The traditional supply chain that most executives have grown up with has been pieced together over centuries of conventional business practices. Someone finds a profit opportunity from extracting, harvesting, or farming something of value. They then hire a sales force. Now, it is a natural law that when sales forces go out and knock on doors, there's an equal and opposite reaction from a group called purchasing, whose mission in life, it seems, is to keep the sale from happening on the very best terms. We have created conflict situations where sellers are trying to sell and buyers are trying to cut the best deal, oftentimes getting all sorts of other persons involved in the process.

Paperwork, purchase orders, or contracts follow, and the order is cut. Then the product is packaged, warehoused, staged, and put on a vehicle—and there is paperwork associated with each of these activities. We send the product to somebody. They receive it, check it, and challenge whether or not it was all there and whether it was damaged. Then we put away the inventory and update our computer systems. Eventually a document gets transmitted, called an invoice. When the invoice reaches the buyer, they look at it and say that wasn't what they agreed to. We have a little argument over what should have been paid and there is perhaps a deduction from the invoice or some adjustment to the amount. Eventually funds get transferred.

This all-too-typical transaction process is replete with inefficiencies. It carriers major administrative, transactional, and financial costs. It entails repetitive moving, transport, and handling. It demands considerable time from sales people, buyers, and others in the organization. Perhaps most damning, it fails to add any real value to the ultimate consumer. This transaction between two companies in the supply chain should have had one overriding goal: To serve the ultimate consumer. But it didn't; instead, it created conflict.

Part of the problem with traditional supply chains is the excessive movement of material. We move it from the production plant, to somebody else's warehouse, to somebody else's production plant, to their warehouse, to somebody else's warehouse, and on and on. It is not unusual to find that the level of transportation is several multiples of the direct distance between the origin and the destination. A major computer manufacturer once confided to us that some of the components used in its computers had traveled 250,000 miles before they reached the ultimate consumer!

Further, there is excess inventory in the pipeline. A typical box of dry groceries on the shelf, for example, represents approximately 300 days of inventory back upstream to the farm. In the pharmaceutical industry, we have documented instances of a 455-day cycle time.

Consider the financial implications. We have difficulty moving cash quickly. It's not unusual for companies to have 30, 45, or even 60 days average outstanding receivables. All of this money is tied up waiting to move upstream, as the supply chain partners argue over the real value of the bill, how much should be paid, and if the quantities were right.

The combined investment in resources is often nearly a year's revenue. This is clearly a dysfunctional process—one ill suited to the 20th century (much less the 21st). Progressive companies recognize that they have no option but to adopt the new supply chain paradigm for the next century.

By extending the enterprise, winning supply chains bring down these archaic barriers to productivity that have built up over the years. As shown in Exhibit 1, they embody certain key characteristics. For one, there is overlap—not a gap—between the various participants. Partners share a long-term commitment, an interwoven relationship not unlike a good marriage. Now this does not preclude a prenuptial agreement. . .just in case. But it does say that I have chosen a partner that supersedes the individual transaction, that supersedes the bidding process, that supersedes the contract.

Until this kind of partnership is in place, the true benefits of supply chain integration will never materialize. Without trust, nothing else can happen. Therefore, it's absolutely essential that the choosing and building of those partnerships happen at the highest levels of the organization.

Successful supply chains also have an information conduit that connects all of the participants. Most companies have the requisite technology in place to extend the enterprise; the problem is they are not using it properly. Today, if you go all the way out to the consumer, there is typically a point-of-purchase transaction. We probably know a great deal about when that transaction took place, the terms of purchase, who was involved, and more. That information is available at the moment the transaction takes place at the consumer level. If we are smart, we will transmit that intelligence all the way upstream so that everyone in the supply chain has visibility over—and can benefit from—that transaction.

Although absolutely transparent to the consumer, the information can be made available immediately to all of the supply chain partners so they can act in parallel, instead of sequentially waiting for their customers' transactions to take place. This allows us to squeeze out inventory buffers and accelerate the cash flow process. When we have a transaction that used up one unit of a particular kind of packaging, for example, then the packaging supplier, the mill, the tree cutters upstream can act on that same information in parallel and do exactly what is required to replenish the pipeline. This eliminates all of the artificial buffer stock all the way upstream and downstream.

