Beyond Collaboration: Supply Chain "Federation"

The idea that large organizations can create a “federated” network, by integrating smaller firms into their network and drive a common purpose is a concept that is emerging as key to global competition. Federation implies common operating procedures, established standards, driving aligned supply chain processes and tacit understanding of how things work. The idea of federated supply chains have actually been around for awhile, and Peter Drucker first descried the idea.

Any organization requires both strong parts and a strong center. The term “Decentralization” is actually misleading—though far too common by now to be discarded. Federal decentralization requires strong guidance from the center through the setting of clear, meaningful and high objectives for the whole. The objectives must demand both a high degree of business performance and a high standard of conduct throughout the enterprise.”[1]

Suppliers that work for a larger company in a federated supply chain are generally pretty happy. The suppliers I’ve interviewed at federated supply chains like Honda, John Deere, Intel, and Flex don’t want to leave, as they feel like they are treated as equals, and assured a steady revenue, and also understand that they are in it for the long haul. Over time, suppliers’ loyalty towards the dominant firm grows. That is one reason why companies like Honda have begun using the term “Supplier for Life”, which suggests a strong, paternal relationship that is governed by high performance expectations, fair product price negotiations, and deep understanding of long-term technology and customer roadmaps.

An interview I had with Jeff Ng, Chief Procurement Officer at Steelcase, provides some clues on how how global collaboration is key to building a federated supply chain system.

This need to understand many different points of view is the central theme of collaboration. It requires that you be able to understand who people are, and what they do. It also requires that you understand how work happens today, and be willing to allow some variation in processes, up to a point.

The idea of aligning people around data and a common process for decision-making makes sense.  But what we are seeing now is something beyond collaboration:   the idea of federation.  There has always been a need for organizations to establish standards of performance embodied in policies and procedures, but in a our study of global  logistics providers[2], we discovered that top performing organizations developed a form of supply chain governance that build in some level of flexibility to adapt to local requirements, by design. For instance, organizations would develop a global process for delivering an outcome in the form of a “maturity framework”, but which allowed people in the global network to achieve the outcome in the appropriate manner that was aligned with their local cultural norms.

As an example, many of the leading organizations we interviewed have recognized that logistics requirements vary from region to region, and as such have moved to a regional logistics design, governed by a centralized supply chain council. The governing council establishes overall guidelines and structures for regional work to operate at a world-class level. Typically such councils have developed standards consisting of three components: process, policy, and playbooks. First, the standards define the processes that must be in place (e.g. customer order promising, transportation planning, order fulfillment). Second, they define the policies that must be followed (e.g. finalizing orders, allocation, scheduling). Finally the standards come with “playbooks” that act almost as a user guide on how to think through the process requirements and get them done!

In cases when there are major tradeoffs or conflicts that occur between regional requirements, organizations have adopted a global sales and operations planning function to optimize global requirements across regional requirements, especially around global product lines. Once established, however, top executives realize that these plans will be interpreted and acted on differently at a regional level. The outcome – a federated supply chain – is the desired outcome when this approach is utilized.

Federation is based on the simple thesis that supply chain leaders cannot standardize the entire world, and need processes that will be a solution in 80% of the cases, allowing for local adoption for the remaining 20% of cases, (so long as the outcome meets the process playbook). This requires a clearly defined organization, with clear roles, and responsibilities, so that people can speak to the same processes, with the same toolboxes. This ensures that all parties are “speaking the same language” and are using comparable metrics and plans. At the same time, differences should be highlighted. Leaders should be aware of the challenges and successes of regions, what they struggle with, and what they are proud of. Leaders should also be prepared to accept a different point of view on what is working locally and what is not, and be prepared to adapt the process to fit the right local requirement. And this means that interactive communication is required to ensure that when decisions are made, everyone is aware of it and is kept informed. Because it is the interaction that creates intelligence, in a cyclical view of new ideas, feedback, and response that forms the interactivity that drives new knowledge. Technology is the game changer that allows this to happen more quickly – but trust is the essential ingredient that allows data to cross boundaries, and forms the glue for federation.

[1] Drucker, Peter, The Practice of Management, 1956, p. 214.

[2] Handfield, Robert, Straube, Frank, Pfohl, Hans-Christian, and Wieland, Andreas.  Trends and Strategies in Logistics and Supply Chain Management, BVL International, Berlin, 2013.