As a supply chain professional, you’ll know that ‘The Supply Chain’ is often thought of as an executional cost centre, rather than a strategic opportunity. As a result, certain myths about supply chain performance have endured, preventing organisations from optimising their supply chains and ultimately improving business outcomes. To achieve superior supply chain performance for your organisation you need to realise how to get there. And busting some myths, many of which are based on outdated business practices, is a pretty good place to start.
This misconception is the bane of many supply chain professionals’ lives. Despite surveys amongst the Supply Chain community referring to increased expectation to manage complexity, retain talent, improve value and manage risk, cost often remains the number one priority.
The real Cost of focusing on Cost
The obsession with lower cost can restrict the evolution of supply chain performance in many organisations. Many of us continue to battle the consequences of this viewpoint. Consider this observation from a recent Supply Chain Management Review (SCMR May/June 2014): By focusing on costs, investment in many supply chains has been limited to such an extent that innovation and competitive advantage may be compromised.
Shifting from Cost to Strategy
Traditionally, supply chains were based on assumptions of stability and consistency – and subsequently focused on maximising throughput and return on assets such as manufacturing facilities. In this context, a preoccupation with efficiency is understandable.
Today’s business environment requires a broader approach, and this should flow from business strategy. This strategy – how you intend to compete and what your points of difference are – should segment customers and channels based on their needs and drive the configuration of your supply chain. These needs may be price, quality or service driven. The strategic planning process should match your supply chain capability against these needs whilst acknowledging that your organisation can’t be all things to all people. Developing your supply chain strategy this way will allow you to differentiate your organisation from your competitors’ and strengthen competitive advantage.
Getting your Strategy right
The key to bringing strategy to life is a clear, objectively defined Customer Offer. This should define the ‘rules of engagement’ with your customers, establish what is required from the supply chain and, as such, allow the front end of your business to match the back end. Without this, your organisation will not be able to measure performance and understand your cost-to-serve, profitability and business sustainability.
If your strategy is to offer high levels of service to certain segments, you need to determine what levels of costs are appropriate. These will be very different to the cost required to serve segments where price is more of a concern than service, and different again for segments that regard quality or customisation of greater value. In addition, the lack of a guiding customer offer can lead to other issues such as loss of revenue via customer dissatisfaction or inefficiencies such as over-servicing.
Managing costs will always be of relevance to supply chains, but the question of costs should stem from a broader discussion of business strategy and customer needs rather than be the starting point. Instead of arbitrarily targeting lower costs, the question that needs to be asked is: what is the right cost for your supply chain? Running an efficient (or lean) supply chain is only one of several possible directions. Additionally, cost should never be the sole measure of success for a supply chain – KPIs and Metrics should reflect other strategic priorities. Focusing on more than just executing at the lowest cost will allow your supply chain to become a source of innovation, growth and opportunity.
It is often remarked by executives looking to fill Supply Chain Manager roles that the most important, non-negotiable requirement is for strong functional and technical expertise. On the other hand, skills such as communication, leadership/people management and cross-functional awareness are often weighted as ‘nice to haves’ when assessing candidates. The over-emphasising of these skills relative to other so called ‘softer’ skills is misguided, and requires addressing for any organisation that proposes to utilise their supply chain to drive competitive advantage.
This is not to discount the need for Supply Chain Managers to have significant technical understanding. However, the scope of the role should extend beyond functional silos and incorporate additional areas of expertise. As the concept of supply chain has broadened beyond simply being a functional Cost Centre, as discussed in Myth #1, the role of the supply chain is increasingly recognised as central to success in many organisations. A broad range of skills is required to meet these expectations. Consider also the uncertainty, volatility and complex trade-offs that most Supply Chain Professionals not only have to operate under but also successfully manage. As such, the key skills required to become an effective supply chain leader and drive improved supply chain performance should now include:
- Strategic ‘Big Picture’ Capability – It is no longer adequate for Supply Chain Leaders to be narrow, functional experts. In order to participate in the strategic decision making process, they need to be able to think holistically, have a strong understanding of strategy, and be able to anticipate and solve problems at a business level, all while managing supply chain trade-offs.
- Collaboration – Similarly, the ability to be able to collaborate not only cross functionally but also beyond your organisation with suppliers and customers will provide your organisation with increased visibility, better risk management and more potential sources of innovation.
- Risk Management – These may include product quality and integrity risks, potential disruptive events or humanitarian risks. As witnessed by events involving garment retailers and OEM manufacturers in Asia, it is no longer tolerable to be oblivious to supply chain risks. Being able to better manage these risks will drive resilience and sustainability in your supply chain.
