by David Jacoby
Forward branding
Forward-looking supply chain strategies seek to brand all the way to the end-customer, even if they do not control the distribution channel. Forward branding12 can strengthen the brand image of both the supplier and the original equipment manufacturer. For example, Intel has run a campaign called “Intel Inside” for years. Consumers have come to associate Intel chips with a superior chip compared with chips from AMD or no-name suppliers. Google and other search engines use the term “Powered by Google” in their customers’ websites. Bose sound systems are branded Bose in the vehicles in which they are sold, and while their owners may not be able to remember what brand of tyres is on the car or what company made the seats, they will remember that their stereo is a Bose. Forward branding creates the impression of a more innovative company in end-users’ minds, which reinforces the value of following an innovation supply chain strategy. Having a strong brand image also allows these companies more flexibility to sell through parallel channels directly to the end-customer.
Designing for the supply chain
Design used to be done independently of logistics and the supply chain, and only the largest companies had packaging departments to figure out the optimal packaging specifications, stacking and nesting capabilities and vehicle load plans so as to be able to ship the most product at the least cost. However, in today’s world of energy consciousness and environmental concerns, green concepts and shipping prices have necessitated forward planning. In addition, short product life-cycles make it necessary to have a standardised and repeatable design for the supply chain process.
The forward planning should consider not just physical logistics, however. An effective design-for-supply chain programme should consider the total supply chain costs, including taxes and drawbacks.
HP has had a very successful design-for-supply chain programme for its all-in-one printer. It tightened linkages between its packaging, R&D and supply chain groups. Designing for the supply chain resulted in the cube-shaped printer that is so common today. The size of the outer box is smaller nowadays, since many of the small peripherals are tucked inside the printer itself. Key parts are standardised, such as the power cord. Configuration is standardised so that the only thing that changes is the language; all other aspects are identical.13
Zara: innovation through supply chain management
A Spanish clothing retailer, Zara, can bring new products to market in three or four weeks by holding materials in undyed form and regularly feeding information about market demand back to its suppliers. This allows it to react quickly to changing demand patterns. When it figures out which items are the most popular, it applies the right colour and pattern to the garment and ships them to stores. Retailers that source entirely from faraway low-cost countries have to issue firm orders long in advance due to the long shipping lead times, so Zara sources from locations closer to its stores.13
10 Organising, training and developing staff
Organisational structure should support the corporate strategy, at least according to the 1962 work of Alfred DuPont Chandler,1 a Harvard professor of business history whose work chronicled the emergence of large industrial conglomerates in the UK, the United States and Germany. Until recently, ambiguity concerning the definition and scope of supply chain management (SCM) created a challenge for business leaders. To the extent that it is unclear whether functions such as procurement are within SCM or separate from it, it is difficult to decide whether they should be stand-alone departments or part of an integrated SCM group.
Designing supply chain organisation
During the evolution from rationalisation through synchronisation, customisation and innovation, supply chain organisation must adapt to the requirements of each stage of evolution: first, functional; second, order fulfilment; third, the supply chain; and fourth, integration. Shoshanah Cohen and Joseph Roussel outlined a similar progression in their book Strategic Supply Chain Management.2 The principal difference between that framework and this one is that they describe the development of supply chain organisations over time, whereas this is a life-cycle model that describes the evolution of the supply chain organisation within a company as it progresses through the four stages of supply chain strategy.
Stage 1: the functional organisation, focused on rationalisation
The functional organisation disperses supply chain activities throughout the organisation (see Figure 10.1 overleaf). Transportation, customer service, production control, procurement and product development are all in individual functional silos. Operations/procurement and order fulfilment/logistics each carry out rationalisation initiatives relatively independently of one another. The fragmented organisation makes it almost impossible to execute an end-to-end strategy.
Figure 10.1 The functional supply chain organisation
Source: Author
Companies that pursue a rationalisation strategy concentrate their resources in activities that generate cost reductions such as auctions, cost analysis, gain-sharing, global sourcing, outsourcing, standardisation, supplier consolidation, total cost of ownership (TCO), total quality management (TQM), value engineering and vendor-managed inventory (VMI). They devote more than twice as many staff to these activities as those that pursue other supply chain strategies, according to Boston Strategies International’s 2008 survey of 58 companies across Asia, Europe, the Middle East/North Africa and the Americas.3
Stage 2: order fulfilment organisation, focused on synchronisation
The formation of a group responsible for order fulfilment is the major change that leads to stage 2 (see Figure 10.2). An order fulfilment department demonstrates a process focus rather than a functional focus. Production control, inventory management and customer service move from the production area into order fulfilment to allow this function to work more effectively with distribution and transportation. Inventory control may be renamed demand planning in recognition of that process.
