Balanced supply chain management: Setting the stage

From the May-Jun 2024 edition of Supply Chain Management Review.

May-Jun 2024

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This is the first of four articles about balanced supply chain management, its traits, and the need for such an approach. The concept draws on the collective experiences of the three authors with supply chain management—a base of more than 120 combined years. Over this period, the authors have seen the ebb and flow of many developments—some, such as computer integrated manufacturing—were initially seen as revolutionary. However, it is our view that the reality generated by many of these developments has failed to meet the hype. These experiences have given the authors an awareness of the need for a more balanced perspective. It is this perspective that underlies this series.

This perspective has gradually evolved over time. Its development can be better understood by reviewing the set of articles written by the authors about the theory and practice of effective supply chain management and published in this journal—Supply Chain Management Review.

The “revolution” in supply chain management: The latest version

If you were to read the recent articles pertaining to supply chains and supply chain management, you could be forgiven for thinking that supply chains and supply chain management are about to change radically now. The reason—new tools now emerging and their potential significant positive impact on supply chains. These are tools like artificial intelligence, machine learning, big data, and analytics. These tools are more than simply promises. There is evidence of their supply chain effectiveness. Walmart, for example, is now using AI to better negotiate costs and purchase terms with certain vendors (specifically small- to medium-sized suppliers), thus reducing both costs and negotiating time. Other areas affected by these developments include final mile delivery, demand forecasting and fleet tracking. This passion has gripped universities and business schools with an increasing emphasis on exposing students to these new developments, in some cases, we propose to the exclusion of other critical areas.

These recent developments depict a trend in supply chain management—for the theory and practice of supply chain management to be like a pendulum, swinging back and forth in response to the latest developments or crises. In fact, we, the authors, are also partially guilty of following this trend. In 2017, one of the authors (Melnyk, S.A., and Stanton, D.J. “The customer-centric supply chain), wrote a paper in this journal on the customer-centric supply chain.

Yet, experience and history have taught us the following.

• Not all developments are equally important. For every success story, there seem to be far more stories of failure. These failures dull the initial shine of these developments.
• The period of these developments is varied. Some like Lean have experienced a long span of impact (introduced first in 1977), while others such as computer integrated manufacturing (observed at the end of the 1980s and early 1990s) have come and gone.
• Management practice tends to lag behind these developments. It takes time for management to learn and understand the strengths and limitations of these developments; it takes time to learn where, when, and how to use these developments. How we use these developments initially may not represent the best or ultimate usage of these developments.
• These developments do not operate in a vacuum—they are often built on or require the presence of other developments and practices. Often it is the failure of firms to recognize or provide these overlooked requirements that significantly contribute to the failure of these overlooked requirements. For example, you cannot hope to succeed with MRP with poor database accuracy and integrity.

Consequently, in reviewing these developments specifically and the theory and practice of supply chain management generally, we argue that what is needed is not a widely swinging approach to supply chain management but, rather a more measured, multi-faceted approach to our field.

The result and the focus on this series of articles is the need for a more structured, yet flexible approach to supply chain management—an approach that we refer to as balanced supply chain management.

Balanced supply chain management (BSCM) is an approach that recognizes that there are no magic bullets; no development is enough by itself. Furthermore, BSCM recognizes that inherent to supply chain management are numerous tensions. Success in supply chain management is finding the most appropriate point of balance when addressing these tensions. This point of balance is not necessarily in the middle or midpoint. Rather, it is at that point that makes sense and is appropriate to the supply chain, the firms, and its strategic objectives.

Some of the most common tensions that must be addressed include the following.

• Customer-centric ↔ supplier oriented.
• Investing in technology ↔ investing in culture.
• Strategic ↔ operational.
• Embracing complexity ↔ encouraging simplicity.
• Focusing primarily on cost ↔ focusing on the other supply chain outcomes (e.g., responsiveness, sustainability, security, resilience, innovation).
• Slow thinking ↔ fast decision-making.
• Long-term thinking ↔ Near-term thinking.
• Being early ↔ appreciating the value of waiting.
• Focusing on the interfaces ↔ Focusing on only the supply chain.
• Focusing on desired outcomes ↔ emphasizing solutions.
• Delivering the right outcomes ↔ delivering just the right numbers.
• Dreaming big ↔ dreaming possible.

