Managing The Basic Supply Chain Functions
Supply Chain Management Review introduces a new series called “Back to Basics.” It’s a look into how excellence in the core logistics and supply chain activities leads to overall business success. The articles in this seven-part series are written by educators from the University of Tennessee. Pictured: Dr. J. Paul Dittmann, Director of Corporate Partnerships, University of Tennessee.
October 1, 2010
What are the “basics” for supply chain managers today? Ten years ago, the supply chain leader in most companies held a title such as vice president of logistics. It was a largely functional role that relied on technical proficiency in discrete areas: knowledge of shipping routes, familiarity with warehousing equipment and DC locations, and a solid grasp of freight rates and fuel costs. He or she reported to the chief operating officer or chief financial officer, had few prospects of advancing further, and had no exposure to the executive committee.
The way companies need to think of the modern supply chain executive has changed dramatically. The leaders today recognize that the need goes well beyond functional expertise.
Supply chain executives still need to be experts at managing supply chain functions such as transportation, warehousing, inventory management, and reverse logistics.
That process today extends end-to end and even outside the firm, including the relationships with suppliers and customers on a global basis. Leading firms now see the supply chain functional leader as the executive to coordinate the end-to end supply chain process - even though this individual does not control it all. Because of that added dimension of cross-functional, cross-company coordination, senior supply chain executives must possess a number of unique characteristics and skill sets that go beyond the traditional basics.
The supply chain isn’t just trucks, pallets, and warehouses. But being trapped in a traditional view is one of the primary reasons that few companies are taking advantage of the shareholder value opportunity presented by supply chain excellence. Some may be skeptical that investing in this new, expansive vision of a supply chain is worth it. But there is an undeniable link between supply chain excellence and shareholder value.
The Supply Chain Drives Shareholder Value
In an increasing, but still small number of firms, the CEO and the board of directors understand the value of the supply chain to their firm. But many other top executives, battered by an immense range of priorities competing for their attention, do not see this link clearly. Yet the link is there. In most firms, the supply chain controls most of the inventory; manages 60-70 percent of the cost; helps generate revenue by providing outstanding product availability; and manages many of the firm’s physical assets.
The “Great Recession of 2008-2010” will increase the focus on a supply chain’s impact on the financial health of the firm. In an era of tighter credit, supply chain levers can be used to free cash reserves from balance sheets rather than depend on restricted credit markets. The opportunity to increase shareholder value in the future, even more than in the past, will come through supply chain excellence as it manifests itself on both the income statement and balance sheet.
Supply Chain as Part of Executive Team
A growing but still small number of firms make sure that their supply chain chiefs don’t just have access to the executive team—they’re a part of it. That role requires them to bring value in terms of educating the CEO and the board, giving them the vocabulary to talk about the supply chain and its critical role in creating economic profit, and finding and driving opportunities to increase economic profit. The supply chain job in those progressive firms is no longer mostly a functional one. Instead, it is a key strategic role that can influence 60 to 70 percent of a company’s total costs, all of its inventory, and most aspects of customer service.
The supply chain leader in these progressive firms has global responsibility for coordinating processes across functional silos that include sales, R&D, finance, and manufacturing as well as functional responsibility for activities such as procurement, logistics, production planning, and customer service. The leader pays as much attention to the demand side of the supply chain as to production and materials planning. He or she knows what it takes to reliably deliver products to customers and to listen to what customers have to say. In some firms, the role of the senior supply chain executive expands so much that the individual essentially becomes the COO, especially in those companies where the COO does not traditionally have responsibility for sales, marketing, or merchandising.
Does the CEO Get It?
In this transformed world, even CEOs who previously had little contact with the supply chain leader, must now demonstrate supply chain expertise. Indeed, supply chain chiefs have even become viable candidates for CEO succession. Wal-Mart’s past CEO Lee Scott, who previously headed transportation, distribution and then logistics for the retailer, is just one example. Mike Duke, the successor to Lee Scott, also has a big dose of supply chain experience in his background. It’s up to the company’s supply chain professionals to find ways to educate the CEO. For example, one supply chain leader told us that after much badgering, he talked his boss, the EVP of Operations, into scheduling a monthly supply chain update with the CEO. Now, after eight months of those reviews, he says that the CEO clearly understands supply chain issues at a much deeper level. In fact, the CEO now mentions supply chain advances in most of his public comments.
The majority of firms, however, fall far short of this ideal. Many don’t have a complete end-to-end process view of their supply chain—and these firms face a big problem if their competitors get it before they do. But, “getting it” isn’t enough. They also have to win the battle for supply chain talent that possesses a skill set beyond the traditional basics.
The Basics Have Expanded
The recently released book The New Supply Chain Agenda, written by Reuben Slone, Paul Dittmann, and Tom Mentzer, identifies five pillars of excellence that form the foundation of the new supply chain agenda. These pillars are not new on the one hand. But they are undergoing a rebirth and renewal as they resonate increasingly in the executive suite and in the boardrooms as critical drivers of supply chain excellence.
- Talent is the first of the five pillars driving supply chain excellence. If you don’t have the right people in place, you can’t build an appropriate strategy - and you certainly can’t execute it. Finding talent for supply chain positions has unique challenges due in large part to the cross-functional and cross-company pressures supply chain executives face today.
- Technology is always critical, but the real key is making sure you choose the right supply chain technology and successfully implement it. Improperly understood or implemented technology can cause severe damage rather than improvement. You must be careful in how you select and apply the latest supply chain technologies, especially given the extremely complex nature of today’s global supply chains.
- Internal collaboration means that each function in your firm plays a critical role in building a successful supply chain. Effective internal collaboration will help you develop a clear vision for how all the functions can work together to achieve supply chain excellence. The New Supply Chain Agenda includes a self-assessment worksheet you can complete to honestly evaluate your process for aligning the demand and supply sides of the firm.
- External collaboration focuses on how your company can achieve breakthrough results by collaborating externally with both your suppliers and your customers. Best practices for collaboration exist and are being applied by more and more firms.
- Managing supply chain change is the last but equally critical pillar of a supply chain excellence strategy. If you don’t execute change successfully, everything else is for naught. You need to learn how to increase your chances of success on the path to supply chain excellence. Because of their cross-functional, cross-company nature, supply chain projects are more difficult to implement than those in other functional areas.
Future articles in this series will incorporate each of these five pillars of excellence in discussing the traditional basics of supply chain excellence. The basics we will focus on cover these core competencies:
In examining the basics, our experts from the University of Tennessee will explain how mastery in these areas leads to success on the bigger supply chain stage.
We’re entering a new frontier where supply chain is a core element in the boardroom. Your degree of success in this environment depends in no small measure on how well you execute the “basics.”
For more articles on Supply Chain Management, check-out our Critical Topics page
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