Figure 10.2 The order fulfilment supply chain organisation
Source: Author
Companies that synchronise devote more headcount to channel design, collaborative inventory management, cross-docking, demand management, pull, sales and operations planning (S&OP) and Six Sigma than companies following other supply chain strategies.4 Most notably, they have more than three times as many resources dedicated to S&OP than the other companies.
Organisation at the New York City Housing Authority5
Recognising the benefit of centralised SCM, the New York City Housing Authority (NYCHA) integrated its former materials management department into a more modern supply chain operations organisation that draws on many of the leading practices in the private sector. Its organisation marries procurement, warehousing and logistics under one umbrella (see Figure 10.3 overleaf). This allows it to obtain synergies between those functions, and also to optimise decisions that cross functional boundaries, such as whether to centralise or decentralise warehousing, which requires a total supply chain cost assessment.
Figure 10.3 New York City Housing Authority’s operations, 2006
Note: Some titles have been modified to resemble their corporate equivalents.
Source: Author’s adaptation of organisation charts from NYCHA
Its centralised supply chain structure is the result of many years of consolidation. In 1985 the organisation had 22 local warehouses that were distributed throughout the boroughs (Bronx, Brooklyn, Manhattan, Queens and Staten Island). It consolidated those to three by 2000 in order to streamline logistics. Since suppliers offered more attractive pricing if they could also consolidate deliveries, NYCHA created a central warehouse in 1998.
The resulting high level of co-ordination has allowed the NYCHA to implement many leading practices from private-sector companies. This includes ABC inventory management, direct shipment, cross-docking and automated procurement transactions; 75% of its material expenditures are on blanket orders, reducing the processing time and cost per order dramatically.
> As a result, the organisation has accurate and efficient purchasing operations, very good customer service and the lowest warehouse labour intensity out of nine public housing authorities in the United States. Customer confidence in the supply chain operations is up, according to the results of customer service surveys and unsolicited feedback from stakeholders. “Supply chain operations are getting more responsive,” according to the head of technical services, which is responsible for maintenance and engineering.
The NYCHA still has progress to make towards integrated supply chain operations. For example, its purchasing group sometimes opts for low price when the maintenance engineering section believes that more durable and technologically advanced products would incur less maintenance and have a lower life-cycle cost. “You can throw out poor-quality tools if they don’t work, but you get hurt working with bad tools, which costs money in medical claims,” says the head of technical services. Also, capital equipment purchasing is handled in the asset management group and is not co-ordinated with the purchases for ongoing operations, which sacrifices purchasing leverage. Finally, field inventory information is not accessible to the supply chain operations inventory management group.
Gary Smith, director of supply chain operations, knows the organisation’s strengths and weaknesses and is enthusiastic about its prospects. In addition to becoming more efficient and lean, the NYCHA has programmes in place that will help it to become more customer-centric and innovative:
We’re making progress here. The new category management structure, whereby buyers and planners work together, and end-to-end processes like storeroom pilot [which allows the local stocking locations to sell back excess inventory] and automated supplier scorecarding [whereby inventory information systems will be programmed to generate periodic supplier performance reports] will help us be even more responsive to our customers.
Stage 3: the supply chain organisation, focused on customisation
In the transition to stage 3, organisations integrate supply chain processes across business units through information systems and matrix management structures and incentives in order to focus on more top-line activities geared towards revenue growth and profitability, such as yield pricing, revenue management and value analysis.
Elevation of the supply chain leadership from the post of director to that of vice-president, executive vice-president or C-level leader (whose title starts with “chief” at, for example, the highest level in the organisation; these executives sit above directors, whose reports are managers) is typical of the transition. Over time, various chief operations positions have waxed and waned in popularity, including chief operations officer (COO), chief procurement officer (CPO), chief logistics officer (CLO) and chief supply chain officer (CSCO). For example, Ann Taylor, an American women’s clothing retailer, named an executive vice-president, chief supply chain officer in September 2008. The addition of a vice-president or c-level position that has jurisdiction over all supply chain issues is the passageway from a stage 2 to a stage 3 organisation (see Figure 10.4).
Figure 10.4 The C-level supply chain organisation
Source: Author
Creation of the c-level supply chain post facilitates the sharing of information among all the relevant departments. Colin Smith, director of marketing for WebEx, a US-based web conference facility, says:
You can’t just link up databases and expect the business relationship to thrive. You have to link up the databases and then allow people in your business ecosystem to collaborate. That’s the way the next generation is going to grow.
