
1. Focus on deploying the right mix of strategic, tactical and executional based skills in order to achieve the desired results
2. Pay careful attention to the training and retraining of the individuals so that the skills are sustainable
3. Globally identify and deploy the resources with a focus on distributed process management and optimization
Technology Success Factors
1. Monolithic applications and deployments are a thing of the past and should be avoided at all costs
2. Emphasize the global accessibility and scalability of all efforts even if there are multiple instances and environments in play--the future calls for consolidation and global distribution across processes and functions
3. Repeatable deployments should be planned so that deployment costs and times reduce with every iteration
4. Maintain a high level of discipline on the level of customizations that are performed to minimize total cost of ownership
... and the final success factor is MEASURE; MEASURE AND MEASURE everything so that visibility and accountability remains at the forefront.
(1) Nestle pieces together its Global Supply Chain by Tom Steinert--Threkeld in businessmag.com
(2) The Myth of Excellence--Why Great companies never try to the Best at Everything, Fred Crawford and Ryan Mathews; Crown Publishing
Sumantra Sengupta is a Vice President with Hitachi Consulting. He can be reached at SSengupta@hitachiconsulting.com.
EXHIBIT 2 Key Aspects of Each "S" S number Dimensions needed to define and execute Scope--1st Process and P&L for Channel Span--2nd Physical and Functional Scale--3rd Virtual vs. Vertical; Type of virtuality and degree of virtuality Skill--4th Mix and Type Structure--5th Physical; Functional and Informational
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|Publication:||Supply Chain Management Review|
|Article Type:||Company overview|
|Date:||Jan 1, 2008|
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