Transforming Global Supply Chains

Stephen DeAngelis

March 28, 2011

Supply chains have been around since villages began trading goods with each other tens of thousands of years ago. Over the course of those millennia, the complexity of supply chains has increased dramatically. The first supply chains probably involved villagers carrying agricultural products and tools along dirt trails to trade with residents of other villages. Today, supply chains can span the world. Supply chain analysts and consultants not only believe that supply chains will continue to transform, most of them believe they must. I began discussion on this topic with a post entitled Building the Supply Chain of the Future. I continue that discussion in a column I co-wrote with colleague Thomas Barnett that was published today by World Politics Review entitled “The New Rules: Managing Global Supply Chains a Key U.S. Advantage.” The first paragraph of that column reads:

“While many in the West fret over the challenge of ‘rebalancing’ the global economy after the recent global financial crisis, several trends suggest that the field of supply chain management could offer a key advantage for an America eager to double its exports by 2014. On the surface, supply chain management might not sound too sexy, but understand this: In today’s globalization, neither companies nor countries compete — supply chains do. Companies like Wal-Mart have known this for some time. Thus, positioning America to be the world’s pre-eminent provider of secure, transparent and efficient supply chains will ensure that our economy masters globalization’s competitive landscape in the fullest sense.”

Adrian Gonzalez believes the “secret to supply chain transformation [is] asking why, then taking action” [“Logistics Viewpoints,” 29 July 2010]. I believe that good solutions begin with good questions. But Gonzalez rightly states that asking good questions is not enough. He continues, “Asking ‘Why?’ and coming up with a PowerPoint solution is not new; taking some committed action would be.” If you are not sure what kinds of questions to ask or how to begin framing them, look at supply chains that have been recognized for their excellence and ask: Why are they better than others? What are they doing differently than you? Kantar Retail annually publishes its list of consumer packaged goods manufacturers and retailers that have been identified as having the best supply chains [“Top Consumer Packaged Goods Supply Chains for 2010,” Supply Chain Digest, 1 December 2010]. Lists like the one published by Kantar might be a good place to start.

 

In another article, Dan Gilmore, editor in chief of Supply Chain Digest, writes that he has a “sense that there are some new supply chain paradigms starting to coalesce” [“Time for more Dynamic Supply Chains?“, 28 January 2011]. He continues:

“Most of us supply chainers believe that SCM [supply chain management] has taken on new importance in the executive suite and the corporate boardroom, as indeed in many companies it surely has. Yet [Dr. John Gattorna, author of Dynamic Supply Chains], in the introduction to the book, says he recently attended a CEO meeting in his native Australia, where the predominant theme when it came to supply chain was still all about using it as a lever (hammer?) to reduce costs. While as always cost reduction is important, the real opportunity in supply chain is to get it better aligned with trading partners to meet real customer needs and thus increase market share and revenues, while probably also reducing costs along the way, Gattorna says.”

“Alignment” is just one of the terms you hear mentioned in connection with supply chain transformation. Other oft-heard terms include: visibility, collaboration, and flexibility. And, of course, there is that word “complexity.” Gilmore addresses that complexity when he writes, “With globalization, outsourcing, etc., what a supply chain even is any more for a given company is hard to get your arms around.” For more on that topic, read my post entitled Defining the Supply Chain as well as the post mentioned earlier (Building the Supply Chain of the Future). In the latter post, 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). Some of them also recommend splintering supply chains to help reduce complexity. Gilmore writes that he agrees with Gattorna that “it is better to think about [the supply chain as] a ‘network of networks.” He continues:

“Gattorna himself thinks we should change the term supply chain to ‘value networks’ to better describe what the real concept is now, and he is probably right, though the term supply chain is so embedded in our consciousness that I doubt such a change will occur anytime soon. … Gattorna, in fact, says that most current approaches to supply chain design are ‘fundamentally flawed,’ but that we have been working on the traditional models and principles for so long that ‘we have convinced ourselves we are on the right track.’ Instead, companies need to ‘set about developing a new business model for enterprise chains and networks of those chains.’ That’s a pretty provocative set of statements.”

