The Flat Supply Chain

Global Supply Chain — Changing Landscape

Globalization is unstoppable. Regardless of geography, industry focus, size or revenues, companies in the developed world and in developing countries are globalizing to gain new customers and access new markets. According to the ninth-annual global CEO survey done by Pricewaterhousecoopers in 2005, globalization and complexity emerged as the two most powerful and inevitable forces (1). Globalization has created a massive increase in the complexity of supply chains. Companies are vigorously revisiting their supply chain strategies to achieve the desired business objectives. In this article we will discuss the direct cause and effect relationship that complexity has added to the supply chains.

Figure 1: Forces impacting SCM landscape

Transformation to a Flat Supply Chain — Addition of New Chains

Traditionally, supply chains have been linear with companies struggling to integrate internal processes with those of partners and suppliers. The priority is now shifting to how supply chains can be aligned to the changing business dynamics. Supply chains are being flattened as companies source from emerging economies on one hand and seek revenue growth in unchartered international markets on the other.

Let's understand the phenomenon of flat supply chains from a simple example: Traditionally, companies have focused on lean manufacturing, just-in-time (JIT) deliveries, minimal batches and shorter lead times. The strategic intent has always been to move manufacturing and the supply base closer to the customer. But, flat supply chains do not follow this pattern. As businesses spread their core operations across the globe, supply chains are elongated, with customers and manufacturing locations moving in opposite directions. To worsen the matter, supply chains become complex as more players, such as suppliers, distributors, retailers, port operators, custom brokers, logistics service providers, and carrier and forwarding agents, are added.

Flat Supply Chain — The Key Attributes

Following are some of the typical characteristics of a flat supply chain:

• Increased supply chain length:

According to AMR Research's 2006 survey of 455 companies in Europe and North America, the average company has 36 contract manufacturers, and 42 percent of companies report that more than 25 percent of manufacturing output is produced by third-party contract manufacturers (2). It is quite evident from the survey that length of a supply chain has increased manifold.

• New dimension to flexibility:

Conventionally, any supply chain would try to achieve maximum efficiencies through integration of processes with the partners. As companies grow and add scale to their operations, such integration would impede flexibility and adaptability in business processes. A typical example would be in the case of automotive original equipment manufacturers (OEMs). When their demand increases exponentially, it is unlikely that the OEM's tier-one or -two suppliers will immediately be able to meet the increased service needs, thereby causing the OEM to loose market share. Similarly, when demand suddenly goes down the OEM is forced to share the burden of excess inventory. Companies are slowly adopting modularization in their business models so that they are not tightly tied with any specific partner. In case of any event or disruption, the cost to the business remains under control.

Figure 2: Transformation from "Traditional" to "Flat" supply chain

• Supply chain risk:

Companies face growing risks associated with flat supply chains. According to the McKinsey Quarterly survey conducted in September 2006, wherein they received 3,172 responses from a worldwide panel of executives across a full range of industries, the top three supply chain risks were (3):

• Availability, cost and quality of labor


• Regulatory concerns


• Reliability of suppliers

Companies are supposed to build capability to mitigate these risks well in time, to achieve the desired business benefits.

• Information is money:

Companies have realized the benefits that can be gained through managing supply chain information. The best example is Wal-Mart exploiting the visibility of its products anytime as they move through the supply chain. Based on the real-time demand at the retail level, these products can be diverted in transit from one location to the other where customers need them. It is not only about visibility but also the velocity of information that is equally critical.

• Higher Interdependence:

Companies adopting flat supply chains are no longer self-sufficient. The power is distributed along the length of the chain. This demands collaboration among the players, and that doesn't come without its share of operational challenges.

Is Visibility an Operational Challenge or an Opportunity to Differentiate?