The information conduit has two other far-reaching dimensions. Once the transactional technology is in place, the partners in the extended enterprise need to do some tactical planning (a more accurate way of referring to forecasting). Even after removing the artificial buffer inventories, uncertainties will remain. Why? Because we cannot foresee all possible production constraints. We don't know whether it is going to rain tomorrow. We don't know whether it is going to be hot or cold next week. We can't forecast consumer behavior with absolute predictability.

We need to better manage that uncertainty by managing to the same forecast. If the supply chain participants upstream—the retailer, wholesaler, packaging supplier, manufacturer—would agree to a forecast range, we then could manage to that range. We would know that our upside is 120,000 cases, for example, and our downside is 80,000. We could then produce to 80,000, while having enough material to quickly rev up to 120,000. The key is that there now is only one buffer inventory of any given product, not multiple ones.

In short, the need for tactical planning (forecasting, if you will) always remains. But this activity does not solely come out of the sales department. It doesn't come out of marketing or finance. It doesn't come out of manufacturing. And it doesn't come out of just one organization. It is integrated across all the enterprises as one. True tactical planning recognizes the uncertainty inherent in a range, while allowing everyone to operate against the same parameters.

The information conduit ultimately should yield strategic data. In this regard, the last party in the supply chain—typically the retailer—has one thing that nobody else has: Contact with the ultimate decision maker. If they are savvy, these retailers understand the dynamics of who the customers really are, what they really want, why they really buy, and what they would like to see tomorrow. If the retailer shared this information all the way upstream, we probably would not have produced 7,000 grocery products in the last two years of which 300 still exist. We certainly would not have produced new models of video recorders and playback machines with 90 percent of the features that people never use. The information conduit has to be managed to extract these kinds of strategic data from the last party in the chain.

Another critical component of a winning supply chain is the goods conduit. The following mindset underpins a successful goods conduit: I am now going to move things as smoothly as I possibly can from raw-material source to the ultimate consumer. I am not going to stop anyplace I don't have to. I am not going to transport anything to anyplace I don't have to. I am going to try to move goods in optimum unit lots so I have an efficient transportation process. I certainly am not going to carry any more inventory than I have to because I've got synchronized information and synchronized manufacturing and forecasting processes.

What is the advantage of implementing these principles? It could mean running the goods conduit with as much as 90 percent less inventory. It means operating at half the cost because I am going to take out half the warehousing. Half of the transportation, the ton miles, will go away, too. The future does not lie in beating up carriers for the lowest price, but rather in reducing the unnecessary ton miles that are being transported around.

Companies that execute this philosophy enjoy some powerful advantages. Not only do they skip whole layers in the process, but they also get closer to the consumer. Importantly, they cannot accomplish this if they haven't first built a relationship of trust and put an information conduit in place.

Winning supply chains also will include a streamlined funds conduit. When the consumer makes a purchase and it goes over a scanner, that will trigger the disbursement of funds to the various players upstream—the carriers, the suppliers, the raw-material manufacturers. Each participant has a pre-arranged share of the customer's purchase. ("Pay-on-scan" is here today; the rest will come soon.)

Streamlining the funds conduit brings important implications for the supply chain. If I only get paid when the consumer buys the product, suddenly there is no value in selling something to the next player in the supply chain. There's no point in putting it into a truck, shoving it out in the yard, doing the paperwork that says we shipped it, and then counting it as revenue. In reality, it only counts when a consumer actually buys that product.

In all likelihood, in the 21st century funds will move instantaneously when the consumer buys. This will serve to focus everybody on the one critical issue: How can we do a better job of meeting the needs of the ultimate consumer than the competitive supply chain does? We no longer are going to have competition between companies. We are going to have competition between supply chains. We are going to have a group of partners working together to serve that consumer better. And this group will be trying to outdo the other groups.

When you talk about partnerships, the sports analogy is compelling. You go out and you recruit the best people upstream and downstream for your supply chain team. You coach them well and give them the right tools to take them through the season. One team will win the championship.

