What It Really Means:  Service is the essence of a supply chain

Editor’s note: What It Really Means is a new recurring series on Supply Chain Management Review designed to clarify commonly used supply chain terms that often carry different meanings across organizations. The series aims to establish practical, shared definitions by grounding terminology in real-world planning and execution use cases. The series is authored by Andrew Byer, a former P&G supply chain leader, and Mike Dobslaw, who leads EY’s Supply Chain Planning Practice.

A phrase often cited in discussions to improve supply chain performance is “service is the essence of a supply chain.” But what does that really mean?

That service is the essence of a supply chain makes it clear the overarching purpose of a supply chain’s design and operations is to meet customer expectations. These expectations are translated into service targets. If service is not at target levels, the supply chain will be forced to adjust. These adjustments can include actions that can increase cost and cash needs to get service back to target. Cost would be impacted by things such as expediting freight, changing supplier and production schedules, running overtime, etc. Cash would be impacted by increasing safety inventories to buffer service. The net effect is without service being at target, it is hard for other key metrics to be at target. 

Why is the mindset that service is the essence of a supply chain important? 

A business will struggle if its customers cannot rely upon it to meet commitments to deliver products or services on specific timing and/or quantity. Unreliability is offset by the customer either risking their sales or carrying extra inventory. These offsets raise a potential double negative: (1) it creates an opening for competition who can better meet expectations and (2) it becomes harder for a ‘low service’ business to sell new products, services and innovation. Sales personnel know it can be very difficult to talk with a customer’s buyer about business-building ideas when the buyer is asking why you can’t reliably fulfill existing orders. In short, the business will struggle due to service issues. To the customer, the supply chain performance is indivisible from the overall company’s performance.

For this reason, service is usually a key metric on supply chain leadership scorecards. However, supply chain leadership juggles a lot of other functional metrics like cost, OEE, material unit price, inventory and new product speed to market—while trying to achieve a balanced scorecard.  

To this end, leading organizations differentiate target service levels across their products. These companies realize providing a high on-time/in-full-service target may not be achievable nor practical for their entire portfolio. It may come across as blasphemy, but having a differentiated service target approach that is aligned with customers, and measured and rewarded appropriately across functions is a step-change that many companies fail to achieve. This approach helps break the functional silos and behaviors sometimes seen in organizations that are rewarded and incentivized within their role: e.g. when manufacturing focuses on OEE/attainment instead of a critical changeover to meet a service goal.

From a priority perspective, however, providing customer service at target levels should supersede other metrics in overall importance. Note: leading-edge companies are able to align with their customers to translate how a customer measures service into their company’s internal target and tracking systems.

Benefits of the mindset that service is the essence of a supply chain: The supply chain is viewed as a competitive advantage and the enterprise is aligned cross-functionally around how to best meet service targets, creating tailwinds supporting business objectives, including:

• increased sales revenue and profit
• reduced expediting costs
• better customer partnerships and joint value creation opportunities
• easier to sell in new items and services
• clarity of purpose: overarching service metric is prioritized above functional metrics (functional groups could include manufacturing/operations, procurement, engineering, etc.)

Watchouts: Unfortunately, there can be many intended or unintended barriers to achieving a broad organizational mindset that service is the essence of a supply chain, including:

• Having a ‘one-size-fits-all’ approach to service goals. While service is the foundation, differentiated service goals should reflect product prioritization—with more important products having higher targets. All functions of the enterprise should be incentivized accordingly.
• Over-promising to customers vs. a supply chain’s demonstrated capabilities
• Not designing the supply chain (or insufficiently investing) to meet customer expectations e.g. instantaneous capacity, facilities close to market for responsive operations, etc.
• Commercial partners disengaged from what’s required to service customers (getting orders in on time, helping address master data or pricing issues that might block orders during processing, etc.)
• Drift on other key supply chain metrics. Just as a business will struggle if service is not in control, it also will have difficulty managing increased cost and cash needs on a going basis if required for service needs. 
• Supply chain sub-functional reward systems considering service “someone else’s job” (e.g. manufacturing seeking only long production runs, procurement only interested in lowest unit cost)

How to develop the mindset that service is the essence of a supply chain?

Consistently providing customer service that meets/exceeds customer expectations requires all facets of the supply chain to contribute.  Therefore, service needs to be the overarching goal and measure with no compromise if, for example, there’s a need to improve financial performance like cost or cash.  Functional and sub-functional reward systems all need to have service as a top-line measure.

About the authors

Andrew Byer is a former P&G Supply Chain Leader. Mike Dobslaw leads EY’s Supply Chain Planning Practice. To learn more about how EY and P&G team to support supply chain transformations please write [email protected]

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