Supply Chains are Transforming but are Supply Chain Managers Keeping Up?

Stephen DeAngelis

August 28, 2014

“The seeds of tomorrow’s global supply chains are being planted today,” writes Robert J. Bowman, managing editor of SupplyChainBrain, “They are the best practices that leading companies are implementing now – practices that will be combined with advanced analytics and modeling tools to forge the supply chain of 2025.” [“Seven Best Practices for Supply Chains in 2025, SupplyChainBrain, 6 August 2014] Bowman insists that looking a decade out “helps today’s managers to focus on the path to supply-chain excellence, at a time when external factors are conspiring to undermine the efforts of global suppliers to get product to market in a timely fashion.” Will Green (@willhgreen) reports, however, that many supply chain managers don’t think that strategizing about the supply chain is necessary. He writes, “Some eight out of 10 supply chain managers do not see their supply chain as an ‘enabler of business strategies’ within their organisation, according to a survey.” [“80 per cent of supply chain managers don’t believe their supply chain enables business strategy,” Supply Management, 20 December 2013] Green continues:

“The poll, conducted by Hitachi Consulting, also found 55 per cent do not regard their business’s supply chain as a ‘fundamental source of business value and competitive advantage’ and 29 per cent see  it as ‘purely an operational function’. Cathy Johnson, vice president at Hitachi Consulting, said: ‘These figures are far from reassuring. For the most part, it seems that senior executives understand the strategic importance of the supply chain, yet the managers who deal with the supply chain on a day-to-day basis do not. A supply chain that doesn’t support the overarching business strategy, and which doesn’t deliver competitive edge – and which isn’t going to deliver a material change in performance over the next five years – is clearly not a desirable asset.’ The survey, involving 100 supply chain managers and directors from nine European countries, revealed almost half did not believe their organisation’s supply chain would deliver increased profitability over the next five years, just a third believed it would deliver an improved customer experience over the same period, and half did not think it would deliver a ‘reduced working capital requirement’.”

You must admit that those numbers are a bit disconcerting. Managers who don’t believe that supply chains can help a company’s bottom line are unlikely to be proactive in seeking new ways to make supply chains more effective and efficient. Bowman, however, believes that “every successful supply-chain initiative involves a blending of technology and business-process change.” His article focuses on “seven best practices that can help businesses to weather the storms they’re likely to encounter in the next 10 years,” He draws those practices from comments presented at a conference earlier this year by Anthony Tarantino, a senior consultant in supply-chain and operational excellence. The first best practice is establishing a center of excellence. Bowman writes:

“Nothing new here – businesses have been piloting such initiatives in one form or another for years. Typically, they involve multi-disciplinary teams that are charged with addressing a specific issue. Tactics include the standardization of business processes and continuing education of key managers. But a true center of excellence can be a ‘political lightning rod,’ said Tarantino. ‘It’s not a slam-dunk to create one that’s successful.’ It must have strong executive sponsorship and be reporting at a relatively high level within the company’s management structure.”

I’m a big believer in the power of pilot projects and in multi-disciplinary teams. If pilot projects are implemented correctly by such teams, they can even change the minds of skeptics. One reason that a center of excellence is a good idea is that it can ensure that corporate pilot projects are not duplicating efforts or working at cross purposes. The second best practice discussed by Tarantino was establishing a hybrid supply chain organization. Bowman explains:

“Companies tend to seesaw between the extremes of centralization, which promotes efficiency and controls costs, and decentralization, which provides flexibility and quicker time to market. The answer lies somewhere in the middle. ‘History has shown that a rigid application of either approach is not going to work,’ said Tarantino. Yet achieving the perfect balance is a constant challenge for every organization.”

Tension within an organization is not necessarily a bad thing. It keeps people on their toes and doesn’t permit them to sit on their laurels. Managers need to ensure, however, that it is creative tension and not tension that leads to internecine warfare. The next best practice promoted by Tarantino involves product segmentation. Bowman writes:

“Products must reflect the realities of the marketplace, which is by nature fragmented and requires multiple tailored approaches. The trick, said Tarantino, lies in determining the optimal number of product types and segments. Defining factors include demand volatility, profit margin, supply-chain risk and resiliency, and variations in order and manufacturing lead times. They break down into millions of data points – hence the need for sophisticated analytics to sort through it all. In the future, Tarantino said, segmentation will become an essential element of virtually every supply chain. Marketplaces are constantly changing, and businesses must conform – even if that means transforming a company’s very nature.”

