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Silos in the Supply Chain

June 29, 2010


One of the business challenges I have addressed since founding Enterra Solutions is the disruption in the flow of critical information (both internally and with other business stakeholders) caused by the existence of silos. I have written a number of blogs on the topic as well (see, for example, The Curse of Silo Thinking and Breaking Down Silos). The supply chain is just as apt to contain silos as any other portion of a business. Guruprasad B. Nagaraja sees them in technical architecture used in supply chain management [“Technical Architecture and the silos thereof….,” Supply Chain Management blog, 27 February 2010]. The blog, sponsored by Infosys, is intended to help readers implement “leaner supply chains through process and IT related interventions” and “discuss the latest trends and solutions across the supply chain management landscape.” Nagaraja (using a lot of technospeak) writes:

“I was recently sitting in a café a flipping through a magazine on Green Architecture for Retailers. It included the entire gamut of retailers – apparel vendors through grocery vendors and how they wanted their stores to be green. … I constantly kept imagining the role of the architect that evaluated a retailer space and proposed the ideas that could be effective. The ideas that would make the environment more smart, more reactive and therefore more effective and worthwhile. … In this article I want to stress … the silos we the (Technical) Architects face. … Today with the ‘advent’ as I like to call it, of the technologies like virtualization, grid, cloud etc, there needs to be a bit of direction to the way we use it. … I have been with multiple clients across the globe and I don’t think any of them are exploiting these technologies to the maximum. Some places the resources are appropriated on an application by application basis like in the 18th century. One may argue this is fine as long as there is a roadmap for server consolidation. But that is not the case. At other locations I find huge farms for each tier – hundreds of 64 bit p6 servers for databases for all the applications in the enterprises’ landscape being underutilized. But then the question is if we can expand these farms anytime why procure it so early. In my opinion it is because of isolated IT roadmaps. DBAs [data base administrators] are consolidating the database servers while the AIX [advanced interactive executive] team has their own version of adopting and adapting to virtualization. Storage team doesn’t know about the DBAs or the AIX team and they have their own version of SAN [storage area network] improvements. … So how do we get around these silos of teams? Well, you can’t. Now, that won’t work will it? I think although this has to be dealt-with on a case-by-case basis, I can’t stress enough how important it is for a technical architect to spend a couple of weeks to understand the dynamics at the client site before dwelling deep into gathering the application specific NFR. Once the landscape is evaluated, the silos won’t be silos anymore and it becomes easy to propose a technical architecture for an OMS implementation. The architects will be talking in terms that the DBA’s, Unix Admins, SAN teams, EAI teams can all understand and relate to.”

The silo problem that Nagaraja observes in the technical architecture of companies can normally be found across the spectrum of activities in which companies engage. Catherine Bolgar advises that companies must avoid “the gaps in corporate performance” created by silos [“Silos,” Zurich Financial Supply Chain Risk Insights, 24 May 2010]. She writes:

“It takes a lot more for a company to succeed than for each employee to do his part. A company is composed of many opposing interests. Product designers want the best materials, but purchasing managers want the cheapest. The finance department wants the leanest possible inventories, but the sales department wants large stocks in order to sell big orders with a promise of quick delivery. The competing departments are like the proverbial blind men exploring an elephant, each perceiving the animal from a narrow perspective. These management silos can undermine the best business resiliency plans and pose problems for supply-chain and risk management.”

The “blind man” analogy is a good one. When critical information is locked inside corporate silos, opportunities are missed and problems created. Bolgar continues:

“‘It would be wrong to think there wouldn’t be silos in any organization,’ says Nick Wildgoose, supply-chain product manager at Zurich Financial Services in London. ‘Teams and groups will always form. It’s an anthropological phenomenon. The key is making sure they pull in the right direction.'”

If you managed to read through Nagaraja’s technospeak concerning technical architecture silos, he was saying exactly the same thing — the key is making sure that corporate teams, wherever they exist and whatever their purpose, pull together in the right direction. Bolgar continues:

“Companies have a number of ways to overcome silos: directives from the top executives, adjusting incentives and bonuses to reflect wider responsibilities and risks, using matrix organization, and collecting and analyzing information to rethink processes and reduce risks. ‘In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control,’ investor Warren Buffet recently wrote. That applies not just to financial institutions but to all companies, says Mr. Wildgoose. ‘Companies in all sectors need to organize supply-chain risk in a holistic, strategic way, as something that drives profitability and shareholder value,’ he says. ‘That needs to be driven from the C-suite level [or a corporation’s most important senior executives].’ Some companies create positions for professionals whose job is to look at risk management of the organization as a whole, notes Bob Ritchie, professor of risk management at Lancashire Business School, at the University of Central Lancashire in Preston, U.K., and founder of the Institute for Supply Chain Risk Management. ‘Risk management has the capacity to straddle all sides of a business,’ he says. ‘At the end of the day, it’s the whole package that works in selling your product or service.’ Another thing top executives can do to overcome silos is to broaden the structure of incentives and bonuses.”

