IBM’s Top Five Supply Chain Challenges

Stephen DeAngelis

April 25, 2011

Tim Carroll, Integrated Supply Chain Vice President at IBM Corporation, wrote in the introduction to a 2010 study, “We’re beginning to hear a new verse — a clear message about the overwhelming need to manage risk. A crisis in some far-flung country can now spread very quickly across the world economy, creating tremendous turbulence. As our supply chains have become more intertwined, none of us is immune. To deal effectively with risk and meet your business objectives, we believe supply chains must become a lot smarter.” [“The Smarter Supply Chain of the Future,” IBM Institute for Business Value, October 2010] Obviously, this was written long before the catastrophe occurred in Japan. If IBM consultants were just beginning to hear about the need to manage risk last year, that message must surely be coming in louder, clearer and more frequently today. The study introduced by Carroll was “based on face-to-face conversations with nearly 400 supply chain executives worldwide.” When the results of these conversations were analyzed, supply chain leaders had identified five major challenges with which they struggle. The figure below shows what those challenges are and the numbers represent the percentage of respondents who indicated that the challenge “impacts their supply chains to a significant or very significant extent.”

 

 

 

The report claims that “supply chain executives rank cost containment as their number one responsibility to the business — far ahead of enterprise growth and product/service innovation.” It is important to note that supply chain executives indicate that cost control is the primary “responsibility” as opposed to their primary “challenge.” The way that the analysts square this circle is by noting: “This intense focus on controlling costs is also quite evident in their activities and programs; two out of the top three types of initiatives are aimed at improving efficiency.” In other words, because supply chain executives already focus so intently on cost reductions they feel they already have a fairly good handle on dealing with costs. The one area of cost control in which they do not feel so secure is commodity volatility. As analysts put it, “Supply chains can’t keep pace with cost volatility.” Bill McBeath from ChainLink Research agrees with the IBM analysts. He notes that “global dynamics ensure that commodity prices will remain volatile, with huge price spikes, for decades to come. Good hedging strategies are increasingly critical.” [“Managing Supply Risk Part Three – Hedging Strategies: Cross-Functional Teams,” ChainLink Research, 16 November 2010]. The IBM report next turns the subject that garnered the most hits: visibility. The report notes:

“At a time when, generally speaking, information is abundant and connectivity is more feasible than ever, supply chain executives still rank visibility as their greatest management challenge. Although more information is available, proportionally less is being effectively captured, managed, analyzed and made available to people who need it. Despite its top billing on the issue list, visibility — and the collaboration required to get information and make decisions with it — is not attracting much attention in terms of activities and programs. Supply chain executives are focused more on strategy alignment, continuous process improvement and cost reduction.”

Another way of stating this is: Supply chain executives are not putting their money where their mouths are. IBM analysts correctly connect visibility and collaboration. Successful collaboration (which requires good end-to-end visibility) is not easy. For more on this subject, read my post entitled Supply Chain Collaboration. I begin that post by discussing an interview conducted by Dan Gilmore, editor of Supply Chain Digest, with David Johnston of JDA Software and Atul Pandey of Infosys Technologies. In that interview, Johnston and Pandey assert that supply chain visibility and collaboration “are critical drivers of … profitable growth.” [“Are Supply Chain Visibility and Collaboration the Key Drivers of Today’s Profitable Growth?” 24 January 2011] As vendors, IBM analysts have some self-motivated interest in helping companies make their supply chains more visible and collaborative. Remember, however, that it was supply chain executives themselves who identified supply chain visibility as their greatest challenge. In another IBM study also released last October [“New rules for a new decade,” IBM Institute for Business Value, October 2010], analysts concluded:

“As the number of supply chain partners increases, the need for accurate, time-sensitive information becomes more acute. But lack of collaboration and integration between supply chain and product development partners continues to be a major concern. Product lifecycle traceability in consumer products, pharmaceuticals and other industries is a growing requirement. Yet, despite continued technological enhancements, lack of visibility to worldwide, timely information to make in-stream decisions remains a significant issue. The bottom line is that the requirements for increased visibility require the dexterity to make fast decisions in response to constantly changing market conditions.”

As president and CEO of a company that is also helping companies make their supply chains more visible and collaborative, I am pleased that our technologists are tackling a challenge that sorely needs attention. The IBM study next turns to the subject of risk. They write, “Risk management emerged as supply chain executives’ second largest challenge — a surprisingly high ranking that at first glance seems more likely to be found on the CFO agenda.” Interestingly, the report claims that heightened interest in risk management isn’t the sole result of disruptions caused by natural disasters, but also the result of “thousands of recall headlines and a deepening realization that globalization and greater supply chain interdependence have not only elevated risk, but also made it more difficult to manage.” They conclude, “In all areas of risk management, leading supply chains are pulling away from the pack.” To learn more about this important subject, read my four-part post on “Supply Chain Risk Management and Disaster Mitigation” [Part 1, Part 2, Part 3, and Part 4]. The next subject to which the IBM consultants turn is customer intimacy. They write:

“Rising customer demands ranks as the third highest supply chain challenge, and two out of every three companies struggle to accurately identify customer needs. However, despite the obvious need for customer interaction, companies tend to focus more on their suppliers than their customers.”

