Within the organization, division of labor was a fine concept when it came out. Obviously, if people focused on their individual area of expertise, in general they can be a lot more productive, if there is a robust mechanism to integrate the fruits of their labor. Unfortunately, the attempts to integrate conflict with the human nature driven by divide and rule from the top, and interdepartmental jealousies at the bottom. If someone gave me a penny for every time I have to listen to a mid-level manager tell me about how everybody else in other departments is under - performing, I would be a very rich man by now.
Most organizations became veritable bureaucracies as they grew bigger. Every person sat inside his/her own department, and was careful about making sure their department did not carry the blame if there was mix-up. Covering the tracks became the norm, and a rigid protocol was developed for interdepartmental co-operational. The resulting departmental silos create silted communication and a culture in which inter-departmental planning is simply not possible.
So what are the problems you might notice in such a divided organization?
We have worked so long on projects where we see these symptoms that it will probably take an entire chapter to explain each of these root causes. So, rather than dwelling too much on explaining each of them here, look out for the case examples embedded throughout this book and see if you can do a quick diagnostic based on these symptoms.
A common tools deployed by most divided organizations to achieve integration was very rigid Enterprise Resource Planning (ERP) system to run their internal processes that co-ordinate inter-departmental communication. By their very nature such systems were very formulaic and prescriptive with a one size fit all approach to planning.
If you are familiar with internal operations of a large corporation, and wonder why you see so much chaos, anxiety, blamegame and other such dysfunctional behavior, this is the key reason. The systems are not setup for the type of operation. Again, I am sure you and I both could probably write a book full of case studies illustrating these types of problems. My purpose in this chapter is just to highlight what is chaining today's corporations and not to dwell too much on it.
Of course, if you do think of an extremely poignant case study which stands far above those recounted in this book, do send them through to me for inclusion in a subsequent edition of this book.
As organizations free up their inter-departmental planning from rigidities of prescriptive, monolithic systems the communications start to bloom, and planning becomes flexible, fluid and adaptive. Efficiency improves considerably and everybody is running together, faster.
However, a higher set of problems emerge due to lack of external focus - on suppliers, on customers and on end- consumers. Many times everybody inside the company is running together, faster in the wrong direction. For a quick example take a look at Sony Corporation. Unhappy customers, slower product development, key new products missing the mark are symptoms of such problems as shown in figure 1.3:
At a macro level, we will discuss only a few of the shackles that chain today's corporations and that too at a very high level. The aim of this discussion is to name a few hidden drags on corporate and economic performance, whose full impact may be difficult to recognize at a first glance. Rest of this book does NOT contain much discussion on these so it is important to put these on record here.
Because like it or not, you will face this in your business. And, whether you can do something directly or not, you will somehow have to overcome these drags. So, when you are reading the rest of this material and working out how to use it in your business, keep in mind these chains as well.
We were discussing the invention of electricity and he asked me: “Dad, what would happen if there was no electricity?”
Since I actually had such an experience, I recounted to him my life in a remote village in Himalayas when my mother had taken a one-year assignment to teach economics to children in a school nearby.
I told my son that there was no internet, no computers, no telephones, no television, no radio and no light bulbs. Even more so, there was no electricity in that village at all. As a result, the whole village would get up at sunrise, go through their daily routines and were go to bed just after the sunset. People used kerosene lamps to light up for an hour or so after dark and only in case of necessity.
My son is only 8 years old, and grew up in Australia. Hence, obviously enough he found this life almost completely incomprehensible.
On my part, this conversation inspired me to think about life without supply chain management.
I have been lucky enough to have the opportunity of working closely with Dr. Wolfgang Partsch – who is one of the co-inventors of supply chain management (SCM) in the early 80s. I have had a number of discussions with him about how the business life has changed compared to the life before SCM was invented.
No doubt, the division of labour was one of the biggest and most popular concepts which came out of the industrial revolution. The principle is that every job is divided into its constituent parts to the lowest possible level, so that each person can specialise in what he does best, this would increase the productivity of the overall system immensely. By the late 70s, the division of labour had totally taken over the business as well as governmental work.
Unfortunately, bureaucratic complications combined with the division of labour had created a world in which every department within any company was running as a small fiefdom.
