Quick-Change Supply Chains

by David Anderson

September 12, 2005

To ensure business success in the 21st century, companies must continuously transformtheir supply chains and build collaborative relationships to gain long-term competitiveness.

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We may never see a television series about supply chains. However, nearly everyone
is familiar with Survivor, where the best players develop fast-changing strategies
to outdo competitors and persevere through shifting conditions. “Outwit, outplay,
outlast” is the show’s motto. So perhaps Survivor can be viewed as a good model
– a template, in fact – for 21st century supply chain management. And if that
is the case, then what will it take to be a survivor of 21st century supply
chain battles?

Survivor’s conflict analogy is relevant to how today’s businesses compete.
We’ve all watched U.S. manufacturers lose ground to overseas companies. And
how many companies have been pushed off the “island” because obsolete operating
models rendered them ineffective? Simply put, most companies already are engaged
in serious battles over product availability, service levels and logistics costs.
Those that aren’t will be soon. The island is getting smaller.

In his Harvard Business Review article “The Triple-A Supply Chain” (October
2004), Hau Lee profiles the new battlefield. The Stanford University professor
states that high speed and low cost aren’t enough to give companies a sustainable
supply-chain-based advantage. As proof, he notes that U.S. supply chains became
significantly faster and cheaper between 1980 and 2000. However, product markdowns
due to excess inventory jumped from 10 to 30 percent of total units sold, and
customer satisfaction with product availability plummeted. Some companies –
like Amazon.com, Dell Computer and Wal-Mart – bucked these trends. However,
Lee’s research shows that the supply chains of these companies are more than
fast and cost-effective. They are agile – responding quickly to sudden changes
in supply or demand. They also are adaptable – evolving rapidly as markets change.
And finally, they are aligned – synchronizing goals and characteristics with
those of their supply chain partners.


So how should the rest of us transform our supply chains to compete in the
future? The answers are complex and highly individual, but there is at least
one common denominator. Most of today’s supply chains (regardless of industry)
are “hard wired.” In other words, they accommodate only standard service offerings,
and have little or no ability to meet fast-changing availability or delivery
requirements. Yet business success in the 21st century will increasingly demand
quick-change supply chains.

Quick-change supply chains adapt rapidly to changes in customers’ product needs
and delivery preferences. In a similar vein, they accommodate global variations
in supplier material availability and logistics provider capacity. They also
are externally focused on issues like evolving marketplace needs and new ways
to work with supply chain partners to satisfy customer demands. Simply put,
there is no place in the quick-change supply chain for fixed methods of manufacturing,
storing, packaging and moving products. That’s because the companies that deploy
them know that customers, markets and (consequently) supply chain behaviors
will be more fluid in the 21st century than ever before.

What Will Be

Sooner than you think, quick-change supply chains – supply chains that continuously
transform themselves to ensure long-term competitiveness – will become the rule
rather than the exception. Their philosophical cornerstone will be cooperative
approaches to supply chain design and execution, working routinely with supply
chain partners, including customers, vendors and logistics services providers.
Regardless of whether those new supply chains are managed internally or with
the help of outsourcing services providers, they surely will use interchangeable
parts – similar to a child’s LEGO set. This will enable them to reconfigure
service and delivery options as marketplace conditions change. New types and
sources of supply chain information, planning technologies and management procedures
also will be required.

Lastly, companies will need to consider, and potentially adopt, a number of
endemic quick-change principles. Here are five:

1. More Logistics Partnerships

Your home is becoming a digital network, with consumer electronics manufacturers
working together to help music, video and information travel from room to room.
In the near future, supply chain masters will strive to achieve the same connectivity
and resulting success. More of them will work together to ensure better availability,
greater portability, more cost-effective service and overall high performance.

Collaboration is the linchpin of this scenario. Even in the 1990s, do-it-yourself
supply chains were becoming more expensive and less effective, while partnerships
with carriers and third parties were becoming more popular. A few innovators
even experimented with outsourcing entire supply chains, with many reporting
significant cost savings and service improvements.

Now the trick is to form new relationships with various supply chain providers
quickly to meet rapidly changing needs. Working with outsourcing services providers
is one way companies can achieve this. In fact, helping clients transform supply
chains or set up new ones is becoming an important selling point among third
parties. Li & Fung, for example, leverages its worldwide supply base of 2,700
partners to offer companies apparel sourcing, manufacturing, logistics, design
collaboration and information systems. This full-service approach enables clients
to rapidly build a quick-change supply chain capability.

To begin seeking the right supply chain partner(s) and developing mutually
beneficial relationships:

  • Talk with organizations in your industry that have successfully outsourced
    all or part of their supply chain operations.
  • Identify a particularly difficult distribution problem within your company.
    Then talk to third-party providers with relevant experience and get their
    input.
  • Make interactions with logistics services providers a frequent and ongoing
    initiative, and encourage C-level staff to actively promote and participate
    in the collaboration process.

