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As someone who has over 25 years in supply chain/logistics management roles, I have often been exposed to the lack of true understanding of this subject matter at the C-level in organizations. In early 2006, I earned a professional certification from APICS –The Society for Operations Management as a Certified Supply Chain Professional (CSCP). Since then, I’ve taught courses in the CSCP Body of Knowledge, and most recently, during the 1st Quarter of 2007, I participated in a business development project with Navesink Logistics, Inc. that focused on specific market segments within the Mergers & Acquisitions industry. As I reflected upon my own study, research and experiences combined with the feedback from my students during the CSCP courses, one general message surfaced that convinced me of the necessity of sharing some critical findings related to supply chain management (SCM) and corporate financial performance.
The basic message is simply this: most companies struggle or fail outright to implement, execute and maintain SCM Best Practices concepts and strategies. A very important distinction to be made at the outset is that SCM is NOT just for Fortune-100 firms. In fact, research evidence shows that the smaller the company, the greater the need to understand and apply SCM practices . A recurring theme throughout my research is that C-level executives just don’t get the real meaning and scope of SCM. More importantly, they don’t recognize the financial impact of SCM on corporate performance (from both positive and negative perspectives), and often lack the forward vision to anticipate the problems and difficulties inherent in applying SCM concepts and tactics to their organizations. The primary intent of Part 1 is to explain why SCM, as a strategic objective, is bound to fail unless led and supported consistently from the highest levels in the organization.
Part of the SCM problem in the "real world" is confusion as to the meaning of the term. Like a lot of business buzzwords, the true breadth and depth of the hard and soft management skills required to execute SCM are not readily visible to the casual observer. According to the APICS Dictionary, 11th edition, a Supply Chain is a "global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution and cash." Supply Chain Management is then defined as "the design, planning, execution, control and monitoring of supply chain activities with the objectives of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally." It's important to note that SCM is NOT just procurement, or sourcing, or demand planning or materials management. These narrow, functional descriptions are found frequently in job listings for supply chain positions that are advertised by companies on the major Internet job boards. As is made clear by the APICS definitions, SCM includes ALL these functional descriptions and MORE.
SCM is built on recognizing and managing four standard flows –
The product (or service)itself
Information
Cash
Reverse logistics
Each of these flows not only inter-relates with each other, but also has a direct impact on corporate financial results. Supply chains consist of people working both inside and outside of individual companies, as well as separate business entities that participate in, or otherwise support, the supply chain operations. Together, all the people in all the business entities contribute towards the success or failure of the supply chain in terms of meeting customer expectations and corporate objectives. Supply chains can be (and often are) very complex – especially at the global level. This complexity easily can become a source of cost or performance inefficiencies that can have severe negative effects upon the financial performance of the firm – a subject discussed later in this paper. The graphic below – The Manufacturing Supply Chain Model – comes from Book 1 of the APICS CSCP curriculum, and demonstrates quite clearly just how complex today’s supply chain structures can be. And just to make it more relevant, suppose that some of the Tier 2 Suppliers happen to be located in China. Controlling and monitoring the flow of timely and accurate information, cash flows and material or product movements to and from all the supply chain members depicted requires a major commitment of resources, and such commitments can only come from the CEO.
As shown in the APICS definition, SCM is about creating Net Value – it is not an exclusive focus on cost reductions. Just In Time, Lean, and Continuous Process Improvement are key SCM tools, but they are not intended just to squeeze costs from one entity or activity of the supply chain. Rather, they are used to immerse the firm in a continuing series of business process improvements leading to higher levels of SCM capabilities. Use of any or all of these techniques requires constant C-level leadership and support to instill the new cultural and philosophy foundations needed in order to ensure linkage between higher-level corporate strategies and supply chain strategic execution.
Another important concept from the APICS CSCP Body of Knowledge is that of Stages of Supply Chain Development.
Based on my own experience, along with the input of my APICS peers and CSCP students, it is quite clear that most U.S. firms operate at either Stage 1 (Multiple Dysfunction) or Stage 2 (Semi-Functional) levels. Stage 3 (Internal Integration) frequently is built upon use of ERP systems or implementation of the S&OP process. Unfortunately, a very low percentage of American firms have chosen to execute either ERP or S&OP, and the failure rate of those that have is very high. For example, The Aberdeen Group released a study last year showing that the average percent of ERP system utilization by American manufacturers is 27.6%! What a tragedy of lost opportunities. And in Stage 4, the firm extends its supply chain activities to select outside firms in its supply chain network. So, the key question again is how can any of this happen without C-level approval and leadership? The answer is easy – it can’t and it won’t.