How the supply chain manager will address these tensions will affect not only the type of supply chain that is designed and delivered, but how the firm and its supply chain will respond to developments such as AI, big data, and machine learning. In addition, how the manager addresses these tensions will also significantly influence the success with which these various developments are implemented and used.

Before turning to an exploration of these tensions, it is important to note that the recognition of the need for a balanced approach is not unique to this article. Previously, in the areas of accounting and strategic performance measurement, Robert S. Kaplan and David P. Norton introduced the notion of the balanced scorecard in a 1992 Harvard Business Review article (The Balanced Scorecard—measures that drive performance, January-February, p. 71-79). The approach proposed in this paper offers a broader treatment of this notion of balance.

We will explore these tensions and their implications in this and the subsequent articles. And there is no better place to start than dealing with the first tension: customer-centric ↔ supplier oriented.

Customer-centric ↔ supplier oriented

This tension is one of the most basic and fundamental ones facing any supply chain manager. Until 2016 (with the publishing of the customer-centric supply chain article in this journal), suppliers and customers were frequently overlooked. The supply chain was focused on execution. Marketing told the supply chain what to build and it delivered. The relationship was simple. Yet, it was flawed and limited. The resulting supply chains were often slow and reactive. They tried to implement a one-size-fits-all approach—only to find that it did not work well.

When supply chain managers became aware of the importance of customers, everything changed. Suddenly, the one-size-fits-all approach was abandoned in favor of supply chains that were built around key customers. With the recognition that not all customers were equally important and that certain customers were more important than others, supply chain managers became aware of the limitations of the traditional relationships with these customers.

As shown in Figure 1A, the traditional relationship between the key customer, marketing, and the supply chain could be described as a straight-line relationship. That is, the customer talked to marketing, who, in turn, would communicate the voice of the customer (what the customer wanted) to the supply chain manager. In theory, this should work; in practice, it was flawed. First, it was slow; it took time for the voice of the customer to work its way through marketing before the supply chain manager was aware of what was wanted (thus contributing to supply chains being perceived as slow to respond and unwilling to accommodate the needs of the customer). Second, the voice of the customer was distorted by the time it got to the supply chain manager. It was the voice of the customer, as interpreted by marketing.

As supply chain managers became aware of the limitations of such straight-line relationships, they were quick to replace them by triangular or customer-centric relationships, as shown in Figure 1. In these relationships, the customer interacts directly with both marketing and the supply chain manager. The voice of the customer is now quickly heard, and heard straight from the customer’s mouth; it is no longer distorted. Furthermore, the effectiveness of this type of relationship has been significantly enhanced by such developments as social media (where the supply chain manager and their department can monitor how the customers, especially the key customers, are viewing their products), and by the internet of things (where myriad sensors can be used to capture massive amounts of data about products, their performance and how customers are using them). The result has been a more customer-aware supply chain manager—a manager who recognizes that it is ultimately the customer who rewards the firm through their visits and their purchases. This approach was recognized by Sam Walton, the founder of Walmart, who noted that “The feeling our customers have when they leave our stores determines how soon they’ll be back.” This can be paraphrased as “the feeling our key customers have when they finish interacting with our supply chain will determine how soon they will be back.” Yet, this swinging of the pendulum to the customer has tended to draw attention away from the supplier base—the set of suppliers who work with our firm and who provide the goods, services, knowledge, expertise, and insights that we need to deliver better goods and services.

Several recent events have served to make the supply chain manager more aware of the important role played by the supplier. These include the pandemic in 2020-2022. During this period, we saw a significant reduction in the supplier base as many suppliers, especially the small- to medium-sized suppliers (those with 500 or fewer employees) found themselves forced to shut down, declare bankruptcy, or undertake “silent bankruptcies” (where the suppliers simply close their doors and shut down). Assuredness of supplies, which had previously been given, was now an issue of great concern. Suddenly, the suppliers became important. As a senior supply chain executive speaking at Supply Chain Management Review’s and Peerless Media’s 2022 NextGen Supply Chain Management Conference in Chicago put it:

“Previously, with supplies being assured, our focus was on the customer, with the result that CRM (customer relationship management) became the critical tool. In today’s world, supplies are no longer assured. Consequently, we must focus on suppliers. SRM (supplier relationship management) has become the new critical tool.”

