Uncategorized

Will Arrogance Stunt your Growth?

by Lora Cecere on July 29, 2013 · 0 comments

It happened on Thursday morning last week. It will probably happen again on Tuesday. And, again on Wednesday. I am driving on a campaign to change thinking.

It is hard to change a mindset. The brain is wired to believe what it has been told for many years.

Every time that it happens, I smile. I understand. I was once there also.

Let me start with a story. Last week in the middle of a presentation, a supply chain leader made the statement, “We have solved the issues in supply through better optimization and use of data. There is not much more that we can do. The issue is demand. I think that we need to focus there.” The statement was delivered with arrogance and conviction.  Many supply chain leaders are so convinced they know the answers that they have stopped listening and learning.

It never occurred to this supply chain leader that there is no place to put “new forms” of demand data into today’s supply-centric enterprise architectures. As I mature in my work as an analyst, I am more and more convinced that the redesign of the supply chain outside-in to use new forms of demand data requires us to “blow up” our traditional, and supply-centric architectures. Why? The data models are wrong. These architectures were defined based on simple, deterministic optimization using the  principles of a ”push-based” supply chain. The systems are based on 1990s thinking.  Remember back then? It was when gasoline was 1/3 the cost of today and there was a lot of excitement about 32-bit architectures and the move to client-server systems. A lot has changed in both business requirements and technology capabilities; yet, the fundamental technologies and the definition of the supply chain footprint remains unchanged.

The Issue

We have been taught, as supply chain leaders, that over the last decade supply chain processes have improved costs, shortened cycle times, improved customer service and decreased inventory. Just ask any consultant and they will quickly tout “best practices.”  Or run the statement by any software provider, and they will share that their solutions delivered these “best practices.”

When I first started working on the book Bricks Matter, I believed it too. I sadly found that this was not the case. After two years of studying corporate balance sheets and talking to supply chain leaders, I now see things quite differently. Numbers don’t lie. Companies are stuck. Based on our recent research, we find that only 1% of process-based companies are making progress on both operating margins and inventory. As a result, I don’t believe that we have best practices. It is my belief that we have emerging practices.

Facing the Issue

Most organizations are stuck on their ability to drive improvements in operating margin and inventory cycles. Too few supply chain leaders have held themselves accountable to their balance sheet results.

Currently, we at Supply Chain Insights are working on presentations for our upcoming Supply Chain Insights Global Summit. At this conference, we are excited to share three detailed analyses of corporate performance over the last decade:

  • Performance on the Supply Chain Effective Frontier. An analysis of how companies have made trade-offs between operating margin, inventory cycles, complexity and growth. Which companies have made year-over-year improvements? And, why?
  • Results of the Supply Chain Index. Which supply chain metrics correlate to market capitalization by Morningstar sector? Which sectors have made the most progress? Who are the leaders in each sector?
  • Supply Chain Resiliency. Which companies have been the most resilient delivering year-over-year results with small incremental improvements over the last decade? What are their secrets?

To understand the current state, I built a database of twenty years of supply chain financial ratios for all public companies. (Note that the ratios are better than absolute numbers because it helps in the comparison of large and small companies and performance across currencies.) In 2012, supply chain process evolution was thirty years old, and I wanted to use the book, Bricks Matter, as a litmus test to tell the story of success. However, I could not find it. Progress was good at the beginning of the decade, but as supply chain complexity has increased, progress on operating profit and complexity has tapered off.

We find that to cope, companies have pushed costs and waste backwards in the supply chain. For example, they have made improvements in cash-to-cash cycles by increasing payables and lengthening terms to suppliers. This increase in payables has increased risk by decreasing resiliency. As we rethink supply chains, we will need to reverse this thinking and take ownership of the entire value network.

