I take supply chain seriously. My friends might tell you TOO seriously. I think that the entire world should. I believe that better supply chain practices can save the world, and I think that it makes a difference in warfare and welfare. I think that it is at the core of the Gross Domestic Product (GDP). Yes, I am an unabashed zealot.
I have been at it for a long time. I have gray hair. Some even call me a Shaman. Some use worse names.
In 1985, when my boss told me we needed to build the end-to-end value network to better service the customer, I did not ask questions. I just started working on it as an objective. Today, when I talk about building the end-to-end value chain, people will look at me strangely and say “That is not supply chain. That is the role of marketing or sales or procurement. ” I scratch my head. I look at supply chain as a way to deliver value-based outcomes in business networks. I have little patience for the discussion of “whose role it is.” I just think it needs to get done, and that in most organizations it is not. We have made too little progress in supply chains and there is a new opportunity with new technologies to design for value.
My definition is wide. In my mind, the processes of supply chain cross over and overlap at the ends of the supply chain. Yes, I believe that supply chain overlays on top of the sales and marketing organizations and the procurement function. I feel that these organizations have defined their roles too narrowly. Too few are focused on the role of the organization in driving value networks to improve value-based outcomes. Most lack the understanding and they are just not incented to build value networks.
The focus has to be market to market. I believe that the supply chain team can make a difference, but it requires reschooling. It is about much more than trucks and sheds. Or pumps and valves. Or contracts and negotiations. In my mind, it is the end-t0-end process: from the customer’s customer to the supplier’s supplier.
To me, supply chain is business. It is a better way to design business networks to drive value-based outcomes. It is a shift from marketing-driven to market driven. It is a transition from digital marketing to digital business. I have little patience for people who want to talk about the fact that sales, marketing and supply chain need to get along and align. In today’s world, they won’t. They are incented differently in the organization, and the incentives put them at odds. Instead, the leadership team needs to build a strategy for the entire organization to focus on the delivery of value-based outcomes. The supply chain can then be the catalyst to map the processes outside in. This is the focus of this blog post.
As I have traveled this week, first to Retail Connections to talk to retail, then to GHX to discuss Healthcare and Implantable Devices, and now to the WIPRO analyst event, many things are rolling around in my head. I want to share four concepts that I think are core to building end-to-end value networks.
We Are Destroying Value. As I look at the building of value networks, traditional processes have moved costs and waste back in the supply chain. Our “best practices” are destroying value.
At my new company, Supply Chain Insights, we are analyzing supply chain ratios over the past twenty years to understand the impact of supply chain practices on value networks. It is fun work, but the results are shocking. Most companies have made their own organizations more efficient (ROA), but they have not reduced inventories and they have pushed costs back in the supply chain on suppliers that are less able to bear them. This has made the supply chain more fragile. Overall, total costs of the value network have increased because companies have not owned their networks. We have let buy- and sell-side transactional relationships erode value. Today, we are not aligned on value-based outcomes.
I can find only two good examples of value networks creating value: Taiwan Semiconductor (TSMC) in the semiconductor industry and Performance Based Logistics in Aerospace and Defense. In every other value chain, we have said we are “collaborating” but in reality, we are moving inventory, costs and waste backwards in the supply chain. Consider figure 1 re Healthcare. Hospitals have reduced cash-to-cash cycles by improving accounts payable and squeezing suppliers. Pharmaceutical and Medical Device companies both have high margins, but have not created stable supply chains. Look at the gyrations of Boston Scientific and Eli Lilly for the same period of time. (And, these are the best of their peer group.) When looked at in a network view, cash-to-cash cycles have gone up in the end-to-end value chain and supply chain results have become unstable. Hospitals lack a basic understanding of supply chain management and the legacy defintion of the sales relationship to the physician is a barrier to driving sustainable value. I am still amazed that we sell implantable devices (without track and trace capabilities) from the trunk of the sales person’s car to the hospital. The discussion in healthcare needs to move from a focus on efficient sickness to health and wellness. We cannot get there from here.
I had a conversation with one of the major medical device companies, a healthcare distribution firm, and a leading hospital. They all said that they wanted to design for value. However, twenty minutes into the meeting, it became very obvious that their role in life was defending their current position in the healthcare. They really believed that they knew “best practices.” I strongly believe that what is needed is a revolution not an evolution. We will never redesign healthcare for better outcomes if we do not redesign the buy/sell relationship and improve the understanding of the service providers on why supply chain matters.
Automotive is a perfect example of what not to do in building supply chain value. The automotive industry took an early lead in squeezing suppliers so hard that they created risk in the supply chain by creating instability. It was one of the issues of American automotive companies’ demise. Instead of pushing costs and waste backwards in the supply chain, companies should redesign for value-based outcomes. A.G. Lafley’s turnaround of P&G, through the focus on the two moments of truth (purchase and usage), is an example. The transactional nature of procurement and sales is a barrier to redesigning for higher value. Please hear my plea: give the supply chain group the opportunity to redesign the value chain from end to end. Own the entire supply chain.
Industries Are Not Created Equally. They Are at Different Levels of Maturity. One of the important characteristics of a mature supply chain is resilience. When you look at year-over-year results of supply chains over the last decade, you see a very different picture of resilience. Mature supply chains have the behavior of Colgate and P&G in figure 2. They show resilience and year-over-year progress against their goals. The next best condition is the pattern seen in the DuPont and Samsung results. DuPont, while not showing wild gyrations over time, actually moved backwards in gross margin and cash-to-cash, while Samsung moved back to move forward. Merck and Zimmer on the other hand show wild swings. They were unable to manage their supply chain performance through the recession. Reversing these swings and gyrations is an opportunity for both Zimmer and Merck. This is what a supply chain is all about. Supply chain resilience is the role the unsung supply chain hero. This can only happen by owning the entire supply chain.