Like analysts quoted in the post on building future supply chains noted above, Gattorna believes that one of the problems is “that companies ‘have been working from the inside out, largely ignoring particular customers’ special needs and wants, and feeding them a diet that meets [the company’s] own special interests.'” Gattorna indicates that another problem plaguing many supply chains is an obsessive focus on cost reduction. Gilmore explains:

“Back again to the subject of obsessive focus on cost reduction, you have to love this line: Companies obsessed with reducing supply chain costs, Gattorna says, often find ‘it brings on a bout of anorexia industrialosa, the excessive desire to be leaner and fitter, leading to total emaciation and death.'”

Supply chain analyst Bob Ferrari agrees with Gattorna that an obsessive focus on cost reduction can be detrimental to a company. He writes, “Additional pressures for cost reductions could risk cutting into the muscle of supply chain capabilities at a time when agility and flexibility to changing business requirements places emphasis on the ability to quickly respond to market uptakes.” [“Supply Chain Storm Clouds Ahead in Overcoming Cost Reduction Needs,” Supply Chain Matters, 29 October 2010] Returning to Gilmore’s article, he notes that supply chain personnel are finally receiving some long overdue attention. Yet, he writes, this new attention may not be enough. He writes:

“Gattorna related the story of an elite gathering of business executives sponsored by the Harvard Business Review a few years ago, where one CEO made this statement: ‘Despite years of process breakthroughs and elegant technology solutions, an agile, adaptive supply chain remains an elusive goal. Maybe it’s the people who are getting in the way.’ Geez, you think? What is more importance for supply chain success (and agility): the trucks and the software, or the people who design and run them? To ask the question is to answer it, of course, but it is amazing how easy it is to lose sight of that. ‘Supply chains may seem like uncontrollable, inanimate beasts, but they are in fact living systems propelled by humans and their behavior,’ Gattorna says. We can probably agree that the ‘people, process and technology’ model makes sense, but to say it seems to imply about a 33% share for each, doesn’t it? Is that right? This isn’t obviously an exact parallel, since it leaves out ‘process,’ but Gattorna says we should start thinking about a ’45/45/10′ mix of human behavior, systems/technology, and lastly hard assets and infrastructure when it comes to determining supply chain performance.”

Gilmore concludes his column with a description of “the essence of what Gattorna means by a dynamic supply chain.” He writes:

“It starts with the fact that customers/markets must be segmented not by product characteristics, as is most often done, but rather by the supply chain needs of customers. … For example, some [customers] need very predictable but cost efficient flow of goods based on largely stable demand. Others require rapid response to very unpredictable demand, etc. Gattorna has broken this down into four main segments. It is different because it looks from the customer back, not the company and its products out, and because it recognizes a given customer will almost always have different needs both generally across the different products it is buying from us, and even for a given set of products across different periods of time. He makes this absolutely compelling point: What looks like supply chain complexity to us is often really a manifestation of the fact a company has highly tuned its supply chain to focus on a particular model, while in reality it is trying to serve multiple models. The company is not aligned with its customers’ buying needs generally and on a particular day.”

Gilmore writes that Gattorna and Dr. David Simchi-Levi have “highly complementary views of supply chain strategy and flexibility.” Simchi-Levi presents his views in a book entitled Operations Rules. I could add that the academics seem to agree with the analysts such as Lora Cecere, Yogesh Malik, Alex Niemeyer, and Brian Ruwadi. You can read more about Simchi-Levi’s book in the first post I mention above and read an excerpt from the first chapter of his book in an article entitled “Understanding the ‘Operations Rules’” [Supply Chain Digest, 16 February 2011].

 

After reading a number of posts and articles about how supply chains are transforming, I would have to agree with Dan Gilmore there is a “sense that there are some new supply chain paradigms starting to coalesce.” As our World Politics Review column stresses, “the private sector will drive this expansion/upgrade process far more than the public sector.”