The New Supply Chain Challenge

By Cathy Johnson, Hitachi Consulting

Supply chain alignment is demanding a different paradigm of roles, responsibilities and accountabilities and with that, how performance is managed. Below, Cathy Johnson discusses the importance of tying everything together for successful supply chain management.

Today’s supply chain is not as simple as it once was. In designing supply chains, organisations across industries need to look more widely than their own boundaries. Complex sourcing, multi-location manufacturing and information about products accessible through a range of channels means that each business must not only be on the forefront of anticipating trends, but also able to execute swiftly and flexibly to deliver services or products to meet customer needs.

Recently, Hitachi Consulting conducted a survey to find out more about how the market perceived the trends over the next 5 years and to what extent changes were required to meet changes in the market. The results showed a surprising disconnect between the executive strategy and the operational execution on the subject of supply chain. When asked about the challenges for the supply chain, for those respondents who accept that change is necessary *see infographic below (only 2 thirds of the respondents said that they expected a shift in priorities over the next 5 years), there are qualitative indicators identifying the areas for change and opportunity. The majority of responses fall into some clear categories. In addition to cost and data/IT, the 2 biggest categories of comments were around the tools or solutions to address specific challenges and the overall alignment of the supply chain in terms of skills, processes and collaboration.

This fits more closely with our original hypotheses. Globalisation has led to a complex network of suppliers, customers, infrastructure providers and legislators which all contribute to the process of satisfying a customer’s needs. Understanding this complexity requires senior executives to view the network holistically and consider how different elements connect. Complexity applies equally to services as well as to tangible products as some parts of the service may be also delivered through a network of partners and alliances. From our experience, this convolution brings a couple of overall challenges: understanding the complexity of this network and tactically operating as efficiently as possible within the constraints of that complexity.

Strategic Alignment

The strategic framework goes someway to helping understanding the complexities of the network. It helps to set the goals and targets for the organisation and the people within. It can, through contracts with partners, suppliers and customers and ethics and guidelines, provide clear rules of engagement. In the consumer industry, for example, ethical supply means that for example outsourced manufacture is linked inextricably with the brand and the brand must do everything it can to demonstrate a clean, traceable line of execution.

Complexity involves variables and components but also how the people in the system interpret these components and work within or around the system to achieve the goal. Human beings work on the basis of relationships and their own motivations which can deviate from what would be a logical and perfect solution for the business. Senior executives must ensure that the processes and systems in place facilitate transparent decision outcomes.

Tactical Action

We would expect a high weighting of responses around tools and solutions based on the supply chain functional focus of the survey. Tactically, the aim of the business is to optimise the utilisation of resources within the constraints and there is a mass of tools available on the market to help a business improve the supply chain.

For example, the selection and implementation of an improved planning process will often be driven by a need to deal with smaller batch sizes, more customisation or to reduce inventory on a stock keeping unit basis. A remodelling of the current logistics routing and warehousing can be due to a need to adapt to a different distribution strategy or customer demands, either the consumer or the retailer. Updating functionality of an existing process or IT system can also be essential to generate efficiency improvements of speeding up the response time in delivery.

But what if this improved functional response actually contradicts the overall performance? Focusing too heavily on the discrete functional solution or the tools can distract the organisation from the strategic goal. Again going back to manufacturing, products are often produced where the capital investment has been made and and the business may need to find ways of utilising the capacity with a cost trade off at a higher level if the flexibility of relocation might not be there. If a decision is made to off-shore or “re-shore” a process to improve response times, the new location will have to be selected on the basis of capability as well as proximity and possibly the ability to very quickly establish the same level of competence as the current set up. Stocks of product may need to be moved from one location to another and managed at a macro level instead of a local level. All this requires a higher level of outlook than a functional local project.

How Do you Connect Strategy and Execution?

From our experience of working with medium to large enterprises across the globe, the critical challenge is exactly about linking the direction of the business with operational reality. Three themes spring to mind here:

Data and knowledge management are variables to be considered to link the two together.

Having a big picture of the interdependencies of success in the process will give visibility of the weakest links and how deal with them.

Finally, to ensure that revenues and cost are managed effectively, the management of performance is likely to require even stronger people skills of influencing and negotiation as the root cause may lie within a partner organisation.

Data and Knowledge Management

Data is rising higher on the overall agenda. Big data could be considered a buzzword, but it has a relevance to how the world is changing and becoming more and more interconnected. Big data and analytics are being discussed across public and private sector boundaries. It is recognised that benefits will be derived from using data on customer and consumer behaviour to predict trends and preferences which in turn will determine how the supply chains will need to be configured for efficiency and effectiveness. Management information is in the spotlight for the legislators who need to ensure that national law is respected. Drawing on data sources which incorporate personal information can pose a risk to a business and therefore executives need to understand the implications of sourcing and utilising data.

