Uncanny. The US GDP in 2021 grew at an unexpected rate of 5.7% in the second year of the pandemic. To understand the phenomenon, the 2019 GDP was 2.16%. Traditional risk management policy assumes a contraction in growth: the conventional focus is the shutdown and reallocation of supply. Companies that viewed the pandemic as another risk management event will struggle the most with Q1 and Q2 earnings reports.
A container from Shanghai to Long Beach was 56 days in 2020 and increased to 80 days in 2021. The two most significant factors were a rise in time between the booking to gate in at the port, up 43%, and the ocean transit time, up 36%. Overall lead times from North America to Asia took 17 days longer than from Asia to North America, or 25% longer. (Source E2open Shipping Index).
Market inflation sits at 7%–the highest since June 1982. With 65% of supply chain professionals members of the Millenials and Gen X generations, inflation is new. The members of the supply chain organization have never managed through a period of growth, inflation, and unprecedented supply variability. Current technologies and processes focus on volume trade-offs. The reinvention of planning is needed, but it is hard to unwind the industry. The most significant barrier lies deep within the organization.
I have been an industry analyst for two decades. As an analyst, I conduct primary research. My observation is that over the last two decades and the myriad of mergers and acquisitions and the building of global supply chains, five things happened which makes it harder for organizations to make good decisions at the pace of business:
- Alignment. The gaps between commercial and operational teams grew.
- Larger. As companies grappled with growing and achieving global scale, the organizations became larger.
- Focus on Cost. The Chief Financial Officer gained more presence with procurement and IT reporting to finance. As a result, focusing on cost and efficiency, and functional metrics throws the supply chain out of balance.
- A Decline in Innovation. Ironically, technology innovation is the highest that I have ever seen. Still, organizations are less willing to test and try technology innovation due to the restrictions and guide rails placed on software procurement and deployment. Today, only 4% of companies are the first to buy new technology—a 40% decline from post Y2K in 2001.
- Less Collaborative. Even though companies use the term collaboration frequently, it does not drive behavior. Over the past two decades, organizations have become more insular and less willing or able to share meaningful data. Payable terms grew, and the focus on efficient procurement and functional metrics reduced the development of strong relationships across the value chain.
Let me illustrate by sharing the story of Lucas. I will then wrap up with seven things you wish the CFO did not make you do and share recommendations.
The Story of Lucas
As the supply chain leader logs into their computer and works through the unprecedented issues, now is a time that the CFO can help. Most CFOs do not realize that their lack of understanding of the supply chain is a barrier to help the organization succeed in these challenging times.
To illustrate, let me share a story of working with Lucas, the CFO of a 35 Billion dollar consumer products company. He asked me to help him understand why his customer service and shipment reliability were poor. I worked with the organization for a year and scheduled a meeting with Lucas to explain that his policies were the primary issue. His response? “Huh? How could this be?”
Let’s set the stage. Lucas was a brilliant and committed CFO. He genuinely cared for the organization and prided himself on forging clever strategies. In his aspiration to become the COO, he was interested in unlocking the secrets of the supply chain.
So, we began the discussion. We started the conversation with sourcing. Lucas had a team that dictated sourcing based on excel spreadsheet analysis to reduce cost and improve tax efficiency. The crackpot team were great spreadsheet jockeys and constantly designed supply chain flows. The issue was that none of these ex-McKinnsey and Deloitte consultants knew how to model variability, feasibility, and constraints. Lucas had no idea how to model the supply chain to develop a feasible plan.
Six layers lower than Lucas in a regional organization, supply chain modeling technologies were being used by a regional team. His crackpot spreadsheet squad had no idea how to use or appreciate this type of modeling. And, the regional modeler, Tim, had never met Lucas. The thought of Tim working with Lucas scared Tim to death.
In addition, Lucas used inventory as a slush fund to make quarterly earnings. There was no realization of the need for inventory as the most important buffer in the supply chain to minimize demand and supply volatility. Nor did Lucas understand how the increase in variability and the continual redesign of the supply chain added to the need for inventory. When we discussed it, he hung his head. The high asset utilization of the company was a barrier to rebound when the company slashed inventory.
The organization implemented an IBP program in 1998 through work with a managerial consultant organization. His goal was to align outcomes with roles and responsibilities. As a result, the thirty regions drove their programs to improve management by objective. The problem? Tight integration and close coupling to the budget shut-off the use of market signals in the business process. Beating the growth forecast and improving margins drove lucrative bonus programs. As a result, the entire organization gamed the system to improve personal gain. The regional teams would always sandbag—or under forecast—to make their budget incentives.