SRM was present before the pandemic, but it took the pandemic to make managers aware of its importance.

The importance of the supplier base has been further emphasized by the increasing presence of what can be best described as supply chain-shaping initiatives. These are initiatives, typically driven by customers and/or the government, that focus not on the transactions but rather on shaping the environment in which these transactions take place. Examples of such initiatives include those focused on cybersecurity across the supply chain, supply chain sustainability (otherwise referred to as the circular supply chain), DEI (diversity, equity, and inclusion) within the supply chain, and social responsibility along the supply chain. For example, consider the case of the tracking of final customers’ Scope 3 emissions reporting, which involves gathering, aggregating, and reporting the emissions of the focal firm, its first-tier suppliers, its second-tier suppliers, and so on.

This category of initiatives is different. For one thing, success requires the participation of the entire supplier base. It is not enough for only the first tier to participate; success requires the participation of the second, third, and fourth tiers of the supplier base. Second, for this initiative to succeed, suppliers are expected to make significant investments in systems and capabilities needed to support these initiatives. However, it is often the focal firms, not the suppliers, that are the primary beneficiaries of these investments. Finally, because the costs of the initiatives often exceed the benefits, the suppliers are now considering an option not previously considered by many supply chain managers—they are thinking about breaking the existing buyer-supplier relationship and leaving the supply chain. This new supply chain reality can be better appreciated by the following two anecdotes.

In 2007, Desso, a leading Dutch-based manufacturer of carpet tiles and sports pitches operating in more than 100 countries, began the process of transitioning its operations (including its supply chain) to a strategy of producing sustainable products (as covered by Soroosh Saghiri, Carlos Mena, and Mike Bernon in the 2015 article, “Flooring the Competition: The Desso Collection,” published by Cranfield School of Management, The Pears Business Schools Partnership, pearsfoundation.org.uk). As it proceeded with this strategy, the management found out that many of its suppliers were resistant to this move. Various reasons were provided, including that not all suppliers were willing to share the exact composition of their raw materials; some did not have this information; and, for some, the costs/benefits analysis was negative. As a result of this strategic shift on the part of Desso, some suppliers ultimately decided to leave the Desso supply chain—a decision that the management at Desso was willing to accept in pursuit of its sustainability-based strategy.

For the second example, a recent conversation with a senior executive from a Fortune 50 company revealed that the company was undertaking a program to embrace cybersecurity across the supply chain. To that end, senior management decided to support the deployment of the Cybersecurity Maturity Model Certification (CMMC) cybersecurity standard and require implementation by both the company and its suppliers. CMMC is a new program introduced and promoted by the United States Department of Defense to address cybersecurity concerns within the supply chain. (CMMC adds a verification component to a previous regulation, DFARS 252.204-7012.) Management was concerned about the reaction of one of its critical suppliers to this requirement. This supplier was a domestic producer of high-quality, precision surgical stainless steel. As such, it provided a critical component. Finally, it was a supplier that operated in an environment where there were few domestic suppliers for this type of product. From the supplier’s perspective, this Fortune 50 company was a relatively small customer. The buying organization was concerned that the supplier might respond to the CMMC implementation demand by dissolving the relationship, resulting in significant consequences—the company had conservatively estimated that it would take nearly two years to identify, qualify, and onboard an alternative supplier.

Often, when suppliers “fire” their customers, these actions occur as surprises—there is often little if any advanced warning (it’s not unusual that most buyers track buyer-supplier relationships in terms of transaction-related performance: are the products on time, of adequate quality, and delivered at or below the agreed to costs. Few buyers monitor the health of the buyer-supplier relationship). When this occurs, these suppliers take with them critical and unique capabilities and skills. Consequently, it is often difficult, time-consuming, and expensive to replace them.

As a result, the attention of many supply chain managers has been drawn to the supplier side of the supply chain. Firms are starting to recognize that in today’s environment, good suppliers are a prized asset and there is competition for them. Furthermore, there is now a new reality. In the past, good customers fired bad suppliers; in today’s world, good suppliers fire bad consumers. For many supply chain managers, one of their goals is to be seen as being a good customer. As noted by Melnyk et al in a March/April 2021 article (Earned preferential treatment: The reward for being a “good” customer) in Supply Chain Management Review, to be a good customer, the buying organization must master four pillars of a good relationship, as summarized in Figure 2.