In a post entitled Building the Supply Chain of the Future, I noted that a number of analysts recommend building the supply chain of the future from “the outside in” (i.e., starting with the requirements of the customer’s customer and working backwards translating the requirements to the suppliers’ supplier). It’s clear from what the IBM analysts write that many companies are still building their supply chains from the inside out — which almost inevitably results in a supplier/vendor focus rather than a customer focus. The IBM analysts continue:

“Although technology has made it more feasible than ever to incorporate customer input, working directly with customers remains the least common supply chain planning practice. In fact, demand planning at one out of every five companies ignores customers entirely.”

When the authors asserted that it is more feasible than ever to incorporate customer input, they were undoubtedly thinking about social media inputs. “Everyone, it seems, from your Aunt Millie to the corner grocer, to some of the largest corporations in the world, have Facebook, Twitter, or other social media accounts,” writes Paul Teague [“Social media’s time has come for procurement,” Procurement Blog, 28 February 2011]. He continues:

“Many of your software suppliers have some visibility on Facebook. And, at least to a limited extent, direct-material suppliers like ArcelorMittal (employees have accounts), Dow Chemical, and IBM, as well as contract manufacturers like Flextronics, and distributors such as DigiKey have visibility there too. Maybe your own company has a presence on some social media site. Maybe you have a Facebook or Twitter account too. In business circles, there is plenty of talk about social media for marketing purposes. So, where are the stories of revolutionary procurement or supply chain advances due to social media? There are reports on the potential for using social media to get insight on demand, and, as Procurement Leaders recently reported, to encourage discussion about such important items as infrastructure. But there are many more possibilities. Procurement executives could use social media as one tool among others to check out suppliers, to collaborate with suppliers and other business partners, to facilitate benchmarking of best practices. No doubt, you can think of many more possibilities. … But, as Procurement Leaders’ Steve Hall says, having the technology and access isn’t enough. You have to study it, decide on its advantages and ‘want it’ before you use it. The time has come to do the studies and start using the technology.”

The final challenge identified by the IBM report is globalization. “Given the growing interdependence among economies worldwide,” write the authors, “it’s no surprise that globalization ranks as a top supply chain challenge.” The kind of challenges that supply chain executives identify with globalization include: global sourcing, unreliable delivery, longer lead times and poor quality. Despite these “negatives,” analysts insist that, so far, “the financial advantages of globalization of their markets and operations outweigh these negatives.” With most analysts predicting that global economic growth will occur as a result of globalization’s penetrating deeper into emerging market countries, companies that master the new landscape are the ones that will remain profitable and thrive. According to Ian Bremmer, “Emerging markets could propel a global boom comparable to the industrialization of the United States.” [“Get Ready for a Growth Supercycle,” Wall Street Journal, 2 March 2011] As I noted in a previous post, “If Bremmer is correct, a ‘growth supercycle’ could generate a flow of money that smart companies will try and get in front of.”

 

Having identified the most oft-mentioned challenges being faced by supply chain executives, the authors of the study “envision a supply chain of the future that is far more” instrumented, interconnected, and intelligent. About the first of those characteristics, they write:

Instrumented — Information that was previously created by people will increasingly be machine-generated — flowing out of sensors, RFID tags, meters, actuators, GPS and more. Inventory will count itself. Containers will detect their contents. Pallets will report in if they end up in the wrong place.”

For more on this topic, read my post entitled Two Views on the Future of RFID Tags. On the subject of interconnectedness, the authors write:

Interconnected — The entire supply chain will be connected — not just customers, suppliers and IT systems in general, but also parts, products and other smart objects used to monitor the supply chain. Extensive connectivity will enable worldwide networks of supply chains to plan and make decisions together.”

That sounds a lot like the outside-in supply chain discussed above. This kind of supply chain has been given a lot of labels, such as: demand-driven; sense and respond; dynamic; living; and optimized. Whatever you decide to call it, it’s connected. Concerning the final characteristic — intelligent — the authors write:

Intelligent — These supply chain decisions will also be much smarter. Advanced analytics and modeling will help decision makers evaluate alternatives against an incredibly complex and dynamic set of risks and constraints. And smarter systems will even make some decisions automatically — increasing responsiveness and limiting the need for human intervention.”

To read more this subject, read my post entitled Supply Chain Analytics. In conclusion, the IBM analysts write:

“Building this kind of supply chain is a strategic undertaking; it implies a different role and set of responsibilities for supply chain executives. These executives must become strategic thinkers, collaborators and orchestrators who optimize complex networks of global capabilities. In their increasingly significant positions, Chief Supply Chain Officers have the mandate — and now the enablers — to create a Smarter Supply Chain of the Future.”

To read more about what analysts are saying concerning the role of Chief Supply Chain Officers, read my posts entitled S&OP: Supply Chain’s Foot in the Boardroom Door and Can Supply Chains Save the World? I agree with IBM analysts that supply chain executives must be strategic thinkers, collaborators and orchestrators. There is a lot more detail in the 72-page IBM report and it is worth reading in its entirety.