B2B Is Not B2C. Clicks are sexier than bricks; but increasingly, companies are learning that they need to put their bricks–stores, factories, and distribution centers– to better use. However, I feel that we need to do it in the right way. I have seen many an article mistakenly claim that B2B models need to adopt B2C techniques. While I do agree that there is a lot that B2B models can learn from B2C, they are fundamentally different. It is not as easy as control/copy/paste.
The term B2B is used to describe many contexts, so let’s start with a definition. B2B usually means one of two things: a B2B online channel presence or B2B Messaging. My use of B2B is about the connection of the extended value networks and the use of both. Today, B2B relationships in the extended supply chain are based on passing EDI messages or portals. EDI is like passing messages in closed envelopes. It is slow and expensive. Enterprise portals are like a bad party game where no one wins.
Data volumes grew 18X in 2011. We are entering an era of machine-to-machine (M2M) messaging that will transform B2B relationships. There will be 50 Billion devices connected by 2020 with a 33% compounded year-over-year growth rate. This will improve the supply chains’ ability to know more about consumption. It will redesign the last mile. It will affect the home, the hospital, the vending machine, the car, and will increase the impact of the connected consumer. It will also impact the factory with a redesign for digital manufacturing. In this world, maintenance is no longer based on time; instead, it will be based on equipment sensing and actual usage. Similarly, distribution centers will be redesigned to implement digital logistics where safe and secure supply chains will be based on RFID chips on pallets, and container and logistics sensing will allow real-time connectivity to determine dock scheduling, put-away and multi-tier available to promise. It is coming. It will not be as easy as stuffing new signals into last decade’s Enterprise Resource Planning (ERP), Manufacturing Execution Systems (MES) or Warehouse Management Systems (WMS). Similarly, Supply Chain Planning (SCP) will be redesigned to take advantage of new forms of sensing. These systems will become legacy applications. Enterprise systems will have to be redesigned for new forms of B2B and M2M connectivity. The Cloud is an enabler. New forms of analytics will yield new opportunities, but we have to be open for change.
As we run the race for Supply Chain 2020, Big Data Supply Chains and the redefinition of enterprise systems will become a new reality. It is my hope that we can use this change to focus on value-based outcomes. It is my mission to help companies see that we can redesign the supply chain from the outside in with a focus on corporate social responsibility, risk management and health and welfare. However, to move forward, we must “learn the practices of the past, to unlearn them to relearn the processes of the future.” We do not have “best practices.” We have “emerging practices.”
The Role of the Store. I spent the week at Retail Connections and facilitated a discussion with retailers on the Role of the Store. Itwas a fascinating discussion. Retailers have made large profits from B2C endeavors, but the tide has gone out. Store profitability has declined. They are being attacked in the store by online retailers. However, the store will not go away.
Retailers now need to truly design for value. For many, the belief is that they should work on cross-channel convergence and have the store fulfill B2C orders. I eagerly shared the pictures of my damaged products from Macys and JC Penneys, companies that have adopted this strategy. The group laughed when I shared the story of how the JC Penney “Customer Service Representative” wanted me to meet the UPS man at 3:00 p.m. on a busy Monday to prove to them that the $2.00 Pyrex bowls they had shipped without packing materials broke in transit. Bottom line: I’ve stopped ordering from JC Penney online. In similar fashion, I have received three consecutive orders from Macys with damaged goods. Macy’s went to store fulfillment without training their employees. Cross-channel fulfillment and omni-channel is easier said than done. I order 75% of my purchases online. I find that only Nordstrom is doing a great job shipping from stores to my home. The difference is training and the definition of the role of the store.
In the session, we talked about how to drive greater value in the stores and erase the erosion in profitability. The group agreed that it cannot only be about price. We discussed driving higher value in the store. Follett told the story of digital signage and gamification in their school bookstores. Safeway shared the story of their QR code wall. Godiva shared how a “chocolate dipping station” in their store increased purchases by XX% (I cannot reveal the number). On the plane ride home, I spoke to HEB about how they are doing different better with the opening of Hispanic stores that sell a few select items that appeal to the Hispanic shopper at rock bottom prices. (Small refrigerators and large colored marshmallows help to drive hispanic traffic.) When I hear the consultants wax (and waft) elegantly about SOMOLO strategies, I want to scream. I think that we have forgotten that the role of the store is about service.
For the record, I hate the name SOMOLO. I hate the name Omnichannel. Sometimes, I think that we get so wrapped up in geek speak that we forget the basics. Retail needs to be about serving the needs of the consumer. It should be a discussion of value. Execution matters. The supply chain matters more than ever. In the last decade, we have only automated B2C. It is time to redefine the retail supply chain for value and redefine the role of the store. Retailers, like hospitals, have had weaker supply chains than those of their suppliers. They have automated B2C and run their stores like it is business as usual. They have squeezed their suppliers and not owned their value chains. I think that it is time for a change. What do you think? Do you think there is a need for change as well?
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As my arms stretch forward to pull for the next lap in the summer heat, three thoughts circulate in my head. (I often write my