Many analysts also note that, by segmenting products, the supply chain for that product is simplified. In a world where everything is getting more complex, simplification is a blessing. Tarantino’s point about the importance of good analytics is also on point. Michael Schmitt (@Michaele2open), Chief Marketing Officer at E2open, agrees. He writes, “Better information leads to better decision-making.” [“Setting the Table For Successful Supply Chain Management,” Manufacturing.net, 20 December 2012] However, he cautions:

“Incomplete, inaccurate, or untimely information can be worse than useless — it can be actively damaging to your business. Demand instability is a perfect case in point. In this environment, success hinges on the ability of the entire trading partner network, not just the brand owner, to reliably and cost-effectively manage demand volatility. The most critical element is good, clean, accurate and timely data from as much of your trading partner network as possible. This data is the basis for creating a single source of truth for your company and your trading partners. Good data is the basis for good decision-making and essential for having a clear picture of your actual situation.”

Tarantino considers big data analysis and analytics so important that he made it the subject of his next best practice. Bowman writes:

“Up to now, most organizations have relied on structured data such as purchase orders, inventory levels and customer returns. The future will see the addition of unstructured data from external sources – books, articles, blogs, surveys, social media – ‘everything under the sun,’ as Tarantino put it. These data points, which account for up to 90 percent of all business information, can have a huge impact on supply chains. Again, though, companies need a means of sifting through the clutter in order to extract meaningful data. It’s analytics to the rescue. ‘This will be essential, if segmentation efforts are going to provide a realistic look at customer sentiments and trends, especially for new market areas and new products,’ Tarantino said.”

In a previous article, Bowman reports that consumer packaged goods (CPG) companies are drowning in data and some have no idea what to do with it. [“CPG Suppliers: Drowning in the Sea of Big Data,” SupplyChainBrain, 14 April 2014] He writes, “It’s the age of Big Data, which is supposed to give companies unprecedented control over their supply chains. But how can they even begin to get a handle on this massive amount of information?” The solution to the Big Data conundrum is implementing a good analytics program. Bowman concludes, “In the vast sea of CPG data, you can either sink or swim.” The next best practice recommended by Tarantino is hybrid outsourcing. Bowman writes:

“Once again, balance is key. Over the past two decades, many companies engaged in rampant offshoring of their manufacturing capacity. They got what they expected in terms of cheaper labor, but they also became burdened with uncertainty caused by the additional distance between source and sale. They’ve gotten smarter in recent years, having achieved a better understanding of the hidden costs of outsourcing and risks such as theft of intellectual property.”

Hybrid outsourcing is another way saying that manufacturers are learning that putting factories in locations closer to where products are consumed is another way to help them simplify supply chain complexity. Tarantino’s next recommendation involves quantitative analysis for risk management. Bowman explains:

“The advanced modeling tools in use by the banking industry were triggered by international accords such as Basel II and Basel III, and by U.S. laws such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. Banks today can model the rarest of catastrophic events – the so-called Black Swans – and supply-chain managers need to be able to do the same. ‘These techniques and tools will be applied to the next generation of supply-chain risk management,’ Tarantino said. Expect plenty of new job openings for the quants.”

Big Data plays a huge role in ensuring that models provide actionable insights. Most of the big insurance companies now have risk models that can help businesses get a handle the numerous factors that could affect their supply chains. There are also companies that specialize in helping identify and mitigate supply chain risks. Supply chain managers need to know to whom they can look for help. The final best practice recommended by Tarantino involves managing intellectual property (IP) and patent protection. Bowman writes:

“IP theft and piracy will continue to grow. They’re a cheap way for foreign competitors to get a foothold in emerging markets. Western notions of business ethics in those countries and in China are essentially irrelevant. ‘Supply chains of the future will have to factor IP risk into their sourcing and trade decisions,’ Tarantino said. … Similarly, good patent risk management can help to shield companies from expensive patent wars and trolls that claim the most basic elements of technology as their proprietary right.”

Bowman concludes, “The unifying theme among all these best practices is the growing inter-dependence among global businesses and their many partners.” If you don’t think you have a global supply chain, Tarantino believes you should think again. He told conference participants, “I don’t think there is such a thing as a local supply chain anymore.” Michael Schmitt agrees that collaboration is going to be at the heart of the most successful supply chains in the future. “When done right, collaboration allows companies to respond more rapidly to possible inventory shortages and shipment delays, he writes. “It also allows you to ward off and deal with supply chain disruptions, create and share supply and demand signals and coordinate with literally thousands of suppliers at one time. By aligning and collaborating with such a wide range of suppliers, supply chain managers gain the visibility they need to respond to any supply chain challenge that’s put in front of them in today’s competitive business environment.” Bowman insists that the upside of supply chain transformation is significant; but, none of the benefits will be attained if supply chain managers persist in the view that the supply chain has little to do with corporate strategy.