Transform SCM By Creating Value The Unrealized Potential
The original purpose and intent of supply chain management (SCM) was to remove excess inventory from the supply chain. With technology, process and people, uncertainty would be reduced. Efficiencies would result with integration, visibility and collaboration. Lean, agile and streamlined would be the standard.
Supply chain management would be aligned with the corporate strategy. SCM would create competitive advantage for companies to drive growth and profits. Some businesses would redefine themselves with supply chain management. Leading-edge, world-class supply chains would be developed and sustained.
This vision of SCM has not been fulfilled. Supply chain management instead has emphasized reducing prices for freight, warehousing, logistics services and supplier products. Cost reduction is a dominant priority. This cost emphasis has, in some ways, resulted in hubris of defining who is dominant in SCM. And, to some extent, it has slowed the development of SCM.
Much outsourcing has been done to achieve cost reductions, as compared to being done to reduce inventories and to improve operational efficiencies. 3PLs have been asked and required to drive down supply chain costs for their customers. Many are asked to provide integration and other supply chain programs to achieve lower costs, not to make the supply chain better.
Competitive advantage opportunities are lost. Short-term decisions can have long-term impact. With the focus on cost reduction, creating supply chain value has been overlooked. Events change so quickly that many companies are in a reaction mode and can get behind the curve if they are not careful.
Value is created for customers and stakeholders. This means executing the perfect customer order continuously for outside customers or for company retail locations. It means have suppliers execute the perfect purchase order continuously. And it means more. Value must also be sustained; it must be ongoing. It has to become imbedded throughout the corporation; it cannot just be a management de jour program with a short shelf life. Supply chain value can brand the company and be strategic to future direction, growth and profits.
Moving from an almost singular emphasis on cost reduction to emphasizing value requires transformation. Organizations are built from the inside out; they are not built back from customers. They are often built around management needs that no longer exist in global sourcing and sales markets. Organizational silos inhibit process effectiveness. Financial systems view logistics as a cost center, one that is difficult to measure. Some supply chain costs hit the P&L; others go on the balance sheet and some, especially “service” do not appear on financial statements.
Transforming a supply chain takes diligence and time. SCM is a process that runs horizontal through a company; it is not isolated to one department in a company. The scope and complexity of supply chain management — with worldwide sourcing and a diverse mix of trade channels, customers and locations — mandates patience. There are no quick fixes. CEO and CFO buy-in on the need for the transformation is important because it can reduce the time required and internal resistance to change. Using vital metrics and obtaining continuing successes is a sure win to gain needed support.
The first issue is identifying where to begin the transformation. Efforts should focus on critical issues that have both external and internal merit–
*INVENTORY IMPROVEMENT. Inventory bedevils companies–too much, too little, in the wrong place, wrong size, wrong color, out of stock, returns, overages, working capital, marked down items. These are some of the ways inventory elicits reaction. Studies have estimated that the financial impact in retail of price reductions for leftover merchandise and for lost potential sales because items were not in stores ranges between $50 billion and $100 billion. That is a staggering amount. The financial impact, while so large for retailers, is not unique to them. Wholesalers, distributors, manufacturers and others have a similar inventory dilemma. Resolving it should be the driver for companies to transform their supply chains from cost centers to revenue centers, even to be a strategic part of decision making and planning.
*TIME COMPRESSION. Time may be the single biggest issue in business. It may be the most measured factor-product lifecycle, cash conversion cycle, supply chain cycle, purchase order to delivery, customer service or other measures. For SCM, the length of time compounds the uncertainty that requires inventory; it adds to the challenge of balancing demand and supply. Total supply chain time must be understood and measured to identify delays or longer than needed times. If the complete picture is not seen, then the potential for micromanaging one aspect can occur. The ripple effect through the entire chain can increase time, not reduce it. Much of the time reduction occurs internal, not external, to an organization. The reasons for the internal time reduction are multiple; the results are not. Time compression is a major benefit of process improvement and technology upgrade. While “time” may not appear on financial statements, value-creating improvements that result from time reduction do.
*FINANCIAL SUPPLY CHAIN INCLUSION. Supply chain people and financial people often use different measures that add confusion and impede change. While that is a problem that needs to be reconciled, that is not the financial supply chain. The issue here is the existence of two supply chains-a product one and a financial one. This issue is not widely discussed; but that does not change its impact on the development of SCM value. This is especially so with imports. There are two financial concerns. One is payment to suppliers and logistics service providers and U.S. Customs and Border Protection. The other is who holds title and impact on the balance sheet, payment terms and Sarbanes-Oxley. Two chains mean the company is divided in its management of the flows. In turn, the separate flows can slow each other down. And therein lies the issue that must be addressed. There must be integration, a melding, of the two chains.
*QUALITY ROLE. Quality applies to both product and service. Poor quality and errors are inconsistent with value. Real quality improvement required identifying and measuring vital activities. It is not meant to be an exercise in statistics; it is a tool for process improvement. Quality is implicit with the perfect order; it is inherent in sustained process improvement. The inbound supply chain that is vital for inventory is a very good area for quality. Supplier certification and other programs are important for managing suppliers and can drive sourcing improvements that directly show up on store floors and customer facilities. They can reduce time, improve inventory, reduce costs, avoid rework and damaged and marked down items. They can put inventory where and when it is needed.
*VISIBILITY, INTEGRATION AND COLLABORATION NEEDS. Transforming a supply chain into value requires the participation and cooperation of all participants, both inside the company and external. Suppliers, wholesalers, distributors, manufacturers and logistics service providers work together. Technology is an aspect of achieving this, along with a sound process. With visibility, integration and collaboration, the foundation for value is laid. The size and complexity of supply chains becomes definable and manageable. Visibility, integration and collaboration are mandatory, not optional, to creating and sustaining supply chain value.
Then there is the question of how to transform. Process, technology and people are requirements for change. The current process should be assessed to understand where the operation is now and the gaps and redundancies that exist. Technology is a process enabler. Without an effective process, the total benefits of technology are not realized.
Performing process evaluation may not be an easy task given organization demands. Assessment may require the use of outside parties–consultants, 4PLs or 3PLs. Likewise implementing process and technology improvements may also require the use of outside parties, at least initially. With successes, as supply chain value is created, the organization will begin to assimilate and accommodate transformation. Supply chain management will mature into what it has been capable of being.
LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.