It is not enough to be a good customer. The supply chain manager must recognize that suppliers can and do leave when certain conditions are present, such as the following.

• For the supplier, the costs of dealing with the buying organization exceed the benefits.
• The suppliers feel that they are not capable of meeting certain customer demands.
• Suppliers have become burned out because of excessive demands, an endless stream of requests for actions that benefit the buyers not the suppliers, and the buyers, because of their requests and the urgency surrounding these requests, are seen as preventing the suppliers from completing those actions needed to keep their business in operation.
• External opportunities for the suppliers are far greater than internal constraints (e.g., importance of the buying firm as a percentage of sales, number of contracts and the time periods they cover, and the degree to which the equipment is specifically configured to meet the needs of that buying organization).

As a result, the effective supply chain manager must be able to balance the need to identify and satisfy the voice of the key customer(s) with the need to be a good customer to their supplier base. While their relative importance may vary over time, neither side can be ignored in the long-term without the supply chain manager, specifically, and the firm, generally, being adversely affected.

Investing in technology ↔ investing in culture

The second tension to be discussed is that of whether to invest primarily in hard technology. At the start of this article, we were to introduce to the newest set of technological wizardry in the form of AI, machine learning, analytics, and big data. Whenever new technology is introduced, there is a tendency to greet it with some form of hyperbole. Definite examples of their success and impact can be found (as in the case of Walmart and its use of AI in generating and negotiating contracts). Yet, several cold hard facts must be recognized (many of these facts come from experiences with similar developments in the past).

First, for every success, there are many more examples of failures. Often the failures go underreported because no one wants to admit that their investments (often significant) did not produce the expected or promised results. Second, for many implementations, the results are not sustainable if the focus is limited to the technology alone. Third, managers learn about the technology over time and, when they do, sometimes, the technology is effectively dropped because it does not translate into a strategic competitive advantage. Finally, for a technology to become a strategic advantage, it must be converted from a technology into a capability.

The major source of these insights comes from the computer integrated manufacturing (CIM) revolution of the 1990s. During this period, alphabet-based technologies with abbreviations such as CAD, CAM, CAE, CAPP, CAQ, CNC, ERP, PLCs, FMS, and robots (to name a few) were introduced. The promise of CIM was simple but compelling—by introducing CIM and its integrated elements, management could improve the effectiveness and efficiency of manufacturing (higher output, more flexibility in production, reduced lead times, higher quality) while reducing the need for resources, specifically people. This promise was captured in a poster displayed in one hardware vendor’s booth at an APICS conference during this period. This poster pictured three components: a button, a man, and
a dog. The dog’s job was to ensure that the man did not press the button; the man’s job was to feed the dog. Yet, this promise was not realized.

The reason—technology by itself, while important, was not enough. For technology to be successful, it has to be embraced by the people in the organization. It has to become a capability. That is, the investment has to be introduced in such a way as to be consistent with the organization and its past, and it has to be extended and customized so that it enables the organization to better achieve its strategic objectives in a way that is consistent with the past and that differentiates what the firm is trying to achieve from the approach found in its competitors. In other words, the hard side of hard technology has to be balanced by the soft side of culture and people. When firms fail with new technology, they often fail because they ignore the importance of people, technology, and soft skills.

Again, BSCM is needed to ensure that the appropriate relationship between these elements and the tension that they create is equalized.

Conclusion: Part one

With this first article, we have begun to lay out the elements of balanced supply chain management and the various tensions that drive the need for such an approach. We will continue this discussion and development with an article in the next issue when we continue to explore and understand the other tensions that need to be addressed and managed for the supply chain manager to better and more effectively operate and thrive in this new dynamic, turbulent, and challenging world.

About the authors:

Steven A. Melnyk is a member of the department of supply chain management at the Eli Broad College of Business at Michigan State University. He can be reached at [email protected].

Nick Little is the director of the Railway Education Center for Railway Research & Education at the Eli Broad College of Business at Michigan State University. He can be reached at [email protected].

Lee K. Levy II is a retired Major General of the USAF, and CEO of The Levy Group, LLC. He is a doctoral candidate at Vanderbilt University and holds the Directorship Certification from the National Association of Corporate Directors. Levy can be reached at [email protected].

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