Imagine that a purchasing clerk would issue a purchase order. Then he would let his boss know that he has issued the purchase order as per the boss’s instruction. Then his boss will countersign the purchase order and would inform his boss that such and such item has been purchased, who would then inform his boss, who would most likely be the head of purchasing.
The department head of purchasing would inform the head of manufacturing, who would inform his subordinate, assistant head of manufacturing, who would inform his subordinate, the factory manager, who would inform the manufacturing planner that the purchasing order had been issued.
There were 6 to 8 different links in this communication chain running from the purchasing clerk to the manufacturing planner or production planner. Each message would go up the chain in a department, right up to the department head, and then across to another department head who would filter the message down all the way to a person who would act on it. In such a world with these eight or more different links in the chain, the time difference by itself was enough for the message to lose its effectiveness.
Combine that timing issue with the possibility of a message getting garbled in a long chain of communication, due to the differences of intentions and possibility of misinterpretations of messages, suddenly you realize what a nightmare it would cause.
Not only that, the departmental heads were almost always the biggest bottlenecks in such a communication scheme where nothing would go up, down or sideways without a departmental head’s approval. Obviously, their capacity to process information was only limited by how much time they had.
Now before you think of this as a ludicrous, and imaginary situation – let me add that I encountered exactly this situation in an Island airlines where I had the opportunity to participate in a business transformation exercise a few years ago.
Many other organisations I have had the opportunity to serve exhibit at least some symptoms of the same malaise.
So, what would be the typical complications you could encounter if there was no SCM?
You would notice that some easy five-minute jobs could quite possibly take days to accomplish, for a simple reason of the lengthy communication chain required to get the cooperation. You would also see a lot of confusion, because of the possibility of the message getting misrepresented. You would see some coordination, but not a lot of it because of the nature and length of the communication chain.
You would see a lot of bureaucratic nonsense with people hoarding information and only giving it to their bosses or their subordinates in a very selective manner. In many cases, this information hoarding would be pointless and even harmful. The rationale behind the behaviour might simply be a cultural norm or an expectation in such a hierarchical organization.
You would also see too much command and control in this type of organization, for the simple reason that when everything has to pass through a departmental head, he becomes an ultimate arbiter of what information filters through and what does not.
You would also see that the departmental head would have to make all the decisions. Even the smallest scheduling decisions, or planning decisions, or execution decisions, which could have easily be made by people several layers lower than him/her, would need to be made by the departmental heads themselves, again for the same reasons.
You would also see such systems as very rigid with no adaptive capabilities to changing needs of the market place. If you notice any of these symptoms within your company, then there is bound to be a problem with how the supply chain functions in your company.
No matter whether you have somebody with a title of supply chain director or vice-president, your company does not act as an organization with an effective supply chain which cuts across the departmental silos.
As this is a very important subject, in another article I will talk about how supply chain helps to alleviate the silos mentality and integrate departments to act as one company.
In my previous article I mentioned the examples of trucking companies (or warehousing companies) who have painted over their old trucks from XYZ Trucking/Transport to XYZ Logistics to XYZ Supply Chain Solutions without any material change in their capabilities or service offerings. While this kind of ‘branding’ exercise seems harmless enough, and most customers are not ‘fooled’ by such over-representation of the capabilities – it does have several deleterious effects. To give you an example – I was recently asked to answer a question on quora.com by a recent entrant into one of these companies who had entered the ‘field of supply chain’ to make a glamorous career. S/he was disappointed when s/he found that most of the work was rather mundane execution level work in transportation and warehousing. To exacerbate the situation they did not see any prospects of getting even remotely involved in the ‘sexier stuff’ such as supply chain modelling or business transformation. Evidently, then, this type is hurting careers, reputations and perhaps even the entire industry when these companies represent that what they do is all there is to SCM!
No doubt strategic sourcing, logistics, warehousing, production planning, inventory management, demand forecasting all are parts of good supply chain management. Yet almost all of them are quite capable of representing that they constitute the entirety of supply chain management. Look at the way that a number of professional bodies have renamed themselves and pretend to represent the entirety of ‘supply chain’ professionals. Their antics remind of the ancient Hindu tale of 6 blind men which was so well captured by the American John Godfrey Saxe in the The Blind Men and the Elephant (Source: Wikipedia):
i. It was six men of Indostan To learning much inclined, Who went to see the Elephant (Though all of them were blind), That each by observation Might satisfy his mind.
