“When the well is dry, we know the worth of water.”, Benjamin Franklin
It was a cold winter day in Minneapolis. The security guard at the gate warned me of frost bite walking from the parking lot to the corporate offices of a client. So, I scurried along with snow crunching under my boots.
I was also expecting a frosty introduction. Manufacturing, distribution and sourcing were at an impasse. I was walking into a conference room of waring factions. After years of functional excellence programs, they had run out of ways to find the money that the corporation needed for growth. They needed the next big idea. They needed to find dollars/euros and they were only surfacing pennies/ shillings through their traditional processes.
Need money? The common answer is to squeeze supply. For many companies, the supply chain is the de facto bank for the company. Through functional excellence and continuous improvement programs, companies generated cash to fuel growth. Supply chain became the place to go get cash. However, after years of harvesting the low-hanging fruit, the savings are getting tougher. For many, the well is effectively dry. Yes, companies can still wring pennies from their functional excellence programs; but they want bigger savings. To gain these, they need a new approach. They need to turn the supply chain over, lay it horizontally, and ask a different set of questions. This is what I did on that cold winter day in Minneapolis. Last week, the company called me to tell me that the advice had saved them 1 million on an operating budget of 15 million; and at the end of the week, I heard from a second company, that had taken my advice and designed horizontal processes from the outside-in, that had saved 18% of their operating budget. Today, I want to share this insight with you.
However, before you read on, get a stiff cup of coffee. The advice is counter-intuitive. For many, it is illogical; but it works.
Start by turning the Supply Chain on its Ear: The key to driving this type of break through performance is to turn the supply chain on its ear. Focus on the design of horizontal processes from the outside-in. Horizontal processes include margin management, contract management, demand shaping programs, working capital management, Sales and Operations Planning (S&OP), supplier development, and new product launch. Ask how to align these processes cross-functionally to gain greater value in the value chain. Ask what is possible? How many value chains there are, and what drives value in each?
Align goals: The next step is to step back and align metrics. Ask yourself the question of “If we reward sales on volume, marketing on market share, finance on minimal budget variance, manufacturing on asset utilization, and sourcing on the lowest cost of materials, will we ever achieve the lowest total cost?” The answer is no. Inherently, only 20% of companies measure and make trade-offs on TOTAL costs. Most measure functional costs with little power to trade-off costs across the vertical silos of source, make, deliver and sell. Have a laser focus on total costs, and taking the waste out of horizontal processes. Look at what drives variability and manual intervention in these horizontal processes and look at alignment of goals cross-functionally against what drives value against the business strategy.
Train for the Decathlon: In a Decathlon, there are ten events. The winner is judged by total performance, not by a single score in a single event. Because the athlete must do well in the four runs and six field events, he has little opportunity to perfect any one event. A decathlete trying to improve performance in one specific event is likely to deteriorate in another, because the physical demands of the various events are conflicting. His training is necessarily different as he strives to improve all techniques, gain strength without losing speed, and acquire the stamina to perform through a competition that lasts anywhere from 4 to 12 hours per day. In short, he trains to raise performance making trade-offs with the end in mind. A supply chain is like a decathlon. Companies need to do well in source, make, deliver, sell, innovation, customer service, order-to-cash, procure-to-pay, inventory management, and sustainability. The company that can both lower total costs and drive innovation is good at trade-offs. They understand that to win the race, that they may score 2nd or 3rd in these individual competitions to win the total score. And, that they will lose if they try to be the best in every event. As an analyst, I have participated in over 50 benchmarking exercises which taught me first hand that the company that tries to be the lowest cost in all functions ends up with higher total costs. (I know that this is counter-intuitive, but it is true.)
Like the decathalon, the supply chain score board is arbitrary. It must be determined. With a focus on horizontal processes, teams find that they must better define the goal. They need a scoreboard that rewards trade-offs. This raises the issue of “What is supply chain excellence?” What drives value in our value chain? The answer is not so facile.
Ask the Right Questions: As companies move from a laser focus on functional excellence to value chain management, there is a radical shift in what matters. Traditionally, the supply chain has been focused on:
- Right product, right place, right time
- On-time and in-full shipments
- The integrated end-to-end supply chain
- Lowest costs
As companies design horizontal systems, they find that these are not sufficient. These focus areas need to be redefined based on answering a higher-set of questions:
- What does global mean? What should be global and what should be regional in source, make, deliver, and sell processes?
- How many supply chains are there? And, what defines value for each?
- What does customer service mean? How do we define it to best support value-based outcomes?
- How do we best sense, shape and orchestrate demand? And, minimize the bullwhip affect?
Ask the tough questions. Put your supply chain on its ear. Change the focus from vertical to horizontal processes. I have seen the evidence, but I now feel even more strongly that there is gold there. Go get it! There are just TOO few ways to prime the pump to drive break through ideas these days.
This week, I am in Philadelphia at SAP’s Base Camp for Industry Analysts. Look for my tweets on #sapindustries and check out my findings on my post next week. Until then, look for me on airplanes combing the world for GREAT supply chain ideas to share.