Those of you who know me well, know that I no longer believe in the Gartner Top 25 methodology. The six years of work at AMR Research on this methodology was actually the stimulus for me to tackle a new approach.  You can read some of my thoughts in my past blog posts at:

Work on the Supply Chain Index

My Thoughts on the Gartner Top 25 

Moving Forward

Where have we made the most progress? The greatest progress has been made through the introduction of new business models. E-commerce is a more profitable form of retailing. Amazon can now deliver almost every category of item to your home with no shipping cost for Amazon Prime customers. Club store formats improved retail turns and operating margins. Performance-based logistics in aerospace and defense changed the A&D industry forever. Modcloth, a fashion retailer that lets the buyer be the designer, just turned ten-years old with revenue of $100M.

Supply chain is an engine for growth and enabling new capabilities. We are at an inflection point of new technologies and processes. The technologies installed in the last decade are quickly becoming legacy applications. To move forward, in my opinion, we need to do five things well:

  • Build Outside-in. Build supply chains from the outside-in, minimizing demand latency and redefining supply processes to sense and respond to channel demand. Recognize that today, the response is inside-out based on orders and shipments. The order is a poor representation of demand. We have never had a better opportunity to build a customer-centric supply chain; but, to do this we have to recognize the difference between a marketing-driven and market-driven response. The first step is social listening and text mining of customer sentiment.
  • Focus End-to-end. Only 1% of companies have a role focused on managing the end-to-end supply chain.  The greatest synergies happen when the supply chain is managed end-to-end as opposed to management as a limited supply chain function focused on logistics and operations.
  • Move at a New Cadence. Embrace new technologies: Internet of Things, new forms of analytics, mobility, etc. It is no longer weekly data weekly… or reporting with a day latency. Instead, it is real-time data. Define and drive new processes like digital manufacturing and digital path to purchase so that our supply chains can operate at the new cadence of data flows.
  • Orchestrate Demand and Supply Market-to-Market. The traditional supply chain drives a volumetric response based on a SKU (item at a location). The future processes, based on new forms of analytics, will be based on matching product attributes to customer attributes while orchestrating price, mix and volume. Experiment with these new forms of analytics.
  • Be Accountable to the Balance Sheet. Today, only 23% of supply chain leaders can easily see the impact of their decisions on profitability. Companies that are outpacing peers have strong supply chain finance functions.

We hope to continue this discussion with you at our Global Summit. It is sold out for technology providers, but there are still seats available for manufacturers, retailers and distributors.  Hurry! The room block is lifted next week, so the best cost on hotel rooms is this week. The event is being held at the Phoenician in Scottsdale, AZ on September 11th and 12th.

I like art, and love unusual sculpture. Some days when I need a pick-me-up, I watch the videos of Theo Jansen’s Strandbeests. These self-propelling plastic pipe structures use wind power to walk. I am amazed as one of these ungainly creatures catch the wind and walk easily across the sand. It is carefully designed alignment.

Over time, these modern sculptures have become more resilient. The artist, over two decades, refined the sculptures to withstand the rigors of the environment. In an interview this morning, on Sunday Morning, he discussed two factors that improve performance:

  • Flexibility at the joints
  • Design of the ends to catch and propel the sculpture in the wind.

As he shared his secrets, I smiled. I had started this blog post on Friday afternoon. It is a discussion of supply chain design and the sharing of research that supports that the best supply chains have flexibility in the joints and are well designed on the ends to propel commerce. Like the Strandbeest, using these two design elements, the supply chain is more resilient. It might even propel your organization to win the race for Supply Chain 2020. Take a minute and watch the video of the Strandbeest and contrast this effortless movement to what you see in your organization and see if you agree.

Flexibility at the Joints

Sometimes I find the writing of reports drudgery. Sometimes, it is fun. One that I enjoyed the most was the recent report Three Techniques to Improve Organizational Alignment. The study looked closely at the views of over 190 respondents from three functions within the organization: supply chain, finance and IT. In the survey, each of the organizations rate the need for agility high, and rate it low. As shown in figure 1, the gap is wide. The supply chain group rates it the lowest.