ii. The First approached the Elephant, And happening to fall Against his broad and sturdy side, At once began to bawl: “God bless me!—but the Elephant Is very like a wall!”
iii. The Second, feeling of the tusk, Cried:”Ho!—what have we here So very round and smooth and sharp? To me ‘t is mighty clear This wonder of an Elephant Is very like a spear!”
iv. The Third approached the animal, And happening to take The squirming trunk within his hands, Thus boldly up and spake: “I see,” quoth he, “the Elephant Is very like a snake!”
v. The Fourth reached out his eager hand, And felt about the knee. “What most this wondrous beast is like Is mighty plain,” quoth he; “‘T is clear enough the Elephant Is very like a tree!”
vi. The Fifth, who chanced to touch the ear, Said: “E’en the blindest man Can tell what this resembles most; Deny the fact who can, This marvel of an Elephant Is very like a fan!”
vii. The Sixth no sooner had begun About the beast to grope, Than, seizing on the swinging tail That fell within his scope, “I see,” quoth he, “the Elephant Is very like a rope!”
viii. And so these men of Indostan Disputed loud and long, Each in his own opinion Exceeding stiff and strong, Though each was partly in the right, And all were in the wrong!
So, oft in theological wars The disputants, I ween, Rail on in utter ignorance Of what each other mean, And prate about an Elephant Not one of them has seen!
Amusingly, the confusion in supply chain management also involves 6 different streams of thoughts.
Supply chain is a relatively new field. Especially at a higher level, there are no people who ‘grew up in supply chain management’.
Traditionally, supply chain professionals have come from one of the three or four streams in businesses.
I have worked closely with all 6 type of pedigree – and each of them have distinct foibles, strengths, weaknesses and biases.
One bias they all have in common is that they tend to have a soft corner for their own pedigree. For example, I spent my own formative years in shipping, logistics and transportation, and for some reason I am still a shipping person at heart. As they say once you spend time at sea – the salt water starts running through your veins.
However, all 6 type of pedigrees also have a great majority of people who are happy to represent their own specialisation as the entirety of supply chain management. That is what causes the confusion.
I could probably write an entire chapter of each of these 6 type of people, and their biases – including the impact of the confusion they cause to damage the profitability and ‘brand supply chain management’. But if you are from within the folds of supply chain management – you will easily recognise most of what I have to say here.
And, if you are not from with the folds of supply chain management then more explaination is no use to you – because you are better off reading my other articles on use of supply chain management for business transformation – just search for those keywords in the search bar next to the tool bar on top.
I will cover the rest of the cause of confusions in my next post. These are rather esoteric models and we will raise the level of conceptual thinking a few notches in that article.
By the 70’s, the division had been carried too far, in fact, so far that each person would pretend that as if he has nothing to do with the other employees. To give you an example, I was working in a business transformation project in a mid-sized airlines and I was sitting in the office of the person in charge of maintenance planning of the aircrafts. At one point in the conversation he dug out and e-mail exchanged with his colleagues from across the room and this e-mail exchange had been carried on over a period of 18 months. This trivial matter could have been solved by just walking across the room in an authentic spirit of give-and-take and collaborating across the silos. People in both silos have entrenched themselves into such a position where no action could be taken, the decision-making was extremely slow and people were pointing fingers at each other.
In fact, every organization we have seen, to some extent or other, suffers from this silos mentality. The bureaucratic organization of supply chain 0.0 leads each department to become a pyramid. Any information which needs to be passed from one department to another would have communicated with the head office of one department to another. Imagine the time wasted and the problem of information distortion in the process. By killing the spirit of collaboration, it hampers efficiency and effectiveness.
No wonder this kind of organizations find it very hard to compete against even rudimentary supply chains, such as supply chain 1.0. Many companies struggle with one business transformation after another without addressing the root cause of information holding and silos in supply chain 0.0. If the company stays stuck in organizational silos, no appreciable improvement will be seen: Information holding will become rife and selective information sharing, the norm. Blame will be the name of the game in such a situation.
Below are 20 questions that every executive should ask about the supply chain in their business:
I repeat it here because it will be relevant to many people fighting the hard corporate battle, many times without adequate backup.
Here is the true incident without any build-up or embellishment. You have to allow for the fact that this incident is nearly 25 years old, and memory does fade after many years and varied experiences.