In selecting the partners for the team, remember that some companies will get stronger, and others weaker. It's obvious which ones you want to align yourself with. If I am the best or if I want to be the best, I want to partner with the best—not the ones always chasing the leader.

Industries worldwide are restructuring. Every day we read about companies in every industry that are merging or taking out capacity. This has important implications for supply chain management. If you think in terms of having 20 potential suppliers for a particular product, then the partner selection process becomes relatively easy. If the one you choose does not work out, there are 19 others in line. But if you think in terms of three or four mega-suppliers emerging for that product in the 21st century—which is where we're heading—then you'd better have a relationship with one of them. In other words, act today to be ready for tomorrow.

Throughout this whole partner-selection process, it's important to be analytical. Carefully consider such questions as: What role does my enterprise want to play in the extended supply chain? If we are the best in the world at manufacturing, then maybe that is what we ought to do. Are we the best in distribution? Then that should be our focus. Are we the best in the world at creating new product ideas? Are we the best at listening to and understanding consumers, and then translating their needs upstream?

There is no company that we are aware of that is the best in every category. They may be world-class in one and possibly even two areas. Therefore, we have to partner if we are going to complete the needs of the supply chain. We need to position our role as well as that of our partners. Then we begin the process of knitting together the right set of partnerships to make this extended enterprise work.

Understanding the power of partnerships in an extended supply chain is the easy part. Acting upon this imperative is another matter entirely.

What will it really take to make companies embrace the extended supply chain enterprise so necessary to future success? Most people, most organizations, most nations do not change until there is a crisis, a trigger point. Pearl Harbor was a trigger point that catapulted a nation into war. A trigger point in a company may be the entry of an aggressive new competitor. You think you have a market all to yourself and here comes a powerful new contender to take away a big chunk. The U.S. automakers discovered this in the 1980s with the Japanese competitors.

A merger or an acquisition that suddenly creates a new market environment could be a trigger point. Or maybe a key customer delivers an ultimatum that you will start doing business his way or not at all. A quality failure or major recall can be a trigger point, too.

Trigger points can come with a change in leadership—a CEO, for example, who understands the new supply chain paradigm. If you're lucky enough to have such a leader, be the first person to get your hand up, knock on his or her door, and volunteer to help. Throw caution to the wind and jump with both feet on the bandwagon. For most, this will be a once-in-a-career opportunity.

Trigger points signal that the future will never be the same as the past. They tell you that it's time to take that brave step forward into the new world. And that only happens when people or organizations perceive a threat in maintaining the status quo in the face of external forces. Only then will they accept the risk of getting out of the box and moving forward. Good leaders communicate the need for change. But unless they back up the talk with action, that change will not happen. People in their hearts have to believe that the organization is at a trigger point and cannot remain on the same course.

There's an important point regarding change management to be made here. The response to trigger points must be timely. Specifically, companies have about two years to conceive, design, and implement a project such as supply chain redesign. If the process takes more than two years, it becomes jeopardized. The main reason is that people and intensity levels change over time and things start to disconnect. Presented with a trigger opportunity, organizations need to recognize immediately that they are working against that two-year clock.

Most companies adopt a traditional approach to trigger points. They do the traditional things. . .put together a select task force, benchmark the best in class, set goals, and vow to cut inefficiency and waste.

They also set specific objectives such as cutting the cost of a transaction from $110 to $90, or improving from four to six inventory turns. They work to lower operating costs by 10 percent or maybe 20 percent. They promise to reduce customer dissatisfaction by improving on-time deliveries from 92 to 96 percent.

Though admirable, these actions fall under the old "paradigm." They haven't achieved any real breakthrough. The real key is to eliminate transactions, put an end to inventory, cut costs by 50 percent, and provide perfect customer service. These are the kinds of dramatic measures that produce the breakthrough results.

Breakthrough thinking focuses intensely on the consumer. It gets all the way downstream to understand who the consumers are and what they want, who they want to do business with, and what is and is not important to them. Acting on this intelligence, a market leader will then build a new streamlined supply chain all the way back upstream to Mother Earth to deliver on that value proposition and give those consumers exactly what they want.

