Recent economic events have forced many managers to confront an important message: the old model of managing supply chains is broken and simply doesn’t work anymore.
Industries from automotive to transportation realize that neither raising prices nor dramatically increasing sales are viable options in a flat economy. This leaves only one alternative: reducing costs across the supply chain. As one General Motors executive recently noted, “One outcome of the downturn has been a strong signal to our top management team that a new model for managing customers and suppliers is needed. Our only opportunity left is to take out cost, and work better with our suppliers.”
Taking out cost
SCRC member company GM is not alone in realizing that the future competitive channel will involve not companies, but rather supply chains competing against other supply chains. To succeed in difficult as well as prosperous economic times, all the organizations that make up an industry’s supply chain will need to step on the brakes or on the gas in a collaborative manner.
The new strategy behind supply chains was described by Jeff Trimmer (former Vice President of Purchasing at at Daimler-Chrysler) in terms of three principles:
- The only entity that puts money into a supply chain is the end customer.
- The only solution that is stable over the long term insures that every element of the supply chain, from raw material to end customer, profits.
- Supply chain management is about the economic value and total content of a product/service.
Now it’s up to corporate management to develop a comprehensive plan for redesigning their supply chains to meet these criteria.
The new model of supply-chain management includes three major pillars: managing relationships, managing supply-chain material flows, and managing information. Despite all the hoopla about e-commerce, our research at the Supply Chain Resource Consortium indicates that sourcing and physical distribution form the real building blocks of the next generation of supply chains. Business-technology leaders can significantly contribute to the strategic goals of their organizations by taking a hard look at the business processes that underlie their supply chains, targeting cost-saving opportunities, identifying IT solutions, and proposing investment returns that you can realistically hope to achieve.
Adapting to change
Driving supply-chain innovation in organizations is no simple task—but in today’s harsh economic environment, it may mean a company’s very survival. As Charles Darwin noted, those who survive are not the smartest nor the strongest—but those who are best able to adapt to change. Can your company be among the fittest and adapt?
Think of the process of mapping your supply chain and business processes as a medical check-up for your bottom line. Just as a doctor studies the critical measures (pulse, temperature, blood pressure), interviews the patient to review symptoms, and identifies the location of aches and pains, managers must begin with a complete assessment of the company’s physical and information flows. Before determining the systems requirements to “fix” things, you’ll need to determine the status of such critical supply-chain metrics as inventory levels, cycle times, customer complaints, and quality rejects. Many executives have done this successfully by literally “stapling” themselves to a customer order, and interviewing all the participants they pass along the way through the system.
In almost every project that the Supply Chain Resource Consortium has worked on with partner companies, this type of analysis has identified significant opportunities for improved communication among downstream customers, internal business functions, and upstream suppliers. In most cases, the lack of communication stems from a single root cause: a lack of alignment among business requirements, supplier and customer contacts, and information systems. Before embarking on an expensive supply-chain system implementation, technology executives need to clearly delineate how the system will help close these gaps.
A clear business case for improving supply-chain performance begins by assigning costs to the impact of poor communication. The diagnosis must be justified using hard metrics as well as qualitative symptoms, and include a treatment plan. Specifically, you must establish how new information systems can result in reduced inventory, improved product-development cycle times, reduced material costs, reduced transaction costs, and improved customer satisfaction.
At a recent supply-chain meeting at SCRC member company Bechtel, the engineering and construction giant, one manager reports, “a senior executive stood up to share his solution to a problem we were experiencing. When he was unable to provide data to back up his solution, he was asked to come back when he had some to share with the group!” Without translating supply-chain solutions for reducing inventory and improving cycle times into financial terms such as economic value-added IT managers stand little chance of convincing senior management to invest.