Today, this incident almost seems like from a totally another life and place. I was sleeping in my cabin (about the same size as a studio apartment) when I heard shouts from the deck. On this particular ship, the chief mate’s cabin was not too far above the deck, and since the ship was at anchor in a tropical paradise condition, I had left the portholes of my cabin open to allow fresh sea breeze in. In fact, the air conditioner was defective, and I had to keep the portholes open.
I expected a peaceful night at anchor, but alas it was not to be. The sounds of other boats’ or ships’ engines never disturbed me. The shouts from deck did. Quartermaster (QM) on duty on the deck, and the Officer of the Watch (OOW) were both trying to wake up me, the Bosun, and other crew at the loudest of their voices.
I hurriedly put on a T-shirt and rushed outside to the boat deck to get a picture of the situation. I immediately saw the Quartermaster (QM) and OOW standing on the deck holding a couple of large crow bars or similar implements trying to simultaneously repel boarders and wake up the crew.
Two boats had come alongside. It is difficult to identify the intentions of the boats at sea, especially at night. Most are merely fishermen, petty traders, or offering goods or services to the crew. In high piracy prone areas the standing instructions at anchor are to never let a boat come alongside without challenge and permission. However, this was not a piracy prone area (I will not name the location because I have many good friends from this region and they are sensitive to any perceived criticism of this nature).
QM and OOW were relaxed till they noticed one of the boats throwing a grappling hook over a gunwale (sort of deck railing). That was a clear sign of intransigence, and got QM worked up very quickly, who was shouting at top of his lungs from the deck. Seeing this, I rushed back into the accommodation, and grabbed the first useful looking implement, a fire axe.
Meanwhile, the Bosun had also come on the boat deck with another bunch of crew – each with a useful implement that could be potentially used to defend the ship. Alarm was raised on ships horn, waking everyone up. A crew member was sent to lock all the accommodation doors from inside – barring one, which we were using. Almost the entire ships crew except for a few engineers and the Captain assembled on the port boat deck to defend the ship.
One of the pirates’ nimble ‘associates’ had scrambled over the taut rope – a steep vertical climb of about 20 feet – to the ships deck. He was in the act of pulling up a small rope ladder so that the rest of the lot could scramble up. We still had the advantage, this was the second best time to repel the boarders. The best time would have been to cut the rope from the grappling hook before the first person had boarded.
Because this blog is getting too long – I have broken the story into two posts. The remainder of the incident is recounted in the blog titled Industrial Age Tools vs Information Age Weapons, which can be accessed by clicking on the link.
That title does give away the key learning which is as follows: In another set of situations, I see people grappling with impossible odds with inadequate weapons all the time. I am talking about business transformations that I help companies with for the last 19 years since becoming a management consultant after my MBA. Traditional tools of industrial age – methodologies, knowledge, practices and power structures are regularly deployed to fight superior forces of information age. Most people do not know the difference between the information age weapons and the industrial age tools, till it is too late.
Take a look at the graphic at the end of the blog. And, if you are still convinced that you have everything for the fight ahead – head out to Surveys Questions to confirm your opinion. On the other hand, if you are still taking stock of the situation, like I was doing from the boat deck before sending the repelling party out, These Surveys Questions will immediately give you the necessary information to formulate your game plan.
Jumia started with a relatively similar aim and manifesto to Amazon, which puts customers at the heart of its operation. In the same vein, the Nigerian site also reaps benefits from being one of the pioneers in Africa’s emerging online retail market. “Being first is good, but it is not everything. What fuels Jumia’s success so far is somewhat akin to Amazon’s evolution into a Five-star business network” – said Vivek Sood, CEO of Global Supply Chain Group.
Jumia is not shy of innovation either, given the fact that people are still skeptical about online retailing as well as online payment in Africa. The Lagos-based retailer launched a range of online payment options but steers its technology-shy consumers by accepting cash on delivery and offering free returns. “It’s very important that people know it’s not a scam,” said co-founder Tunde Kehinde. They even take a step further and deploy a direct sales team of 200 to educate Nigerians about secure online shopping, which also serves as a means to build trust. Now with pick-up stations spanning over 6 locations, a warehouse facility, 200 delivery vehicles in Nigeria and 4 other country-specific microsites, Jumia seriously strives to become a one stop shop for retail in Sub-Saharan Africa. “Here you are collecting cash and reconciling payments almost like a bank desk, here you are building a logistics company,” said co-founder Raphel Afaedor.