That means you don't give them 50 features on their VCR they don't want. You don't give them fancy packaging when a plain brown wrapper will do. You don't give them a branded product and spend 10 million dollars on advertising and raise my price. Instead, you give them the basic product that meets the functional need at a very competitive price, streamlining and cutting out all of the unnecessary steps and waste in that total supply chain process.

Here is what the 21st century paradigm—the extended enterprise—is going to look like. The objective is not cost reduction, or inventory reduction, or cycle-time reduction alone. The ultimate goal is market share. The goal in a consolidating market worldwide is to take a bigger and bigger piece of the pie. Because if we've got a 10-percent market share today and we've got a consolidating industry, we are going to need 30 percent just to be the Number 3 player. If we want to dominate the market we've got to think about 40- to 50-percent market share worldwide. In all probability, this will mean managing not a single supply chain, but multiple supply chains. There could be one supply chain for North America, one for Europe, and one for Asia. There could be one for consumer direct, another for dealers, and yet another for mass merchants.

Market share brings with it a host of competitive advantages. It reduces warehousing and transportation costs, cuts inventory levels, eliminates waste, lowers transaction costs, and takes out unnecessary sales and purchasing functions. Market share allows you to increase the value to the ultimate consumer in order to get a bigger share of the decisions those consumers make to buy one product vs. another. If an organization looks at supply chain redesign microscopically as cost reduction, it will never think boldly about what it should be doing to capture market share.

There are a number of well-known examples of companies that have thought boldly about their supply chains. Motorola, for example, has effectively built relationships with key suppliers. They have reduced the number from 4,000 to 1,000—of which 300 are really key. These key suppliers are strong enough to provide an edge in terms of acquiring, using, and commercializing technologies. At the same time, Motorola locked up the suppliers' capacity to some degree, keeping it away from its direct competitors. The company's overriding goal is to reduce the annual costs of materials 5 to 7 percent a year every year. Price was not a major factor in Motorola's partnering decision. Instead, it was the quality of the supplier and the quality of the relationship that mattered most; the cost component followed.

The relationship between Procter & Gamble and Wal-Mart has been well publicized. But P&G also built a relationship with K-mart, Wal-Mart's arch rival, that differs significantly from the Wal-Mart program. Essentially, P&G managers catered to K-mart's specific needs, which were different from Wal-Mart's. They helped them with marketing and training, two P&G specialties. They helped them solve environmental problems. They helped them with safety-related issues. They even helped K-mart raise capital. As a result, P&G's sales to K-mart have doubled in five years. K-mart, meanwhile, now enjoys lower inventories and supply chain costs.

Chrysler provides another instructive example. On the ropes and near bankruptcy, the automaker intensely focused on its core competencies while aggressively outsourcing and partnering with suppliers. The impressive end result was attractive new models, reduced design time, and lower production costs. Chrysler has become the most profitable automobile company, certainly in North America. The ultimate market test is that more people are driving Chrysler products today than five or six years ago. Though the company was certainly driven to reduce costs and get new models out faster, its overriding objective was for higher market share. Put another way, Chrysler changed the paradigm.

Supply chain professionals and their organizations today face a pivotal challenge. When they have a trigger point that can lead to the new extended enterprise paradigm, they can follow one of three courses of action, as illustrated in Exhibit 2.

1. They can deny or ignore it, and begin the death watch for their company. And make no mistake, business as usual is long-term death.
2. They can recognize that something needs to be done and go out and identify the best practices and try to implement them. But in the end, all they've achieved is incremental movement up the curve. At best, this is a survival strategy; at worst, it leads to failure.
3. They can completely redefine and reposition for sustained competitive advantage. They comprehensively identify what the ultimate consumer needs and wants. Then they streamline the supply chain all the way to the raw-material source—and do that better than anybody else. These leaders clearly identify what position they are going to play in the extended enterprise and who their partners will be. They drive relentlessly for market share. And at the end of the day, they emerge as the winners.

   

   This extended enterprise brings massive benefits. However, only the CEO can sponsor and drive the change needed to realize those benefits. The time to act is now. Is your CEO taking action? If so, what can you do to encourage or help?

And if your CEO is not taking action to extend the enterprise, should you be looking elsewhere for a leader who is?