Another key SCM concept is about Collaboration in all functional activities across the supply chain. Collaboration starts inside the firm by breaking down the old functional, silo organizational structure, and replacing this with a process-oriented structure. Collaboration involves the following critical issues:
· Building trust between supply chain members and activities throughout the supply chain
· Sharing of critical information – supply, demand, production/procurement plans and schedules, transportation/distribution plans and schedules, inventory data and status, customer requirements, etc.
· Linkage of corporate strategies and objectives among key supply chain partners in order to maximize customer satisfaction and overall supply chain profitability
· Connect the supply chain network by use of IT resources to link all participants fully from raw material suppliers through to end customers
The general objective of collaboration strategy is to enable the firm to achieve what are known as the 3 Vs of SCM operations:
· Visibility – increased ability for all supply chain members to see what’s happening throughout the supply chain (or not happening), and react accordingly;
· Velocity – increase the speed of flow for information, products or services, and cash throughout the supply chain, and
· Variation – reduce variations in specific activity performance metrics or product quality leading to higher levels of standardization and reliability.
And the only real reason for the firm to improve its capabilities in the 3 Vs above is to strengthen its capabilities in the 4th and most important V – Value. However you define it – value to customers, value to shareholders or other stakeholders, creating and growing Value is what SCM is all about.
But here's the skeleton in the closet that's just not discussed openly in much of the literature on SCM. Building supply chain "Best in Class" capabilities causes real upheaval within the firm, requires a lot of hard work and training to get through these periods of turmoil, and these must go on continuously. Why is this so? To put it simply, implementing SCM best practices inflicts major CHANGE on the organization, and change is usually painful and resisted. Becoming a top line supply chain performer is not some one-time project that may run for a few months, and then life is suddenly wonderful. Instead, it requires fundamental shifts in corporate vision, philosophy and culture, as well an acceptance of the fact that change is constant, inevitable, and can be ignored only to the great peril of the company. So the willingness to accept and embrace changes in philosophy, vision, attitudes, etc. must start at the C-level, and become in essence part of the very fiber of the business.
Considering the main foundation elements of SCM discussed above, along with the performance objectives found in the 4 Vs, it’s obvious that NONE of this can happen without the CEO being the driving force and chief advocate. But human nature has a big role here as well, and I think it’s fair to say that no CEO would chose to bring such grief and turmoil on the organization unless (s)he had a very clear picture of the long-term Value such efforts would bring, and a very high degree of confidence that such value can be realized.
With the focus of today’s CEOs on near term earnings performance (quarterly for public companies, and as little as 6-8 quarters if private equity or hedge fund ownership involved) it shouldn’t be a surprise that the long-term value benefits of SCM are not widely recognized in the executive suites. Some comments by a former President of the Council of Supply Chain Management Professionals (formerly known as the Council for Logistics Management) illustrate the point: “The stock market is one of the greatest impediments to supply chain management." That's Tom Speh talking -- associate dean at Miami University's Richard T. Farmer School of Business. As a past president of the CSCMP, he speaks from experience -- and frustration. "How can I better invest in sophisticated software and take the time to develop relationships when I'm constantly being beaten to gruel by the stock market?" he asks. "Look at all those presidents and CEOs who have to justify what's going on every three months and explain why their earnings are off by a penny." So do you really expect your CEO to risk reinventing the company into a supply chain star performer without a solid conviction that the results will be more than worth the efforts? As Dr. Evil likes to say – Riiight!
Fortunately, some recent research from both academic and professional sources is available that shows SCM excellence has significant impact on corporate financial results. Interestingly, some of these studies show clearly the severe negative consequences on business results from supply chain inefficiencies or incompetence. In Part 2 of this article, I’ll summarize some findings on the positive side of the supply chain fence, and then provide hi-lites of research linking poor SCM capabilities and execution to negative financial results. Finally, in Part 3, I’ll introduce a series of supply chain finance calculator tools, that will demonstrate how to link SCM operations performance to financial statements and metrics. Readers will also see clearly the power of translating operating results into key financial performance measures such as Economic Value Added, Earnings per Share, Present and Future Value Cash Flows and overall Business Valuations.
Richard C. Rhodes - CSCP, CPIM is an Executive Consultant with Navesink Logistics, Inc. Contact: rr@logjobs.com
References:
How Supply Chain Glitches Torpedo Shareholder Value - Vinod R. Singhal & Kevin B. Hendricks -- 1/1/2002
APICS – The Society for Operations Management: APICS Dictionary, 11th Edition and Certified Supply Chain Professional Curriculum, 2006
The Aberdeen Group, Report Excerpt in Modern Materials Handling Magazine, October 2006
Material Handling Mgmt Magazine – February 2003 Editorial
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Introduction