- People Skills – Talent shortages are commonly identified as a significant looming barrier to supply chain performance. As such, it is critical that Supply Chain Managers are able to inspire and develop the next generation of leaders and innovators. In addition to skills assessments and catered training, this may involve mentoring and jobs rotations as well as making the supply chain appear an attractive place to work by providing employees clarity of career paths and incentives to develop.
- Communication Skills – Communication skills are vital. The ability to distil complex supply chain concepts into need-to-know areas or communicate the impact of a decision simply and clearly, especially while explaining the competing trade-offs at work, is often more difficult than understanding the theory behind it. This includes being able to engage in finance terms where required. In a recent Kinaxis blog (Kinaxis - Marketing), the ability to sell projects or initiatives that support organisational strategy, as well as to explain the importance of the supply chain to the CEO and throughout the organisation, was referred to as “marketing the supply chain”. Adopting this perspective could really propel supply chain driven benefits in your organisation.
Ideally, it’s a healthy balance of these soft and hard skills that’s required. Where candidates are weaker in one area over another, consider the mix of skills across your team or where you can focus development. Building the right team of people within your supply chain provides a substantial opportunity to lift supply chain performance, often without the considerable investment required by other initiatives.
Myth #3: If we just get our forecasting right, we’ll be able to execute perfectly and solve our supply chain issues
As many of us would have observed, forecasting often cops the blame for many issues within the supply chain. This has only been compounded by the proliferation of terms such as “demand driven supply chains” increasing awareness of the importance of demand planning. However, the inference that forecast accuracy is the sole cause of issues is dangerous and stems from two main misconceptions.
Firstly, forecast accuracy should not be considered as an end in itself. Instead, it is one contributor to outcomes that needs to be managed to deliver expected results.
Secondly, despite of all best attempts, forecasts by their very nature will never be completely correct. It’s much more important for your organisation to recognise this fact and manage an understood level of risk than to expend too much effort improving forecasting when it may not translate to better outcomes.
What this means for your organisation is that in an environment where increased volatility, shortening product lifecycles and complex customer fulfilment models are making forecasting increasingly difficult, the effort required to improve forecasts may not provide the expected supply chain benefits. This is particularly true if you have broken links in your supply. For example, increased volatility will be reflected in increased forecast error – and this should directly translate to the quantity of safety stock required. However, if you are using a blanket safety stock policy such as weeks cover, you won’t be able to benefit from or buffer changes in forecasting performance or risk profiles. To put this in an everyday context, if you were to move from a house where you park your car on the street into a new house with a garage, and yet you retained your existing car insurance policy, you would not be benefiting from the lower risk of your new parking arrangements.
Either way, it’s more important that your organisation understands this volatility, can anticipate the expected error of statistical forecasts, and is able to manage this risk. In fact, there has even been discussion that given the operating environment that many organisations face, forecasting has little relevance to the short-term, executional horizon and should focus on buffering this variability while preserving demand plans for longer-term capacity and strategic planning.
While such an approach may not be appropriate for every organisation, the question that should to be asked in relation to this is how right does your forecast need to be? That is, what level of aggregate risk is manageable given your customer offer and working capital constraints? The balance between improving forecasts and managing risk via responsiveness (including the use of inventory) should flow from your organisational and supply chain strategy. In order to assist this process, many organisations use an inventory optimisation tool to model customer service targets against varying levels of forecast error and working capital. If an acceptable mix cannot be found, you may need to revisit your Customer Offer. Taking this approach to setting forecast accuracy targets will provide a more beneficial outcome for the organisation than, for example, taking last years’ number and increasing it by x %.
However, this is not necessarily an easy process – managing these trade-offs requires a mature, organisation wide dialogue. Without this understanding, it’s impossible to understand the ROI of forecast improvement initiatives, especially as efforts to improve forecast accuracy may suffer from diminishing returns.
Forecasts are just one driver of performance. Without a clear understanding of the expected level of error within your demand plan, plans cannot be built that manage this risk. However, if this risk is understood and the management of this risk reflects current strategy, your organisation can drive consistent, beneficial outcomes.
Another common myth that prevails is that the latest and greatest piece of software is the primary source of innovation or advancement available to drive optimised supply chains.
In simplistic terms, supply chain capability can be conceptualised in terms of People, Process, Systems and Data. To rely solely on the Systems element of this model to improve performance is naïve at best. Technology will not optimise your business in isolation of these other elements – especially as software needs to be configured to reflect strategy and business rules and supported by appropriate processes. And as discussed earlier, having the right people can be a source of significant innovation. In addition, even the best system will not help your organisation make decisions regarding exceptions such as capacity constraints, out-of-stocks or delivery delays. These decisions should be driven from your supply chain policies, which in turn are guided by organisational strategy. Software should be configured to highlight rather than be expected to solve these issues.
