Is it Time for to Move Away from "World Class Supply Chains"?

An excerpt from our book “The Procurement Value Proposition” got a nice section of CSCMP’s Supply Chain Quarterly edition this week.  The book looks at what the future procurement capability will need to be, in light of the massive “game changers” of globalization, technology, cultural diversity, demographic issues, and sustainable pressure that is changing the entire ecosystem.  Much of the book was written based on my own recognition that the field needs to change.

I had the opportunity to also witness the evolution of the field now known as “supply chain management” over the past 25 years. As a young assistant professor at Michigan State University, I was part of a group called the Global Procurement Benchmarking Initiative, led by Professor Robert Monczka. During the 8 years I was at Michigan State, we benchmarked over 300 companies all over the world, and set forth many of the principles for what we called “World Class Procurement”. Many of these principles became the foundation for consulting practices at Accenture, Deloitte, Booz Allen, and others. The principles at the time were certainly appropriate. The idea was that procurement needed to establish a position not just as a “buyer, but as a centralized function that would allow it to understand spending across both direct and indirect categories of spending, leverage this spending, and achieve significant cost improvement. The efforts also began looking at procurement as a vehicle for measuring supplier performance, improving suppliers through development activities that needed help, and acknowledged that some relationships with suppliers needed to be more strategic than others. The work done during this period highlighted many important issues, that were encapsulated in a “maturity model” that identified how organizations could develop these capabilities over time towards a truly “world class procurement” organization.

Supply chain management as a field evolved as large organizations saw the need for dedicated functions responsible for management of materials, which included purchasing of raw materials, management of manufacturing processes, and logistics (movement of materials). The mid-1960s witnessed a dramatic growth of the materials management concept. Although interest in materials management grew during this period, the concept’s historical origins date to the 1800s. Organizing under the materials management concept was common during the latter half of the nineteenth century in the U.S. railroads. They combined related functions such as purchasing, inventory control, receiving, and stores under the authority of one individual.

External events directly affected the operation of the typical firm. The Vietnam War, for example, resulted in upward price and material availability pressures. During the 1970s, firms experienced material problems related to oil “shortages” and embargoes. The logical response of industry was to become more efficient, particularly in the purchase and control of materials. Widespread agreement existed about the primary objective of the materials concept and the functions that might fall under the materials umbrella. The overall objective of materials management was to solve materials problems from a total system cost perspective rather than the viewpoint of individual functions or activities. The various functions that might fall under the materials umbrella included material planning and control, inventory planning and control, materials and procurement research, purchasing, incoming traffic, receiving, incoming quality control, stores, materials movement, and scrap and surplus disposal.

Many of the traditional concepts that evolved from this perspective of “driving cost of materials lower” were focused on increasing efficiency of operations in the supply chain from supplier through to end customer. For example, the “Theory of Constraints”[1] emphasized that to optimize the end to end system, the “bottleneck” operation had to be addressed by adding capacity at this operation. The concept of “just-in-time” and “lean manufacturing” focused on standardization of products, improving coordination between different enterprises to reduce inventory, and only delivering the exact amount needed in small quantities that could be immediately consumed by the follow-on operation. Purchasing evolved to look at “strategic sourcing”, which included combining volumes of requirements from across the business, grouping them into large bids that went out to suppliers, and driving down costs due to larger quantity discounts achieved. This also led to the use of “reverse auctions”, where suppliers would bid on these quantities online. In logistics, the focus became on centralization of distribution centers and warehouses to drive optimization in transportation routing and reduce inventory across the system.

All of these concepts are still valid, and are in use. One of the problems with the field of supply chain management is that the three groups involved in these activities (purchasing, operations, and logistics) have been lumped together as “supply chain” functions, but never really stopped working independently from one another. There have been professional disputes among the logistics, operations, and purchasing trade associations over who is really driving the supply chain; purchasing feels they are calling the shots, while logistics professionals claim that they have oversight over the supply chain! All the while, they claim to be driving “world class procurement” or “world class logistics” practices, implying that these practices are the best of the best.

But there have been problems with the “World Class” view of the supply chain world. Although transactional excellence and efficiency is certainly an operative element that forms the basis for excellence, there is a shift away from the idea that “World Class” is something that applies to every situation. Because managing the supply chain is no longer about just outward-facing capabilities, but about deep understanding of the components of customer value, and being able to derive supply chain solutions that meet this need. While cost optimization may certainly be one element of this equation, value has many differential meanings. Managing the supply chain first and foremost requires that the function act internal consultant who spend a great deal of time listening, not just to the explicit needs of the organization for materials, information, services, knowledge, and capability, but also to the intangible elements. In a sense, real-time supply chains involve understanding and predicting what internal users and customers will need right now, even before they themselves recognize that they need it. And velocity and speed is an integral capability that requires quick response to customer needs to create the right capability.

[1] E. Goldratt, The Goal, 2nd ed. (Great Barrington, MA: North River Press, 1992).