As companies move from internal manufacturing (i.e. controlled by internal teams) to outsourced manufacturing they are faced with a new set of supply chain constraints and trade-offs. As supply chains elongate, the physical movement of goods in the supply chain increases manifold. The situation is worsened in a reverse supply chain scenario where the goods are returned from the customer and sent back to the right supplier, which could be located on a different continent. Consider a simple example where the supply lead times are stretched due to sourcing from a different continent. Obviously, companies would respond to this by building safety stocks in the system, thereby blocking its working capital. This is one simple instance of challenges that can crop up due to supply chains becoming flat.

There are many critical challenges a company faces while transforming itself to a flat supply chain. In addition to process-specific challenges there are few issues such as supply chain cost, quality and compliance that cut across the entire spectrum of the value chain.

There is no one simple solution to all these problems. There are many ways that companies try to respond to these challenges, such as adopting certain set of best practices to achieve the desired performance. Managing supply chain information is also a way out. No matter what, though, supply chain visibility is emerging as a critical differentiator for companies to stay ahead of competition.

According to Aberdeen's June 2006 study benchmarking more than 150 manufacturers and retailers, almost 79 percent of companies reported that their top concern is the continued lack of supply chain visibility due to manually-driven processes. Approximately 77 percent of the companies put supply chain visibility as their top technology investment priority over the next 24 months (4). The second highest concern was the uncoordinated nature of global supply chain processes across all the parties involved.

Below is an example of a European pharmaceutical company adopting visibility technology that resulted in cost reduction and boosted sales (4).

We believe that companies should manage supply chain visibility in the following manner, as described in the process-technology-organization framework.

"What to Do" — The Process Angle

The process piece of the framework guides the business users and advises what needs to be done to improve supply chain visibility, thereby overcoming some of the stated challenges. The critical ones are described below:

• Effective deployment of Sales & Operational Planning (S&OP) Processes — Conduct fortnightly/monthly S&OP meetings:
As companies mature in a flat supply chain, an effective and a successful S&OP process provides a forum to bring right and timely information in front of all the stakeholders. It is a very integral component in building transparency and trust in the system. The ideal scenario would be to conduct S&OP meetings as frequent as possible to align it with the market dynamics, thereby capturing the latest information in the system and taking suitable actions.

• Review inventory turns internally and externally:
Inventory management in a flat supply chain has its own challenges. Due to multiple players, it is difficult to optimize the inventory levels and maintain total inventory cost to the minimum. One of the significant requirements to do this is to have a clear multi-echelon inventory visibility system. Companies need to review the inventory status periodically and that, too, both inside and outside its four walls of operations. Because of the dynamic nature of the business, business users should periodically revisit target service levels and inventory norms at various stocking points in the supply chain. Based on analysis, corrective actions can be planned such as: liquidation of inactive inventory, appropriate distribution of active inventory, and sharing ageing analysis with concerned stakeholders etc.

• Alerts and exception management:

With various planners involved in a flat supply chain, loaded with tons of data, it is not possible to manage information and act manually. Moreover, there are high chances of critical incidents being missed due to all the chaos. Companies need to build alerts and exceptions through critical business rules so that planners can immediately take action on them. One simple example of an alert message could be as the inventory in a particular depot goes below, say, 50 percent of the target stock norms, the concerned planner gets an alert and either expedites dispatches or moves stocks from a nearby location to this depot to avoid loss of sales.

• Align supply chain metrics with business goals:

Flat supply chains with geographical spread of business functions need a comprehensive yet flexible metrics hierarchy to capture performance and help manage visibility in the system. Companies should explore deployment of process-based metrics such as the demand-driven supply network (DDSN) model proposed by AMR Research, the SCOR 8.0 model, etc., against conventional function-based metrics. Some of the global companies adopting the DDSN model are Dell, Nokia and Procter & Gamble.

ConsumerCo, a $1 billion manufacturer of household goods, had issues with low demand forecast accuracy, below-par perfect order fulfillment capability,and high inventories (5). By adopting the DDSN metrics hierarchy it was able to target the critical issues through a root-cause analysis. Poor demand visibility was the main cause for all these problems. So, with proper alignment of metrics, ConsumerCo reduced cost and improved service at the same time.

