Now that we reviewed the different aspects of managing the Supply Chain and "Closing the Loop", it's time to look at what is required to make this happen. Obviously, to be able to do what I described over the last series of posts, I need data, data of what happens at the different levels in the Supply Chain. Some of this data resides in my own IT systems (ERP, CRM etc.) but the majority will be available through the companies in my ecosystem.
This is where "the rubber meets the road". Indeed, how do I get access to that data? Why would those companies share that data with me? It may flow from our business model. Indeed, if we have a SMI/VMI contract with a customer, we will have visibility of his sales and know the inventory in that node of the supply chain. That only works with tier 1 partners, and only with a fraction of them.
So, how do we get information from the remainder of our ecosystem. Well, we agree to share information. This is easier said than done. In an interesting study, dating from 2006 and titled "To share or not to share", Emile van Geel identifies four key success factors. Let's look at those a little more closely.
First, a clear strategic direction needs to be in place. If your company wants to build closer collaboration with partners, it first has to recognize and internalize the critical importance of those partners in the supply chain. This requires the acceptance that the relationship you have with your partner is important for both companies. You may want to argue that not all your partners are of critical importance, and I agree with that. The question is then whether a close collaboration is required with all partners, and my answer is no. It is important to identify early on in the process which partners are critical. One way to go after that is to identify the importance of their influence on the product you sell, or on the distribution of the product in the market. For example, if you make electronic equipment, you best have a close collaboration with your component and ASIC suppliers, but such relationship is not needed with your nut and bold supplier. This also forces you to think about who will provide you the key information.
Second, internal readiness is required. Indeed, if you want close collaboration with key suppliers, you may require your procurement department to change its attitude towards those suppliers. Indeed, it might be difficult to convince them to share a lot of information while having intensive price reduction negotiations. The best way to achieve close collaboration is by starting from a win-win approach. May sound old-fashioned, but it certainly works. Put yourself in the shoes of your suppliers.
Third, make sure that, when you open up your information to your ecosystem, you demonstrate execution excellence. Indeed, if you are sloppy in your own operations, don't expect a lot of willingness to go on a continuous improvement cycle. Exposing your performance directly to your partners will identify new areas where improvements can be made. Listen to their inputs and act. Establishing a good set of key performance indicators helps grab attention. The SCORTM KPI's are good candidates for that.
The fourth key success factor is trust. Building trust with partners is not an easy thing to do. Above all it takes time. Don't expect them to immediately trust you, if your procurement department has spent the last 10 years in screwing the last nickel out of them. This is often where close collaboration fails. Management does not understand the need for time in building trust. The impression is that because we have changed, the partner immediately needs to trust us, where he may ask himself what the trick is behind the change in attitude. According to McCutcheon and Stuart, trust is "the belief that the other party will act in the firm's interest in circumstances where that other party could take advantage or act opportunistically to gain at the firm's expense." That will not happen overnight.
In his paper, Emile van Geel adds a fifth success factor, innovation. I increasingly believe that, by listening carefully to partners and by reviewing operations jointly, we find many areas of improvement and innovation. However, that requires an organization to be open to listen to others, and not believing they are the best in the world. It is often difficult to change the attitude and develop such open and honest relationships. The Japanese are probably farthest down the road. Let's learn from them.
Last week, I was in Singapore at the SCM Logistics World 2009. My presentation was around how to build a weatherproof Supply Chain through the increase of visibility across the ecosystem. Having talked about the subject previously on this blog, I'd like to focus this time on a debate that took place amongst the participants, and this one was focused on how to look at the end-to-end supply chain holistically and identify how the performance of this one could be measured.
Over the last 12 to 18 months, companies have cut costs as never before. The smart ones have done this in such a way that their supply chains have become leaner and meaner, resulting in real savings that benefit the end consumer. In doing so, they have lowered the inventory buffers that shielded portion of their supply chain from variability and uncertainty in others, and as such increased the level of risk across the ecosystem.
So, understanding the supply chain, its dynamics, how it behaves, and implementing the management processes and governance required becomes critical. Many people will agree with the statement I just made, but it is how to do this that holds people back. Actually, when browsing the internet on this subject provides little useful information. Yes there are a couple software packages and the odd presentation (to be paid for), but nothing else. Interesting.
Companies have been focused on their supply chains for years, but they do not seem to have thought through how to measure them end-to-end. I believe there is no need to make things more complicated that they are. The industry has been using the SCORTM (Supply Chain Operational Reference) model for years. This model proposes for each node in the supply chain a series of KPI's. Could we use those for an end-to-end measurement? That was the debate in the corridors of the conference. Let's look at it in a little more details.
Let's look at the level 1 KPI's. The first one, Perfect Order Fulfillment, is really a Supply Chain KPI, as it relies on all partners in the supply chain to deliver their elements to ensure the final product is complete, meets the specifications and addresses the expectations of the customer. With the buffer inventories disappearing, the ecosystem is no longer compartmentalized and using this measure as an end-to-end one makes sense.
The second one, order fulfillment cycle time is an interesting one. Indeed, if the supply chain manufactures to order, it is clearly a measure of the supply chain performance. On the other hand, if the customer is delivered from stock, obviously there is only a portion of the supply chain that affects this measure. This demonstrates that not all KPI's are applicable in the same way to the supply chain. However, the exercise remains interesting.
The next three, Upside Supply Chain Flexibility, Upside Supply Chain Adaptability (The maximum sustainable percentage increase in quantity delivered that can be achieved in 30 days) and Downside Supply Chain Adaptability (The reduction in quantities ordered sustainable at 30 days prior to delivery with no inventory or cost penalties)., are by nature supply chain measures, so do fit our approach here. The same applies to Supply Chain Management costs.
Cost of Goods Sold (The cost associated with buying raw materials and producing finished goods. This cost includes direct costs (labor, materials) and indirect costs (overhead)) is one that is difficult to calculate across a supply chain as not all partners are willing to work "open books", which is what you would need to correctly calculate this metrics from a end-to-end supply chain level. So, this is probably not a good metric to go with. The same applies to two other metrics, the return on Supply Chain fixed Assets and the Return on Working Capital.
The last KPI, Cash-to-Cash Cycle Time is applicable for supply chains that work in a deliver order model, but not for the ones that deliver from stock.
All in all, a number of KPI's are useful and could be applied if the appropriate data can be gathered across the supply chain. From experience I do know the use of a small number of KPI's already makes a large difference, so while we may want to think at creating a couple more, using the ones we already have, would help companies focus on optimizing their ecosystems and in turn improve their delivery capabilities in addressing the new opportunities that appear on the horizon.