2. New Information Management and Planning Tools

High-frequency data sources – detailing on a real-time basis what’s happening
with customers’, carriers’ and suppliers’ supply chains – are integral parts
of a quick-change supply chain. Unfortunately, one-stop supply chain information
sourcing isn’t happening any time soon, so companies will have to rely on multiple
data sources to drive supply chain performance improvements. A key differentiator
will be their ability to establish data aggregation and swapping relationships
– either directly or through third parties – with customers, logistics providers
and suppliers.

Business Service Platforms

In the late 1990s, many believed that dot-com marketplaces were the answer
to supply chain data-availability problems. Although that didn’t happen, the
next generation of e-markets – business service platforms (BSPs) – may succeed
where their forbearer failed. In “The Invisible Hand of Commerce” (Optimize
magazine, July 2004), Thomas Koulopoulos and James Champy describe BSPs as hubs
of enormous networked communities, such as those being developed by Wal-Mart
and Dell with their suppliers and customers. However, these company-driven BSPs
will soon be succeeded by next generation networks – where multiple, competing
product and service providers do business. Within these networks, real-time
information will be widely shared among supply chain partners.

Wireless Enterprise Data Sources and Mobile Enterprises

BSPs may eventually become major players in electronic commerce. But other
types of information hubs are emerging now. A good example is wireless enterprise
data sources – RFID, telematics, remote entry, bar codes and so forth. Used
individually, these tools are emerging as valuable contributors to supply chain
efficiency. But what if they were linked together using world-class execution
and planning technology? This is starting to happen in the form of mobile enterprises
where anytime/anywhere ecosystems are based on the increasing ubiquity of people,
inventory, knowledge capital and assets.

Business Information Networks

Business information networks (repositories of information critical to real-time
supply chain management) have also become important tools for enhancing supply
chain performance. To stock these “BINs,” information on logistics requirements,
channel performance, product availability, etc., is collected directly from
supply chain participants (e.g., shipment status from carriers) or indirectly
as part of other activities (such as retail takeaway data collection). BINs
operate all along supply chains, helping to manage customer relationships, shipments
and supplier interactions. However, they also can function as stand alone information
sources, or be linked to supply chain execution, management and planning software.

Figure 1 shows how companies will increase their use of new supply chain information
sources in the coming years. P&G, for example, is adopting and implementing
a partner-focused collaboration model around supply chain information sourcing.
And Dell is pioneering a customer- and partner-focused supply chain datasourcing
model that synthesizes information from numerous internal and external providers.

These pioneers remind us that, for the time being, individual companies will
need to take the lead in developing industryspecific strategies for capturing,
integrating and leveraging large quantities of external data as:

  • Consumer goods manufacturers are increasingly squeezed by tighter delivery
    and service requirements. For them, an information management priority might
    be to provide customer service people with more and better data from hubs
    that focus on transportation tracking and customer sell-through information.
    This has the potential to increase product availability, thereby creating
    more frequent on-time deliveries and more satisfied customers.
  • Complex inbound supply channels often daunt high-tech manufacturers and
    retailers. Better and more frequent supplier-management data could help them
    reduce delivered-material costs and increase the flexibility of their product
    pricing.
  • Resource companies often fall short in their ability to blend plantlevel
    data with shipment status information. Improvements in this area would help
    them increase overall supply chain productivity, while enhancing security
    (e.g., for hazardous cargo).

3. More Incentive-Driven Performance Metrics

Many businesses enjoy collaborative, symbiotic relationships. However, Wall
Street still rewards (or penalizes) individual companies. This is why your CFO
is often suspicious of multipartner supply chain improvement projects, such
as RFID. After all, such “opportunities” promise higher returns for both you
and your partners. But they still cost your organization real money.

So how can supply chain leaders combine collaboration and enlightened self-interest
to achieve high performance? Supply chain masters often work first with innovative
customers and suppliers (not necessarily the largest ones) to develop joint
programs that reduce supply chain costs or improve service. Wal-Mart does this
all the time, using lowest delivered price as its (excuse the mixed metaphor)
800-pound carrot. However, most approaches don’t need to be this aggressive.
One favored strategy is to work closely with suppliers to evaluate inbound material-flow
options and identify ways to share productivity savings. This approach could
reveal that your suppliers actually are better equipped to coordinate your just-in-time
deliveries than you are. Dell recognized years ago that its suppliers are the
best managers of Dell’s material flows. Thus Dell supply chain professionals
focus on defining and monitoring supplier- performance metrics, rather than
physically managing flows.

The bottom line is that suppliers and customers often know more about what
types of improvements yield the best results. This explains why P&G second-largest
office is in Bentonville, Arkansas. Simply put, P&G figured out that living
next door to your best customer is a good way to improve logistical, product
development and merchandising performance. But it and many like-minded companies
also apply other strategies to build success in multipartner supply chain projects
to:

  • Work with partners to understand the legal options associated with cross-company
    incentive sharing. This can be done in the context of a task force – with
    companies, customers and suppliers working together to determine costs and
    benefits and develop joint plans.
  • Identify how potential initiatives may alter the flow of cash across companies.
    Nothing gets a CFO’s attention faster than free cash flow. If a deal can be
    formulated that correctly measures the value of improvements, while providing
    a way to legally share the costs and benefits, then executives will pay attention
    – particularly if it involves major customers or suppliers.
  • Establish an ongoing process for examining new incentive programs with supply
    chain partners. For example, the process might require new suppliers to propose
    gain-sharing pricing, based on agreed-upon service and cost/performance metrics.
  • Consider developing a vendor management organization (VMO) inside your company.
    VMOs make dedicated resources available to coordinate interactions with vendors,
    pursue supply chain improvement initiatives and monitor the performance of
    multipartner projects.