WebEx feeds back information from its customer care group to its product development group. The customer care group conducts business reviews, some via WebEx itself and others on the phone, with the main user at the customer company. Based on questions about how the respondents are using the product, the company determines if they are getting the value they should be getting, and if they are they using new features and products that have been available since the last customer service interaction.
Stage 4: integrated organisation, focused on innovation
In stage 4, cross-functional teams integrate supply chain processes across functional areas, particularly processes that offer synergy in the conception, design, testing and commercialisation of new products, and report to senior executives. Standardisation, value engineering and early supplier involvement are all used to simplify and expedite the new product process (see Figure 10.5).
Figure 10.5 The integrated supply chain organisation
Source: Author
Marketing shares market research with R&D so that the organisation can deliver new products that are sought by the market rather than be pushed from the company outward. Marketing plans jointly with product development, procurement and manufacturing on the rapid ramp-up of new products. Distribution shares market insights with sales to enhance customer knowledge and feed customer relationship management (CRM) systems. Sales shares inventory levels with procurement and production through S&OP to jointly agree on pricing strategies such as demand management and revenue management. Finance works with production and distribution to determine customer profitability. IT works with multiple areas of the company to provide applications that support collaboration, such as CAD/CAM, supplier relationship management (SRM), demand planning, advanced planning systems (APS), warehouse and transportation management systems (WMS and TMS), CRM, pricing, e-commerce and product lifestyle management (PLM).
Innovation-focused companies devote twice as many resources to new product introduction as other companies and spend twice as much time as others in cross-functional teams. The co-ordination between the supply chain department and other departments ensures the strategic connections that ensure success.
Despite the multitude of interfaces, innovation does not need extensive resources, as illustrated by these two examples from “pure service” companies. Wikipedia, a continually morphing encyclopedia that has practically become the definition of innovation, employs only 15 people. Plaxo, a social networking service that facilitates one-to-one interactions among 20m registered users, employs only 50 people.
Developing a world-class skill base
As functional silos have disappeared, supply chain managers have needed to work more in cross-functional teams, rotate between departments to become cross-trained and learn new technical skills.
Today, average supply chain managers spend more time (30–40%) working with external partners, and usually deal more with strategic relationships rather than transactional ones. They need more decision analysis and financial skills, since there are more strategic and less transactional decisions to be made. They also operate on a decision time horizon of between three and five years, compared with around one year in 2001 (see Table 10.1).
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Table 10.1 The change in CPOs’ backgrounds
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CPO average no. years of experience in functional areas
Function
2003
1987
Purchasing/supply
12.7
17.0
Operations/production
4.3
4.2
Finance
2.5
0.8
Management information systems
1.3
0.5
Other
0.9
0.7
Engineering
0.8
1.3
Marketing
0.8
1.6
Accounting
0.7
0.6
Transportation/distribution/logistics
0.5
1.0
Total (years of experience per respondent)
24.7
27.8
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Source: Rudzki, Robert, Smock, D.A., Katzorke, M. and Stewart Jr, S., Straight to the Bottom Line, J. Ross Publishing, 2006
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To be successful, the new role requi
res individuals with a different profile than in the past. As a result of cross-functional teaming, interdepartmental rotation and the need for new technical skills, professionals rotate through functional areas, spending less time in any one supply chain area. For example, the average number of years spent in the purchasing function decreased from 17 to 12 years between 1987 and 2003 (see Table 10.2).
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Table 10.2 Illustrative profile of a category manager in a large industrial company
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* * *
Source: Boston Strategies International
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Success factors6
The success factors for future supply chain leaders are IT skills, comfort with and aptitude for doing international business, interpersonal and cross-cultural skills, financial skills and functional experience.
They need to be familiar with and able to make decisions about new hardware and software applications, for example the selection of communications equipment and the encryption of communication with virtual private network (VPN) security. Mobile solutions and technologies such as voice over internet protocol (VOIP) and click-to-talk that are designed to increase the volume and the richness of customer contact will become an increasing part of supply chain management.
International capabilities are a career advantage. Formulating the right manufacturing and sourcing strategy requires context, education, information and wisdom from experience, and sometimes hard-learned failure. Some companies are bringing manufacturing back onshore or trying to decide what combination of products and services to offer to win today’s new and more competitive game. Other important success factors are language skills, and a sense of humour and flexibility to accept and appreciate cultural differences along the way.