How Today's Supply Chains Increasingly Define Strategy and Deliver Performance

3 reasons supply chain is more important than ever, and where to begin transforming supply chain to create stronger enterprises that can meet today's challenges


A whitepaper from Vinod R. Singhal, a professor of operations management at the DuPree College of Management at Georgia Institute of Technology, suggests that if there is one area where companies can ill-afford a miscue, indeed, that would be supply chain management. (See "Quantifying the impact of supply chain glitches on shareholder value" by Professor Vinod R. Singhal, DuPree College of Management at Georgia Institute of Technology and Professor Kevin Hendricks of the Richard Ivey School of Business, University of Western Ontario, Canada; Published by SAP, 2003.)

Singhal and his research team looked at 838 supply chain stumble announcements appearing over a 10 year period in the Wall Street Journal and Dow Jones News Service. The group's research shows that in terms of frequency of such missteps, the most common include parts shortages (25 percent of instances), followed by customer requested changes, problems with product launches or production problems. What the group learned is that, on average, such stumble announcements result in a nearly 11 percent initial hit to the company's value as measured by stock price. And after adjusting for industry and market movements, the total shareholder value loss associated with a glitch can be as high as 25 percent.

What this highlights is the degree to which a company's business strategies and objectives are entwined with its supply chain. Any failure to link objectives and outcomes to the realistic capabilities of the supply chain can lead to failure. The corollary: To the degree companies can achieve greater alignment and cooperation between business strategy and supply chain operations execution, the chances for success increase.

2. For the C-suite, predictability is invaluable

The above study shows that reliability is a profound driver of a corporation's valuation. But reliability means more than getting a product to a certain place by a certain time or having a service performed when and as needed. It also encompasses predictability, which means the right product or service, the right quantity and the right quality all at the right time as intended and expected by your customers. Both reliability and predictability are essential if supply chains are to run in an optimized manner.

In short, a company must deliver on all its promises, both internally and externally. View the stakeholders of any business: Customers want zero defects in all aspects of the relationship. That's not just the quality of core products or services themselves but the entire service bundle, including logistics, implementation, financing and billing. But this predictability and reliability are also critical to internal stakeholders. Procurement, finance, manufacturing, sales — virtually all internal functions can perform more capably and more efficiently when variances are minimized.

And, by corollary, in the absence of predictability, costs multiply. Uncertainty and unpredictability are major drivers of cost within a supply chain. For example, if a business postulates sales of 100,000 units of a new product line, the supply chain organizes and expends resources to supply this level of demand. But if there is a delay in the product launch, the supply chain must hold more product in inventory for longer than expected, increasing working capital costs. Alternatively, what if there is a last-minute alteration of product or service specifications? Again, this leads to higher production costs as well as raises the potential for lapses in product quality.

Over the short term, such pain will be absorbed at varying points along the value chain. The pain for the company itself that fails to deliver predictability can be temporarily masked. Suppliers may absorb lower margins or customers may accept diminished product quality or supply unpredictability "for now." But in the long run, uncertainty introduces costs that inevitably damage the entire value chain. As already highlighted by the Singhal/Hendricks study, the hard reality is that suppliers and other external groups such as analysts and investors all place great value on a company being able to perform as promised.

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Reliability and predictability, as many leading companies have now concluded, are essential to building a sustainably profitable business model. Improving performance in these areas, it is further realized, is best accomplished through not only closer integration of supply chain with ongoing operations but also an expanded role in corporate development and strategic planning.

For example, a consumer products manufacturer is in the process of transforming its operating focus and strategy to optimize the reliability of manufacturing processes. Greater reliability, the company recognizes, results in stronger margins, a byproduct from greater efficiency in everything from production runs to inventories and supplier costs.

But this focus on manufacturing reliability has implications on sourcing strategies, product development, product lifecycle management, marketing strategy and certainly pricing. The realization for the company is that operating executives need more say in coordinating decisions across a range of functional areas. In effect, there is a need to create guidelines that can align strategic constraints with opportunities. In essence, decisions made in marketing, sales, product development, R&D and a host of other functions need to factor in supply chain optimization.

3. Achieving global growth requires a reliable and truly globalized supply chain

Today's supply chains are increasingly global, technology-infused, collaborative and interactive. Driven by global economics and largely enabled by advances in collaborative technologies, high performing businesses rely increasingly on a more complex and globalized end-to-end supply chain. It is now common for product and service inputs and processes to emanate from many dozens or even many thousands of related and external providers scattered across myriad states, nations and continents.

Concurrently, product and service bundles themselves tend to require extraordinary degrees of technological sophistication. This is not to say that every product or service is itself composed of high technology. Rather, the rising complexity of product/service development and delivery more often than not involves more skill sets than could be contained within a single business entity. Technological sophistication is now essential not only from conception but also through development, manufacture, quality control, post-sale customer service, product feedback and then back to product refinement/re-conception. This added product/service complexity forces companies to pursue ever broader swaths of capabilities, thus placing further demands on end-to-end supply chain processes.

At its core, a supply chain must be well-defined, well-informed and intelligent. This means being able to exercise decision making or discretion at the most influential moments in any business process. The function must also exude flexibility, interconnectivity, customer-centricity, end-to-end transparency and whatever additional attributes might be appropriate for a given business strategy, customer base or industry.

Given the current state, however, there is an obvious acceleration in the trend towards globalization-driven efficiency. Largely enabled by tremendous advances in collaborative technologies and networking, companies are rapidly evolving from the state of maintaining a mere global presence to functioning as full-blown global operating companies. It is an inescapable reality that leading companies must now seek out low-cost providers wherever they reside. Similarly, the technologies needed to enable such global collaborations advance incessantly. As such, the conditions necessary for companies to build interconnected, collaborative, dynamic and responsive global supply environments are now omnipresent.

Additionally, as more companies begin operating globally, pressure for even more supply chain globalization builds. For example, in the past, many businesses might have been able to get away with maintaining multiple, often regional, but generally competing brands. But as more customers globalize, their procurement operations seek to consolidate supply operations on a global basis. As such, they begin to question managing relationships with multiple providers the world over who, in the end, all belong to the same corporate family.

Companies are fast evolving towards a world of global sourcing and operation. The success of their business models will be determined by how swiftly and capably they can gather inputs from anywhere in the world in order to deliver a product or service to any given customer anywhere in the world. Companies must become adept at identifying and managing vast ecosystems of internally and externally generated product and service components on a global basis. They must become expert in building flexibility in capacity while maintaining reliability, predictability and quality.

The ability to manage a global supply chain is now an essential core competence. In the end, the greater the influence of globalization, the more a company's business model is defined by its supply chain capabilities.

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