The supply chain needs to be designed to be agile. It does not just happen. There is no industry standard. In this research, we define an agile organization as one that is designed to withstand the levels of demand and supply volatility and deliver the same levels of cost, quality and customer service.

An agile organization, like the Strandbeest, has flexibility in the joints (at the connections between functions within the organization and in the interconnectivity between organizations in the creation of value networks).  A barrier to creating this level of flexibility is the tight integration of functions.  While the transactions need to be tightly integrated, the planning and analytics need to be based on “what-if” analysis and visualization. In our research, we find that only 11% of companies feel that these criteria are being met in their IT architectures today.

Figure 1.

To have this flexibility, the organization also needs to be aligned. In this study, we asked each organization to rate how well each organization was aligned. In figures 2-4, we share the ratings and perspectives of the individual functions. The self-assessed ratings are very different.

The only commonality in the three views is the gap between sales and the rest of the organization. Many companies have made the  mistake of rewarding sales for volume and the rest of the organization for profitability. This, by definition, creates misalignment.

In the figures below, we share the perceptions of each “teams’” view of alignment. Contrast how different these three views are.

Information Technology Group. As shown in figure 2, the Information Technology (IT) team views the organization as more aligned, with fewer gaps, than their finance and supply chain counterparts. They also have a false sense of how well they are aligned with the business teams. They believe that the team has achieved greater alignment than is seen by the other line-of-business counterparts.

Figure 2.

Finance Group. The Finance Group sees the largest gaps within operations. For this group, the gap between operations and finance,  and sales and finance, are both acute. They also feel that there is a gap between manufacturing and procurement, and sales and operations. While they see the gap between sales and IT, they see it as less important than the gap between other functions.

Figure 3.

Supply Chain Team. The perceptions of the supply chain show the greatest lack of organizational alignment. In the views of this team, there is a greater gap in organizational alignment than felt by the finance or the IT teams. This is particularly true in the teams’ view of alignment between the operations group and IT.  This group also feels a large gap in manufacturing and procurement alignment and the gap between sales and operations. They see that the operations and finance team are more closely aligned than the views of the finance team around this alignment.

Figure 4.

So, how do we Run the Race for Supply Chain 2020?

Just as the Strandbeest walks the beach, organizations need alignment to run the Race for Supply Chain 2020. To improve alignment, the research study supports three next steps:

1) Improve Sales and Operations Planning. In our research, we see that companies that have a mature view of S&OP and are modeling the network, and planning to maximize opportunity and mitigate risk, nearly double their perceptions of organizational alignment.

2) Clear Supply Chain Strategy. Agility does not just happen. It requires design. Postponement, demand and supply orchestration, and supplier network flexibility are all tactics that require careful design and deliberation. Today, 95% of organizations are not clear on supply chain strategy.  Like the Strandbeests, the supply chain needs to be carefully designed, and redesigned, to improve agility.

Some organizations see agility as shorter cycles. This is a mistake. Many times people can do the wrong things quickly and create a heap of problems. Take the example of a shoe manufacturer that I worked with for many years. The CEO believed that the best supply chain had short cycles. The team focused on improving cycles and were surprised to find that their costs were 38% higher and that their supply chain cash-to-cash cycle was 49% longer.

3) An Effective Supply Chain Center of Excellence. While the supply chain center of excellence is present in over 35% of organizations, only 53% of companies surveyed  feel that they have a successful supply chain center of excellence. The primary issues lie in the design of supply chain strategy and the facilitation of cross-functional horizontal processes. Most of these issues lie with the organization’s view of supply chain as a function versus the definition as an end-to-end process.

What do you think? Any ideas on how to improve organizational alignment and flexibility? We would love to hear your thoughts.

We will be sharing more on this research and other snippets from our 18 research studies at our upcoming Global Summit to be held at the Phoenician in Scottsdale, AZ on September 11th and 12th. For more on how to register check out our Supply Chain Insights Global Summit website .