Both co-founders and Harvard Business School graduates built the business from $75 billion in funding and are bringing “a couple of million” dollars in monthly revenue, a growth rate of nearly 20%. Vivek Sood, author of the book “Move Beyond the Traditional Supply Chains: The 5-STAR Business Network”, said: “Jumia is taking the right steps towards building the five cornerstones of a super networked business: innovation, efficiency, profitability maximisation, product phasing and result-oriented outsourcing. With the promising results so far, perhaps we could see the next perfect example of a 5-star business network besides Amazon.”
Good solid supply chain thinkers are in high demand and low supply.
I would know, I run this company called Global Supply Chain Group for the last 17 years.
It appears that it was not too long ago (when we formed this company) – most business people were struggling to understand what is supply chain and what does it do. We have come a long way since then.
Every politicians speech today is laced with references to global supply chains and business networks that run the commerce on earth today. Companies that are seen as supply chain trend setters are leaving everyone else (even in adjoining industries) biting the dust.
Take a look at the chart below:
But Amazon.com is not the only one.
Current trend is becoming clear- companies such as Apple, Zara, Uber, AirBNB have one thing in common – Supply Chain Leaders as CEOs. Integrators are in high demand. Optimisers rule the roost.
Every era has its own heralds and the mantle changes every few decades.
As as example, it only one or two decades ago that strategists coming from McKinsey or 3Bs (BCG, Bain, Booz) were the prime candidates for the role of the CEOs. What made this necessary was the need for strategic thinking that was missing at the highest level before that. But clearly the mantle has passed on the the integrators / real supply chain leaders now. Here are the previous trends:
I know, you are asking where is the proof. Take a look at the picture below:
It will take a long time to explain the picture above, if you don’t get it by seeing it. It is also perhaps unnecessary in that case. Suffice it to say that two skills are becoming critical for business leadership:
Integration – of various parts of the 5-STAR Business network, internal and external resources, into a complete unit that delivers the customer experience
Optimisation – that enables sound profitability while delivering the customer experience
I have many other pretty pictures to expound these points, but I would rather focus on the outcomes.
So, what would you expect if above two skills were available in abundance? For sure, you would expect good business outcomes. These could take the form of any of the 5 possible themes:
This is the topic I cover in great deal of detail in my book THE 5-STAR BUSINESS NETWORK – so I will not talk about it in this post. Rather I want to focus on the reason I wrote this blog:
Now, if you have read it this far, there is a good chance that you know someone who will benefit from this information. Earn yourself some brownie points by letting them know – by sharing directly, or via groups. It only take 15 seconds.
Integration – of various parts of the 5-STAR Business network, internal and external resources, into a complete unit that delivers the customer experience.
Optimisation – that enables sound profitability while delivering the customer experience
I have been asked this question a lot on Quora, as well in my board and other speeches. A lot of supply chain commentary is becoming too technical and mysterious. Supply Chain Software sellers have a vested interest in creating the mystique – similar to what McKinsey used to do about 20 years ago. But Supply Chain Management (SCM) need not be mysterious. Remember, if someone cannot explain it easily enough – they do not understand it well enough.
The purpose of one of my books – Unchain Your Corporation – was precisely this – to demystify the supply chains. This books is written for layperson, can be read in 2–3 hours, and had more than 200 stories and anecdotes to help the readers use complex concepts.
Supply Chain Software sellers have a vested interest in creating the mystique – similar to what McKinsey used to do about 20 years ago. But Supply Chain Management (SCM) need not be mysterious. Remember, if someone cannot explain it easily enough – they do not understand it well enough.
At its core, SCM is just about two things – integration, and optimisation.
Integration of various functions (purchasing, production, logistics, inventory management, finance, sales) within a company. And, Integration of of various companies that form a supply chain together to serve an end consumer.
Optimisation – is the art of getting the best results from the same inputs. You will be surprised to know that most GPS software do not even give you the optimum route even if they have real-time traffic information. The key to testing optimisation is by doing the same exercise manually and comparing against the results of the software. There are clearly degrees of Integration and Optimisation. Higher levels of Integration and/or Optimisation will lead to higher level of efficacy in supply chains.
See the figure below – that comes from one of my board speeches:
If you supply chain consultants are not telling you these two simple truths, then all the talk of automation, big data software and driverless vehicles is a pipedream without a purpose.