Decisions around software should, again, flow from your strategy and the level of service and response required by your customers. As was succinctly summarised in a recent blog: “The IT piece follows; it does not lead… you have to first figure out what is the reaction time you require to make your revenue and profit model.” (Supply Chain Brain).
From our experience, where we have seen the best results from software being used as source of competitive advantage, is where organisations have identified Best-of-Breed tools – be it demand planning, network modelling or warehouse management systems – that support their desired supply chain model. When compared to generic ERP modules, these tools have the ability to drive greater performance - but again, only if appropriate to your organisation.
For example, should you decide to focus on inventory, a successful ERP implementation may deliver a 5% reduction in inventory while maintaining service levels, whereas through integrated, constraint optimised planning, a Best-of-Breed Advanced Planning System (APS) could deliver a further 10% in inventory reductions while also increasing service levels by roughly 2.5%.
However, this only paints part of the picture. To return to the earlier model of People, Process, Systems and Data, where APS implementations are complemented and reinforced with process and culture reform, these benefits are almost repeated. That is, we have observed that the benefits from software can be matched by the benefits of improving processes in tandem with the software implementation, with a particularly significant impact on excess or obsolete stock. By solely focusing on a software project involving the implementation of the tool, and neglecting the opportunity to review and revise related business processes, is to by-pass many potential benefits that the software brings.
Like Myth #1, this is one myth that persists. It stems from a lack of understanding that results in people focusing on the physical elements of the supply chain, as well as the way warehousing and distribution costs appear on an organisation’s books. While this is understandable outside the workplace (no-one wants to bore their friends at a BBQ by explaining the ins-and-outs of Economic Order Quantities or Seasonal Statistical Forecast Models) from an organisation’s perspective it is neglectful at best. As a result, warehousing and transportation projects may overlook potential opportunities and sources of improvement. That is, the bigger picture – including upstream causes – may be lost in the desire to get quick cost savings.
To illustrate this, consider the perspective of a Financial Controller who notices that freight costs are rising and begins to renegotiate freight rates. If this has not been done for several years, this process may yield some results. However, given the commodity nature of freight rates, it’s likely most rates are already competitive and there’s not a lot to be gained. In addition, if these costs are rising as the result of something such as changing customer behaviour or an outdated inventory policy, this undertaking will never get to the root cause of the issue.
As an alternative, consider tackling this as a holistic supply chain project involving three key steps:
- Review your Supply Chain Network Design in light of current strategy. This may be as involved as running a detailed network modelling project (also known as Supply Chain Network Optimisation) or as simple as mapping out your current network and looking for potential bottlenecks, constraints or redundancy. Regardless, your network should be capable of supporting your Customer Offer in an optimal manner.
- Focus your Supply Chain Planning capability on the drivers of inefficiencies. Having reviewed and possibly revised your Supply Chain Network, focus effort on improving planning to reduce noise and imbalances in inventory as well as redistribution and expediting costs. The potential for improvements from better use of inventory can far outweigh the benefits of better freight rates.
- Analyse the Delivery / Order Fulfilment Task for potential improvements. As a final step, it may be worthwhile to improve your transport utilisation, such as by running a Route Optimisation analysis, and remove further redundancy at the execution stage.
Having followed these three steps, should you then decide to undertake a freight rate review, you’ll be in a much better position to negotiate rates that meet your needs, based on a supply chain configured to your organisation’s requirements.
The benefits of a well-run warehouse and distribution network are clear, however what is needed to drive and support it can be deceptive or less obvious. Taking a broader perspective of the potential causes and sources of supply chain network improvement will help drive long-term, sustainable benefits. And your Warehouse Managers will thank you.
To summarise, let’s return to the 5 myths discussed. Converting these into five supply chain requirements or initiatives would create a process flow to improve supply chain performance that looks something like this:
At first glance, these statements may appear valid activities, with at least some grounding in the reality of supply chain. However, compare and contrast them to the activities suggested to counter these myths:
While these steps are not necessarily linear or dependent on the prior step, what should be evident is that all subsequent steps flow from, but also guide, your strategy (unlike the first model where the emphasis is on efficiency and executional performance).
While activities from both models may deliver results, without this link to the greater business, results from the initial five activities may be short-term, unsustainable and offer less opportunity for improvement than the others. It’s also important that all parts of the business are singing from the same song book – that is, that your supply chain initiatives support and complement, rather than contradict, current strategy. No supply chain should operate in isolation of the business context it operates within.
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