Thinking like a CEO to Make the Case for Supply Chain Investment

Aligning CXOs and supply chain executives on the road to significant gains from global supply chain management

Alex Thompson of TradeBeam
Alex Thompson of TradeBeam
By Alex Thompson

In order to help supply chain executives make the case for investment in supply chain management, it is important to first answer two fundamental questions:

Firstly: What is the value of SCM to corporations?

To answer this question, TradeBeam and Stanford University conducted a study in 2009 titled "How Enterprises and Trading Partners Stand to Gain from Global Trade Management: A New Process Model for the China-to-US Trade Lane." We found that importers stand to gain savings equal to 1.4 percent to 4.3 percent of total sales by improving the efficiency of their supply chains with automation and accompanying processes and skills. Exporters receive similar benefits, from 1.7 percent to 2.3 percent of total sales. These savings can yield a profit increase of up to 70 percent for an importer and 40 percent for an exporter. Driving these bottom line savings and overall improvements in operational efficiency are improvements in key working capital and cycle time metrics such as days sales outstanding and the order-to-receipt cycle.

Secondly: What do "CXOs" believe is the value of SCM to corporations?

Judging by the relative inefficiency of global supply chains compared with their domestic and regional counterparts, which is a result of underinvestment, there are two likely CXO views regarding the perceived value of SCM to corporations:

  • They don't believe the benefits of global SCM investment (automation and accompanying processes and skills) will be as large as noted above; or,
  • They are focused on getting the most out of the high-level advantages of globalization (lower material and labor costs and new revenue markets) and are postponing lower-margin investments in the supply chain to a later date.

Given these viewpoints, it is important to articulate the value of SCM with hard evidence, and to demonstrate how global supply chain investments serve as enablers for the other benefits of globalization, namely low-cost country sourcing and the potential for gaining market share in emerging markets.

So what can supply chain executives do to make the case for more investment in global SCM? Well, with a better understanding of the value of SCM, as well as the decision-making mindset of CXOs, supply chain leaders should begin to follow a highly structured, rigorous plan that is no different in principle from how an executive in any department should strive to gain acceptance for corporate projects.

Following is a representative multi-step plan, tailored to supply chain executives:

Step 1. Come up with evidence.

First, document your business value chain holistically, across divisions, geographies and functions. Then determine strategies to make your supply chain better fit your business strategy, and determine the costs and benefits of the most profitable strategies. That means understanding the level of inefficiency of your own supply chain, establishing the level of efficiency of the leaders and laggards in your industry, and then determining the net benefits to your company over a 10 year-plus horizon in today's dollars.

Step 2. Build a cross-functional, global, multi-level team.

The obvious step here is to identify key internal and external stakeholders and influencers. But you also must determine the internal corporate landscape and process for project investments. As part of this process, of course, you will need to obtain stakeholder buy-in to the process, taking extra effort to make allies of the IT department. In laying the groundwork, you also will need to identify key obstacles and friction points, as well as strategies to overcome them.

Step 3. Demonstrate SCM project value.

Start by communicating how big-picture globalization trends are likely to impact your company's competitiveness in the next decade. Drive home a key point: Global supply chains are immature, and the resulting inefficiency presents a significant opportunity for companies to gain competitive advantage. The tools, processes and skills for operating efficient and agile global supply chains are out there, waiting to be deployed.

It is important here to extend beyond traditional supply chain boundaries into cross-functional systems, uniting sourcing, logistics, compliance, operations, finance, sales and customer support. There has been a lot of talk in the last 20 years about cross-functional systems, but few successful implementations. The obstacles are largely organizational. Again, the tools, processes and skills for effective cross-functional system management are out there.

In addition, you must be able to demonstrate systems that can deliver the right level of efficiency, speed and flexibility for your business strategy over a five- to 10-year timeframe. That means avoiding systems and processes that will be obsolete within a few years, or that have no room to grow because of limited scope. Equally important, avoid paying for unnecessary functionality that can result in extra costs for your business due to extreme complexity and poor usability. It is important to strike a practical balance not just between short- and long-term fit, but between factors that are sometimes competing, such as speed versus flexibility and customization.

You will also need to ensure the system and processes can support the level of centralization and decentralization desired by your company, balancing benefits of uniformity against demands of local control. Some systems are better suited to centralization than others. As an example, behind-the-firewall, licensed software can be highly customized at the regional level, supporting highly decentralized operations. However, companies that deploy ERP solutions often end up so customized that upgrades are highly costly, often resulting in complete re-implementations after a few years. Software-as-a-service (SaaS) solutions, on the other hand, lend themselves to uniform adoption across regions, systematically enforcing usage of common tools.

Finally, make it easy to try out the project with a rollout plan that includes pilot projects, lowering the risk below other corporate project investments that may require all-or-nothing, up-front million dollar investments. In an environment with low risk tolerance, and with the example of the unwieldy ERP implementations of the 1990s still in recent memory, many corporate executives are inclined to take a wait-and-see approach to new investments, even if it means tolerating inefficiency. Low-cost piloting makes it harder for executives to say "no," as they have little to lose and much to gain.

Our study with Stanford can help companies through all three of the key processes noted above, but provides significant detail for sections 1 and 3, gathering the evidence and communicating the project value:

Coming up with the Evidence: In order to gather evidence, companies historically have started by mapping out their business processes. To assist in this process, standards bodies have developed over time to help companies use uniform methodologies. To date, the Supply Chain Operational Reference Model (SCOR) is one of the most popular reference models used by companies to map their supply chains at multiple levels. In our study, we develop a new Stanford Global Trade Process Model (STPM), which complements the SCOR model, as well as models developed by the United Nations, adding more attention to the global aspects of supply chain management, ties across functions, such as finance and manufacturing, and linkages between IT and process performance.

Demonstrate SCM Project Value: Once a supply chain is modeled, we provide benefit categories, as well as benefit calculations to help companies determine the gains to be had for each component of their program. By estimating process times for "as is" process steps, and measuring against estimated process times for "to be" process steps, all measured along a critical path, companies can determine the range of benefits that can be expected and the sources of those benefits.

The goal of the STPM is to provide a framework that serves as a starting point for companies with global supply chains, enabling companies to perform process modeling and cost/benefit estimating in a structured manner, communicate effectively with internal and external stakeholders, and measure and improve their operational performance over time.

Companies that follow the basic steps outlined above in tandem with analytical tools such as the STPM will be able to identify global SCM investment costs and benefits in a rigorous fashion, assemble a cross-functional team empowered to make decisions and overcome key objections, and articulate the value of projects in a clear manner. By doing so, they will stand a better chance of aligning CXOs and supply chain executives to help their companies realize the significant gains of global supply chain management. ¦

About the Author: Alex Thompson is chief architect of TradeBeam, Inc., a global trade management software and service company. To obtain a copy of the study "How Enterprises and Trading Partners Stand to Gain from Global Trade Management: A New Process Model for the China-to-US Trade Lane," contact TradeBeam at [email protected].