And, if your Supply Chain MBA is not teaching you these two basics then you might have wasted 2 years and thousands of dollars.
Here is why… …Everything else in supply chain stands on those two foundations. Your supply chain relationships are part of integration effort, and automation is part of optimisation effort.
In this article I want to focus on the second biggest mistake companies make during business transformations.
In case you are wondering why I am focusing on the second biggest mistake rather than the biggest one – it is because I have already written a blog post on that topic last week. Here is the link to it.
But the second biggest mistake is even more common and well known.
Yet it is so common that it worth spending half an hour writing a blog post about it. Even if 10 business transformations are put back on track after reading this blogpost – it would have done its job. After all each derailed business transformation is a huge waste of human effort and ingenuity.
So, what are the cliches that are used to describe this second mistake. I am sure everyone is familiar with these:
Putting the Horse Before the Cart.
Confusing the Cause with Effect.
Post Hoc Fallacy
A theoretical discussion of human fallacies is out of scope of this blogpost. You can read more about these here.
In many cases these IT upgrades take a life of their own and business objectives of the transformation projects start taking a back seat to these technological considerations.
In my book UNCHAIN YOUR CORPORATIONS I have given more than 20 examples of this phenomenon, in various contexts. Below I quote from the book:
Modern supply chains collect information at each node of the network. This rich data is methodically analyzed to optimize demand, supply, inventory, costs and service levels to create the best profit results. Not many people know this art – while there might be many pretenders.
The next component in business transformations is the informational part of the business network, which is strongly bounded by its IT systems. A word of caution, though, IT should always be viewed as a means to an end rather than the end in itself. In other words, systems are implemented to facilitate information exchange that is conducive to business transformation.
In the project we were working on, the challenge was indeed, moving the system from the regional to the global structure. Apart from having islands of data to consolidate, the company also found themselves dissatisfied with a system that met only 70% of its needs.
Even though you may be tempted by flexibility as it offers more room for maneuver in the future, every additional bit of flexibility breeds corresponding complexity.
To get a more realistic picture of the complexity, type “supply chain software” into Google and you will get more than 75 million results. How do you know which one is the right one? Though many of them will pretend that they can, there is not a single piece of software that can do everything that you require from a supply chain software solution.
Plethora of tools are available – each with its own peculiarities and limitations. Old ERP type systems can lead your operations into a big hole from which it will take years to emerge. Furthermore, each tool is most suitable for certain situations, and unsuitable for other situations. You need the ability get the right tools – just the ones that suit your situation – and combine them well.
I have dedicated a whole chapter to IT systems in my book The 5-Star Business Network and here I would like to focus only on a few key things. To get this component right, you also need to see things through the eyes of the system provider. It is a delicate dance between rigid functionality and flexible business outcome.
How do you choose the right software for, say forecasting, from among more than 2,500 such systems? How do you link this system to the other systems it needs to work closely with – say inventory management software? How do you pick the right inventory management software from among more than 2,000 systems that claim to do more or less the same thing? Do you go for a single solution that is about 50%-60% right, at best – or do you go for a best-of-breed solution that can cover more than 85% of your need, if you do it properly? All these are very complex questions to answer.
Figure below, taken from my book The 5-Star Business Network, illustrates just some of the ways a business can falter along their road to using IT for business transformation.
FIGURE: PROBLEMS WITH USING INFORMATION TECHNOLOGY FOR BUSINESS TRANSFORMATIONS
Then you configure the pieces to form an integrated system, that meets your rapidly changing needs in a business transformation.
We need to revisit the strategic component, to examine the level of disconnect between the corporate strategy and the IT capabilities and carefully find tools that fill that gap.
In the past, it might have been the case that corporate strategies were made up in the air, then supply chain strategies were formed by people down in the warehouses based on their own assumptions about what the business wanted to achieve, and the IT staff work in their own cubicles to provide systems based on poorly articulated needs.
If the above example of three isolated types of strategies resonates with your personal experience, you would also concur that despite numerous vocal calls for enterprise-wide collaboration, people still continue to work in silos. This is equal to saying many companies are still staying at Supply Chain 0.0 while others are moving towards 1.0 or 2.0 or, even mastering Supply Chain 3.0.