4. New Coalition-Based Supply Chain Management Practices

For better or worse, supply chain executives and supply chain organizations
acquired greater power in the 1990s. The better is that supply chain professionals
now do an improved job of managing complementary functions: transportation,
warehousing, after-sale service and sometimes even inbound materials management
and manufacturing. The worse is that this expanded scope often came at the expense
of other functional areas. But does a better way exist?

Generally, yes. And a good start is to work harder to draw relevant executives
and departments into the supply chain management process. Given the increasing
number of internal and external supply chain constituents, this broader, coalition-style
approach is clearly relevant and could soon be essential. In such a scenario,
P&L responsibility generally remains with the supply chain group. But supply
chain strategy – establishing new channels, defining service levels, determining
investment priorities and so forth – is more likely to involve teams composed
of customer relations, procurement and manufacturing executives.

Executives will need a sequenced, value-creating approach to launching coalition-style,
supply chain management strategies – potentially one that includes customer
and supplier executives. To begin:

  • Forge stronger relationships with customer service, sales and marketing
    executives, perhaps by inviting them to discuss upcoming supply chain investment
    priorities.
  • Include sales and procurement decision makers in contract and channel management
    meetings with customers and suppliers.
  • Clarify up front the role that each participant is expected to play, the
    anticipated results of the collaboration and the added value a coalition approach
    brings to the table.
  • Ensure that participants have support staff available to do the tactical
    heavy lifting between meetings.
  • Establish a series of attainable, short-term goals; for example, improving
    service to the most profitable customers.
  • Propose a schedule for future meetings, predicated on hitting performance
    goals established by the coalition. Schedule update sessions with key executives
    (e.g., the CFO), who may not be part of the coalition management process.

5. More ‘Continuous Transformation’ Capabilities

Thousands of supply chain executives have spent millions of hours pulling together
the support, assets and cooperation needed to create world-class supply chains,
which is why few want to hear that their carefully crafted solutions now need
to be more flexible or responsive. The reality, however, is that such changes
probably are necessary and inevitable. But couldn’t transformation take place
with less pain, resistance and disruption?

The answer may be continuous transformation, an ongoing process during which
companies collect relevant information; evaluate and prioritize changes; and
effect new capabilities as needed to support shifting requirements. Continuous
transformation is the life-blood of quick-change supply chains.

This doesn’t mean that supply chains must be in a constant state of revision.
The point is to make decisions and directives about raising the profit performance
part of the routine. For example, initiatives geared to improving product availability,
fill rates and on-time delivery usually hike profits. So they would be topics
of regular discussion. Constantly revisiting profit performance opportunities
also is a good way to build coalitions with sales and marketing. Here are some
other winning behaviors associated with supply chain transformation:

  • Work to continually shorten the supply chain. Zara brings 11,000 new fashions
    to market each year, generally with a threeweek lead time.
  • Jointly define key performance indicators (KPIs). Henkel (a multinational
    manufacturer of consumer and industrial products), Condis (a Spanish supermarket
    chain) and several packaging suppliers established an interesting continuous
    planning forecasting and replenishment process for laundry and home care products.
    The program’s major components are daily data interchange for select items;
    coordinated business plans (e.g., combined promotions and collaborative forecasts);
    and specific, mutually acceptable KPIs.
  • Exhibit unwavering leadership. Supply chain transformations become casualties
    when leaders lose faith in the strategy or process. Texas Instruments avoided
    this trap by putting multiple, senior-level champions behind a global project
    to re-engineer planning and forecasting. This helped the company move steadily
    ahead in its mission to schedule all plants simultaneously and thus reduce
    costs.
  • Monitor competitors’ actions closely and look to other industries for guidance.
    Tesco made the decision to pick and pack Web orders from its retail stores
    after watching other online grocers make unprofitable investments in distribution
    facilities.

Outwit, Outplay, Outlast

Revisiting our Survivor analogy, it’s clear that tomorrow’s supply chains
will differ in one crucial way: On Survivor, the goal is to stay on the island.
However, the principal mission of 21st century companies must be to get off
the island, to establish linkages and build and extend relationships beyond
the island, across the enterprise and potentially around the world.

Think about the core missions of tomorrow’s companies and supply chains: Team
up and integrate more completely with business partners. Join with customers
to fully address their fastchanging requirements. Collaborate with suppliers
to shorten the supply chain, reduce costs and increase availability. Each of
these goals also distinguishes the quick-change supply chain. Each helps companies
grow more profitably, operate more efficiently and achieve high performance
in less time. And none of them can happen on an island.

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