It probably doesn’t surprise you that a blog sponsored by a financial services firm believes that “incentives and bonuses” is a good solution. The entire financial services industry is awash in concerns over incentives and bonuses. But, in this case, the logic behind the recommendation makes sense. Bolgar explains:

“Usually, the manager responsible for the manufacturing plant has incentives based on production utilization, while the procurement manager’s incentives are calculated on the savings he generates. Rather than doing what’s optimal for the company as a whole, each does what’s optimal for his own performance criteria. Stephan M. Wagner, professor of supply chain management at the Swiss Federal Institute of Technology Zurich, tells of an appliance maker whose strategic differentiation was quality. Amid problems, it found that the purchasing manager had been buying cheap parts. He was unaware of the company strategy, he wasn’t part of bigger decision-making discussions and, above all, his bonus depended on keeping costs down. To avoid this, some companies are shifting bonuses to a wider measure of company performance, with a smaller percentage based on the environment the manager can directly influence, Dr. Wagner says.”

Bolgar is basically saying “look before you leap” and “think before you act.” She continues:

“With a little forensic work, a company can also calculate the cost of risk as well as of savings, to better determine performance. A cheap supplier might not look as attractive if the contract stipulates a supplement for weekend work, or if a disruption means using air freight instead of sea shipment, says Mr. Wildgoose of Zurich Financial Services. ‘You might have quite a small savings in the unit cost of an item, but a big loss if a main production plant has to be closed for a few days.’ Such costs aren’t always pulled together, because they aren’t always as easy to define as supply chain-disruption costs, appearing instead as increased logistical costs or material variances. ‘A good finance person will highlight the variances and what needs to be done to change them, but they need to recognize these interrelationships,’ he says.”

Not all silos are functional or organizational. Sometimes, Bolgar reports, silos result because people have a difficult time seeing challenges from different perspectives. She explains:

“A silo problem is a people problem, says Dr. Wagner. Some engineering firms get around this by using cross-functional teams, especially for the launch of new products. Such short-term groupings originally intended to reduce costs by involving purchasing managers at the design stage. Now they also are being used to execute the supply chain in a way that reduces risk exposure. A company that excels in this area is Cisco Systems Inc., the San Jose, California, information technology giant. Cisco adopted a matrix organization as a way to drive innovation, but has found other benefits: speeding growth and reducing supply-chain risk. Highly autonomous councils and boards work on projects, led by executives who are working on multiple major company agendas in parallel. Kevin Harrington, vice president of global business operations in the customer value-chain management organization at Cisco, compares it to piloting 30 cars at top speed down a crowded 16-lane highway. ‘The only way to do that is to get out of the box of hierarchy.’ Thinking about supply-chain risk when a product is still on the drawing board allows Cisco to ‘take a more aggressive posture in controlling our destiny throughout the product life cycle,’ he adds. Cisco also incorporates risk management into employee performance. It devised a resiliency index of weighted factors that the manager of each business unit would be accountable for. ‘We talk in terms of performance expectations and cost. We explain what’s expected, and partners are free to organize around those any way they want,’ Mr. Harrington says. ‘A collaborative undercurrent runs really thick around here,’ he adds.”

Long-time readers of this blog know that I’m a big fan of collaboration. Drawing people from numerous disciplines to look for solutions to a given challenge provides much better results than relying on a team of experts from the same field. Just as in the parable of the blind men examining the elephant, perspective does matter. Bolgar concludes:

“Companies have silos because they make performance easy to measure, says Dr. Wagner of the Zurich Technology Institute. Silos develop along the lines of job functions or geography. Good companies break down silos by implementing cross-functional teams and getting purchasing managers involved in product development, says Dr. Wagner. Silo-fighting ‘has to be improved on a continuous basis,’ he adds. ‘The effects fade away if you don’t launch new initiatives all the time. … Overcoming silos can be done, but it’s never finished.'”

Wagner is correct. Silos will always exist and only a constant and persistent effort to open doors for information sharing between siloed sectors can mitigate the negative effects that can emerge wherever silos appear.

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