Figure – The process and service component
As you can see from Figure above, which shows typical processes in a supply chain 1.0, there are four levels that need to be weaved into a cohesive whole. Typically, there can be missing links between processes – vertically, or even horizontally.
Even worse, for instance, a delivery scheduler may not know how his work output related to that of his next cubicle neighbor – the customer forecast expert.
During a transformation, processes and services may get streamlined, re-aligned or even created from scratch to accommodate change. That is why it is pivotal to keep in mind how they all fit together by devising a visual presentation such as the pyramid diagram above.
I was having a conversation with one of the senior executives responsible for business transformation in a large-sized industrial company with operations and plants across the developed world. This particular person had come from one of the top tier global consulting houses and obviously was very well versed in the hypothesis-driven problem-solving approach, which both he and I had learned in our formative years in top tier consulting houses. He was adamant that this approach would be enough to carry out a large-scale supply chain transformation in his business. Hence, he was very skeptical about the supply chain methodologies that we were espousing.
In his mind, he could derive the same results from the first principles using his hypothesis-driven approach. And I was patiently explaining to him the difference between going back to the first principles to create a new approach, and deploying a tried and tested approach for supply chain transformations which had the benefit of having adapted the same hypothesis-driven approach.
So I gave him an example of the early stage motorcars where people were still using solid rubber tires and a number of fittings which were a carry-over from the days of horse buggies. Of course, if he had the luxury of time and budget to make all the mistakes there were, he could probably recreate a modern-day motorcar, going through all the stages of evolution. He was smarter than most of the population, so he could perhaps complete the task in 20% of the time that it took for the actual evolution to take place and perhaps, at 20% of the budget. Yet, if a modern-day motorcar was already developed, wouldn’t he be better off testing if it suited his purpose and adapting it for his use?
Obviously, on one hand, you can become too rigid and attached to the process itself. On the other hand, robust processes, based on experience from a number of similar business transformations in the past, are far more useful than some skeptics envisage.
After all, who would you like to be your guide for a climb – a person who can theoretically show you a path through a map of a mountain, or a person who has actually traversed that particular journey several times before, and knows all the pitfalls along the road?
Now let us talk about the “service” bit in the process and service component.
One of the hangovers from the last century industrial organizations which never ceases to surprise me in a modern-day organization, is the importance attached to a product in comparison to the importance attached to service by the company.
What do I mean by that?
The service might be just fitting the product, or providing the right information about the product, or helping customers choose the right product for their needs.
To give you an example, if you are a customer of a motorcar company like Ford or General Motors and you are looking for a particular part, you will be amazed to know how many different possibilities there are of fitting the right part for the purpose. You will then need to discuss your particular needs with someone called a Parts Interpreter in order to pick a suitable part for your motorcar. It is a very specialized job and invaluable service provided by the car industry to its customers. It is the service that makes the cost of parts more expensive than the base cost of manufacturing and selling that part.
In almost every project we have done, when we calculated the overall cost-to-serve, it is very clear that the product component of the cost was supplemented by the service component of the cost, which was quite substantial to start with, and getting higher progressively.
In other words, the overall cost-to-serve is made up of cost of product plus cost of service, each a fairly significant component of the overall cost-to-serve. Then why do companies keep ignoring the cost of service or treat it as a minor hassle, rather than manage it as an overall part of the full cost equation?
Hence, service is merely an after-thought, even though the cost of service might, in many cases, be higher than the cost of product.
That is the reason why a cost-to-serve analysis is an eye-opener for senior management teams or for boards of directors, when an overall cost breakdown is laid out, clearly showing that cost of product is far less than the cost of service. Suddenly, the entire orientation of the management changes towards managing the service component much more efficiently and effectively than they have ever done in the past.
We have noticed that tendency in airlines, in the automotive industry, the mining industry and in many other industries.
Similar to the informational component, companies are increasingly discovering their ability to cherry-pick service providers that deal with different service modules. Before this can happen, service components must be broken up into geographical, asset based and activity based components to discover and engage best service provider for each module. This is known as modularization.
Then, service modules are homogenized in order to create and manage parallel interactions with several service providers at same time. The cherry-picking or commoditization of service modules enables you to configure a best-of-breed customized business-to-business network that would be impossible to emulate for your competitors, and provide flexibility, cost advantage and risk mitigation to your company.
Sure you will need the right tools, and deploy them rightly – that is important. But much more important is why you are deploying them, and are you getting the right results from them?