It's About Time for a new "World Class Supply Chain" Paradigm

As a young assistant professor at Michigan State University in 1992, I was part of a group called the Global Procurement Benchmarking Initiative. This initiative benchmarked over 300 global companies, and set forth many of the principles for what we called “World Class Supply Chains”. 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, and were considered ground-breaking at the time.

Many of these principles were based on the theme that supply chain managers could move beyond being a “buyer and shipper of stuff” “ but as a centralized function that combine spending across both direct and indirect categories of spending, leveraged this volume through purchase power, and sought to achieve significant cost improvements and efficiencies. An automotive executive recalls how difficult this was given the technology limitations that existed in the early 1970’s.

To drive centralized buying I had to dive down into the Bill of Materials and do a cross-tab. Fortunately, we had a decent commodity coding system for each part number with a prefix that described the car the part was attached to, the function of the item and the suffix that described engineering levels, color, and material to a certain degree. This was the first intelligent database system at the time that allowed me to look at a “deck” of the current buy for a commodity group for our production buy. I started by looking at no more than 10 commodity groups, and looked at the production buy across these commodity groups. With the data organized this way, I was able to see that I could consolidate the number of suppliers by commodity, the value of the buy for the group, using data that no one had ever seen before! This was really exciting! Then I created a matrix of around 35 existing buyers, pulled all the heavy truck stuff out of it, and ran summaries of the data. I could then start to see how many commodities I was dealing with, and was able to reload the commodities to a smaller group of buyers with broader responsibilities that might cover more than one commodity.

Over time, executives also began to understand and realize the critical role that suppliers and distributors played in driving revenue and controlling costs. They began to establish systems for measuring supply chain participants’ performance, improving performance through development activities when they could not do so on their own, and acknowledged that not all relationships with these third parties were the same, with some needing more attention because they were more strategic than others. Over time, the terms “strategic sourcing” and “logistics integration” were coined, which largely involved combining volumes of requirements from across the business, grouping them into large bids, 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, reduce inventory carrying and handling costs across the system.

Many of the traditional concepts that evolved from this perspective of “driving down costs” focused on driving efficient operations in the supply chain from supplier through to end customer. Many of these principles also coincided with the introduction of “lean manufacturing”, based on the “just-in-time” thinking pioneered by the likes of Toyota. 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.

Another group at MSU under the leadership of Dr. Donald Bowersox led the concept of the “Logistics Renaissance”, proclaiming that logistics was a value-added function that could drive market penetration through technology adoption. All of the work going on 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 supply chain” organization.

However, “world class” still emphasized distinctions between the functional areas of purchasing, operations, and logistics, which were still viewed as disparate functions. Arguments broke out internally and in academic debates over which area had dominance over the others. The three groups involved in these activities (purchasing, operations, and logistics) were lumped together as “supply chain” functions, but never really stopped working independently from one another. Professional disputes emerged among the logistics, operations, and purchasing trade associations over who was really in control of the supply chain; purchasing felt they are calling the shots, while logistics professionals claim that they have oversight over all movement of material in the 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. In fact, “technology integration” was supposed to bring all these groups together, but in fact there still exists lingering tensions, discontinuities, and waste in the end to end supply chain of many organizations. Sure, they could buy things more efficiently, and ship things more efficiently, but were they really linked? Hardly.

One executive I interviewed emphasized this very succinctly:

We get hung up on World Class too much. World Class is simply a set of tools on a tool belt – but the real wave of change is on understanding the business well enough to apply the tools that will drive a total cost model, that spans the end to end value stream. Leveraging and strategic sourcing has gotten in the way of that. And a centralized world-class solution is not always appropriate in every operation globally, because a single model may not work for every small, medium, and large operation. 

World Class is focused on ticking the box around completion of the tools. We are too focused on getting an answer, rather than focusing on an outcome. We want to create nice two by two’s with a label for a supplier, rather than generating and delivering a coherent strategy. I see supply chain practitioners using the tools incorrectly, and should be spending more time instead understanding what a performance specification looks like before going to the supply chain. There needs to be much more focus on the pre-award phase of the business, and the competence of the people doing this. And the total cost concept goes well beyond that.

In the end, there are some real problems with the “World Class” view of the supply chain. 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.  And so we need to approach the problem with a different toolbelt, and be ready to use a number of different tools depending on the different business drivers and geographic components that are in play.

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