Why your supply chain doesn't work

It might be a lack of strategy, say the experts.

By Jim Thomas -- Logistics Management, 6/1/1999

Ninety-one percent of North American manufacturers rank supply chain management as very important or critical to their company's success, according to a recent Deloitte Consulting survey. Yet only 2 percent of the manufacturers in the same survey rank their supply chains as world class. What's the problem?

In a word, strategy, answers Jim Kilpatrick, senior manager in Deloitte Consulting's Supply Chain Results Practice. Almost 50 percent of the companies surveyed have no formal supply chain strategy.

"Companies don't get it," says Kilpatrick. "Strategy involves more than managing the warehouse or transportation. It's also production, marketing, sales, and planning--the management of materials, information, and funds from the raw-materials supplier to the ultimate consumer."

The absence of a plan often explains why enterprise resource planning (ERP) software and other information technology initiatives fail, Kilpatrick continues. "Companies implemented ERP systems because it was the thing to do or because the competition did it," he says. "But the underlying business assumptions were not correct. The integration of timely general-ledger information is not enough. If you want to reduce inventory, it may imply SKU (stock-keeping unit) rationalization, which changes marketing and sales plans. You have to apply math to statistics if you wish to reduce safety stock or centralize the distribution of slower-moving products."

ERP systems initially worked because they were applied to back-office functions. "The systems generated savings that were driven by headcount reduction," says Kilpatrick. "But we are talking about getting money into the bank quicker. We need ERP systems to provide timely information that characterizes the pulse of the business."

Survival Strategies

Experts agree that a formal supply chain strategy will be critical for survival in any industry. Across the globe, companies are reducing their supplier bases by 40 to 70 percent, says Jonathan L.S. Byrnes, a senior lecturer at the Massachusetts Institute of Technology. He says the common denominator among the survivors is "supply chain excellence."

Byrnes, who specializes in strategy, says supply chain executives falter on strategic issues because their expertise and mindset generally revolve around tactical issues, such as cutting costs and improving operating efficiency. "I liken it to mowing the lawn around Stonehenge," he says. "Supply chain executives don't ask why these enormous stones have been placed in their path, but they are very good at mowing around them."

Kilpatrick agrees. "Distribution and operating managers generally are promoted to supply chain executive positions," he says. "They often do not know how to leverage technology, finance, and strategy."

This reliance on the tactical can only lead to short-term solutions, adds Kilpatrick. "Corporations go for the quick win, like lower transportation costs," he says. "But they do not knit transportation and inventory together to achieve long-term results."

Dissatisfied with internal solutions, companies often hire third-party logistics providers (3PLs) to come up with strategic solutions. Yet that rarely succeeds, says Byrnes. (See the accompanying sidebar.) "3PLs rarely find themselves at the front-end of a major innovation," he says. "They usually don't enter the picture until a company develops its RFP (the 'request for proposal' companies use to solicit bids from 3PLs). By then, the customer has mapped out a strategy."

As a result, the third-party providers end up providing service improvements in an operational context only. "They take out a warehouse, reduce the size of a truck fleet, or remove a union, and save a company 10 percent," says Byrnes. "So the customer expects the 3PL to continue to take cost out of the system year after year. Sooner or later, those opportunities run out, but the 3PL still must live up to an unrealistic expectation because it could not articulate a supply chain strategy."

Failure to Communicate

Many times, executives fail to frame supply chain issues in terms top management can understand. This problem often is compounded by chief executive officers who do not fully comprehend the importance of supply chain issues. "Very few CEOs possess a supply chain background," says Byrnes. "These leaders have extensive experience in marketing or finance because 10 to 15 years ago, those were critical areas along the CEO career path. Supply chain management was not."

But it is critical today, and many innovations will take place in the supply chain over the next 10 years, says Byrnes. This period will be crucial for companies seeking to develop their supply chain strategies. It is the supply chain manager's window of opportunity, a time to drive supply chain strategy to the forefront of boardroom issues. Kilpatrick suggests supply chain managers start by addressing an issue that is important to everyone in the boardroom: customer service.

"Companies need to focus on what adds value to the customer," he says. "In supply chain management, that is an elusive challenge. For example, customers of office-furniture manufacturers may expect a seven-day order-to-delivery cycle. Some of these manufacturers may focus on rapid customer response and reduce their delivery cycle from seven to two days. But the customer is prepared for a seven-day cycle, so the reduction does not add value."

A strategy also must account for a diverse customer base that demands different levels of service. "Auto-parts distributors serve original equipment manufacturers with 100-percent fill rates," says Kilpatrick. "But do Sears and Pep Boys need that level of service? And do mom-and-pop shops need the same level as Sears?"

"The only way to find out critical information about your customers is to ask them," says Byrnes. "Prepare a survey or talk to purchasing or operations managers to learn what they need."

With such survey results in hand, the supply chain executive may define customer value. Chances are, the survey will include functions other than logistics, including sales, marketing, customer service, or finance. "No manager will be expert in everything, but the supply chain organization as a whole should," says Kilpatrick.

For that reason, the supply chain executive must team up with other top executives to create a supply chain organization and develop a plan. This involves selling a vision to other managers, who usually do not possess a supply chain background. Supply chain executives then must take the sales process forward and educate senior management as to the value of such a vision.

Unfortunately, these steps rarely happen, says Byrnes. "The supply chain executive dismisses opportunities by saying 'That's a marketing problem,' or 'No one asked me,'" he says.

The argument becomes circular: The supply chain executive did not offer his strategic plan to senior management because senior management did not ask for it. Meanwhile, senior management did not ask for a strategic plan because the supply chain executive never offered it.

Supply chain executives must get around this impasse by taking the initiative, Byrnes says. "The organization should generate its strategy through the supply chain executive," he says. "After all, the supply chain executive has the greatest understanding of how a change--say, in the mix of customers or customer order patterns--affects changes across the entire organization."

Without the initiative of an executive, supply chain management will produce average results, at best, says Kilpatrick. "Ninety percent of the companies we surveyed said supply chain management would become more important in the future. If that's true, average is not a good place to be."

Strategy and the Third Party

If companies fail in their own attempts at supply chain management, can third-party logistics providers (3PLs) provide a better solution? Observers answer with a qualified no.

Strategic roadblocks exist between third parties and customers, says Bruce R. Abels, president of Saddle Creek Corp., a Lakeland, Fla.-based 3PL. In a presentation called "Ethics and Protocols of Third-Party Relationships" at the Warehousing Education & Resource Council's annual conference, Abels said problems begin in the "pre-selection phase" where both parties exhibit self-destructive behaviors and seldom address strategic issues. Here, third parties oversell and under-listen, they inflate capabilities, they may lack knowledge in specific areas, and they don't ask hard questions.

On the other side of the table, customers "put the bid cart before the horse" by demanding a price quote without regard to the 3PL's capabilities. They often don't pre-qualify third parties, and they prepare bid packages that are incomplete. In addition, they ask for unreasonable leadtimes.

Abels advises 3PLs and customers to approach pre-selection as a "collaborative process." "Unfortunately, our industry compounds the problem by responding to bids," he says. As a result, the customer establishes the perception that the 3PL is a vendor, not a strategic partner, before the contract is signed. The perception continues as the relationship progresses through selection, preparation, and startup. By the time the 3PL begins operations, it often has become defensive about rates and margins. The customer "lets the 3PL handle problem issues," says Abels. Costs, not value, become the critical issue.

In a positive relationship, the third party and the customer share strategic components, including company mission, business objectives, logistics mission, and logistics objectives. And, just as important, Abels says, "both parties operate as equals."