"How to Do" — The Technology and Organization Angle:

Technology will play a pivotal role in providing visibility in flat supply chains. The business cannot be supported by a rudimentary way of capturing information.

It needs to look toward an extended enterprise application systems and standardize processes to have a single source of data. Companies can also look for specific business solution applications for immediate and low-cost benefits such as inventory optimization tools, business intelligence tools and master data management.

One of the leading fashion retailers demonstrates the capability to use technology for competitive advantage (i.e. reduced time-to-market at less cost). The company spends heavily on sophisticated technology such as PDAs for all its store managers to monitor customer preferences that are sent to a central planning office. This has resulted in reduced execution time, allowing it to postpone design decisions to incorporate feedback from its stores. It has also helped in adapting to new designs when unforeseen events occur.

With growing complexity and variety in IT systems that are deployed across the supply chain, companies are adopting service-oriented architecture (SOA) to achieve flexible collaboration at a lower cost. According to the survey of almost 300 line-of-business executives done by Aberdeen Group in September 2005, more than 60 percent of companies with annual revenues of more than $1 billion either have or are in the process of standardization on common platforms for supply chain management. It also shows that 63 percent of all the responding companies have SOA projects underway, while almost 80 percent of large companies (revenues more than $1 billion) do (6).

Moving on to the soft, intangible side of managing visibility in a flat supply chain is about organizational structure, change and resistance.

An AMR research study of over 300 North American companies conducted in Q4 2005 showed that approximately 37 percent of companies have experience with a distinct supply chain organization structures for two or more years. Also, 44 percent of companies heads of supply chain report to a C-level officer who is a chief operating officer (COO) in most of the cases, and they seldom have a direct reporting responsibility to the CEO (7).

As an organizational restructuring exercise, we propose that companies have a separate Global Supply Chain function that reports to the business head, acting as an interface between the supply and demand organization. This function should own the responsibility of S&OP processes and aligning operational plans with the business objectives. Any such organizational restructuring would result in some sort of change and resistance within, but with proper top management support and communication, the results should outweigh the chaos that exists during the transitioning period.

It will impart suitable process training to all the business users whenever a new process or technology is deployed or upgraded. It will also result in an effective and impartial flow of information within and outside the four walls of the organization, thereby building trust and transparency in the system.

Change management is a very essential component because new processes and technology need a buy-in from the various business users and demands skill upgrading.

With the above framework in place, organizations can overcome the challenges of managing visibility and create an opportunity to differentiate and excel.

Conclusion

While the challenges in a flat supply chain are obvious and many in number, companies can adopt the suggested framework to manage their visibility in a flat supply chain to a great extent and observe obvious improvements in business processes. It is basically a combination of process and organizational initiatives enabled by correct technology application.

Yet, the improvements will be neither automatic nor immediate. Managing the supply chain in this new world requires perseverance. Companies need to continuously work on it as an ongoing effort to achieve excellence in a flat supply chain.

References

1. Pricewaterhousecoopers (2006) ‘9th Annual Global CEO Survey-Globalisation and Complexity-Inevitable Forces in a Changing Economy', www.pwc.com.
2. Hillman, M. and Hochman, S. (2007) ‘Supply chain technology landscape has radically changed for everyone', Global Logistics & Supply Chain Strategies ‘07, January.
3. Muthukrishnan, R. and Shulman, J.A. (2006) ‘Understanding supply chain risk: A McKinsey Global Survey', The McKinsey Quarterly ‘06.
4. Enslow, B. (2007) ‘Global supply chain excellence: New best practices to master', Global Logistics & Supply Chain Strategies ‘07, January.
5. Hofman, D. ‘Achieving supply chain excellence', Ascet — Vision.
6. Manhattan Associates (2006) ‘The Service Oriented Architecture in the Supply Chain — Benchmark report', www.manh.com.
7. Cecere, L., O'Brien, D. and Martin R. (2006) ‘Three factors to improve success in supply chain organisations', AMR Research report ‘06, February.
8. Friedman, T. ‘The World is Flat'.