A respected think tank has commented that business intelligence and analytics will remain high on the agenda this year as most businesses are relatively mid-way at best on the maturity scale of information usage. This echoes again the challenge we see for the supply chain which is quickly becoming dependent not only on the provision of management information to customers suppliers and business partners but the collation of data from these and other wider sources and putting it to timely use.

Knowledge management is a further form of information which is critical to influencing performance and getting the best out of the available people. Here there is a balance between providing the tools for people to share documentation and experience and actually getting people to connect. Breaking down thebarriers to communication and encouraging people to connect to share ideas through whichever tool or medium needs to be part of the executive agenda.

Big Picture

An outsourced manufacturer is not an optional extra in many cases but an integral part of the supply chain which needs to be fed with the right data and information to allow a timely response to the consumer or customer’s needs. In the past, outsourcing has been used to hive off operations and processes perceived as non-core. Often this involved off-shoring to a cheaper location. Two things have changed here in many industries: 1. the offshore locations have lost their cost competitive edge, 2. Processes are becoming more linked and integrated and customers are becoming more discerning about the brand and visibility of product sourcing and service delivery. This is not to say that all outsourcing is wrong but the way of thinking about the end to end process has changed. Performance outcomes need to be managed end to end, regardless of who “owns” the process or the resource, and outsourcing adds an extra complexity.

A further example of where the big picture is changing is resource usage. Consumer and user awareness is leading people to make purchasing decisions based on the full picture of how a product or service is impacting the environment. Pressure to impact the carbon footprint means that the overall resource consumed in the delivery of the product or service are similarly not just someone else’s problem. The concept behind the smart city is to collaborate holistically to save cost and use resources more optimally. It is not beyond imagination that cities and communities could equally look holistically at, say, how they supply food, how they integrate the local and regional farming communities to ensure the best local supply, inform consumers on the availability of local produce to stimulate seasonal demand (something which has arguably been lost) and encourage a wider spectrum of local products in the region. Together with recycling and waste management this supply will be an integral part of the community generating surplus for export into other communities.

Managing Performance across Boundaries

Supply chain alignment is demanding a different paradigm of roles, responsibilities and accountabilities and with that, how performance is managed. Ability to link the big strategic picture with the dynamics of the market and be fluid in the process depends on getting people, their behaviours and their motivations aligned, from the top of the business to the bottom. These are key levers in ensuring the top and bottom line objectives are achieved.

Information which is vital to the end to end result as perceived by the customer is not in one place. Achieving the best outcome for the customer can require the collation and interpretation of data from a range of different sources. Demand signals can come from historical data, pushed advertising and search engines trigger customers to purchase spontaneously and these sales are more difficult to predict. Knowing how to supply this need can require connections between multiple warehouses which are constantly being accessed. And that is before you actually start to move the goods.

The mere presence of more data and sophisticated analytics will not change this unless it is complemented with the right decision making capacity. What we see in many businesses, not restricted to the supply chain, is a range of ability in actually interpreting even simple data sets for use in decision making. All too often, data is looked at and not actually turned into meaningful management information. We see huge numbers of spreadsheets created by individuals for calculation alongside the ERP system for comfort purposes.

Setting Key Performance Indicators which span organisational boundaries represents a further complexity. KPIs may be defined in one way are actually measured differently in different locations and then interpreted differently according to local ideas and requirements. People will do what gets measured and will ensure that they protect their own interests in the process. When projects are selected, these can be influenced by personal goals and incentives. As such, a personal target in execution can distract from the overarching strategic goals. This means managers must ensure they are connecting business requirements and the way they motivate people. This is nothing new, but from what we see, the best organisations focus 80% on the people and decisions and 20% on the tools when selecting and prioritising projects ensuring that there is sufficient encouragement and motivation to collaborate. Pushing decision making down to the lowest possible point in the process where action can be taken timely is essential even if this means a loss of power.

What we have taken from these trends is that there was perceived to be clarity on what needed to happen to impact supply chain performance, either because respondents felt they were doing what was required or they could see what they needed to do. The overall picture however indicated that there was less clarity on how to tie everything together particularly into the strategy. This is the new supply chain challenge.

About the Author

Cathy Johnson
VP Consumer Industry
Hitachi Consulting

Cathy has spent 20 years working in operational consultancy and industry and has direct experience in delivering manufacturing excellence programmes (including supply chain projects) in the consumer industry.