Manufacturing equipment lead times were 19 months. Based on the regional forecasts (even though there was always a consistent under-bias), Lucas delayed the purchase of new equipment. As a result, the organization prided itself on having a great IBP plan tightly coupled to the financial budget but moved to the rhythm of an infeasible plan out of sync with the market. Yesterday, as I pushed my grocery cart past the aisle of Lucas’ products, the shelves were bare. No, not just a few spots were empty, but the entire rack was barren. I smiled.
In the pandemic response, there are a lot of lessons for business leaders. The impact of historical bad practices takes leadership and many years to unwind. Many of the changes go against convention and require courage to drive change.
Seven Things You Wish Your CFO Had Not Made You Do
So if you too are managing the supply chain in the world of CFO dictates, here are seven mistakes your CFO may have had you make, and some recommendations:
- Manage the Supply Chain to the Budget. A singular focus on cost throws the supply chain out of balance. The most efficient (lowest cost per unit) supply chain is not the most effective, especially in these unprecedented times. The discussion needs to shift. Companies need to manage the supply chain to a balanced scorecard of growth, margin, inventory turns, customer service, and asset utilization. Use digital simulation capabilities to help the CFO understand the impact of variability on margin. Use market signals to drive scenario planning. Use technology to show the impact of this bad decision making.
- IT Standardization. Unfortunately, the large solution providers that were the basis of the IT standardization discussions, underdelivered in the last decade on innovation. Today, companies that myopically focus on IT standardization are statistically less able to use market data to make organizational decisions. While IT standardization makes logical sense, it defies that logic that the genesis most impactful innovation over time is from start-ups and entrepreneurs. What to do? Drive change. Set up go-fund me sourcing for internal projects and allow teams to test and learn in divisional settings. Govern by implementing stage-gate processes (analogous to those in the management of product innovation.) Invite innovative technologists to regular lunch and learn sessions and encourage team members to submit new ideas to internal seed capital processes.
- Mandatory ROI on IT Investment. While we test and learn on product innovation, organizations shut down their ability to learn through technology innovation by mandating a fixed ROI from promising, but untested technologies. The use of RFP processes also puts companies at an additional disadvantage. Focus less on rigid implementations and more on value delivery. Especially in the area of decision support, ask questions on what makes a good decision and test and learn using new capabilities. Don’t box these implementations into traditional project management approaches.
- A Zealous Focus on Cost. Only 29% of companies can quickly get to and analyze total cost. Instead, most companies manage based on functional metrics—lowest manufacturing, procurement, or transportation costs. In parallel, only 1% of companies can easily see margin impacts. The analysis of demand shaping activities averages four weeks, and only 50% are ever evaluated. As a result, most companies shift demand—increasing cost and not improving growth—while wringing cost and agility from operations. This approach increases complexity and cost. Focus the entire organization on margin. Develop capabilities to understand market signals and baseline demand. Using the new forms of analytics test and learn on market approaches.
- Data Sharing and Procurement. Walk away from the automation of procurement for RFPs. Host open supplier forums by category and brainstorm how to improve data flows directly with suppliers. Build true relationships with important suppliers and encourage shared innovation. Build supplier development teams and hold the organization on the sharing of quality data.
- Sourcing Decisions Via Spreadsheet. Unfortunately, excel spreadsheets drive 93% of supply chain decisions. The reason? The users trust the approach, and it is easier for the finance team. The problem? It is impossible to model the details of variability, constraints, and cross-functional trade-offs in a spreadsheet. Get at the issues of why your organization holds onto spreadsheets like Linus holds onto his blanket. Help the Linus’ in your organization to see the impact of variability through modeling and simulation.
- Tight Integration of S&OP To The Budget. The S&OP process needs to be horizontal from the customer’s customer to the supplier’s supplier. Drive cross-functional decisions through a balanced scorecard approach. Use market data to model opportunity and supplier data to understand risk and allocation. Clearly define governance to ensure that the organization is not under or over-biasing the decision process based on internal rewards.
What sounds so logical to many is actually the fabric of underperforming supply chains. Think about my discussion with Lucas. If you have a Lucas in the organization, initiate a discussion with the executive team on how these archaic practices will suffocate the organization during the pandemic.