As anyone who has led a corporate wide Supply Chain initiative knows the technology is the easy part, the hard part is the change management. Modern corporations reflect many of the same dysfunctions we see today in our gridlocked government. The inability of organizations to turn Supply Chain Excellence rhetoric into real action is evident in many large companies. That is not to say that departmental Key Performance Indicators (KPI’s) are not being met but that the overall effectiveness of a companies end-to-end supply chain still leaves much to be desired especially from a customer, shareholder and employee point of view.
Supply Chains that seek to transform themselves and become world class require a great deal of internal alignment among individuals, organizations and metrics. Unfortunately, companies are not wired well to achieve such cross functional success. Metrics are often too narrowly focused and executive goals actually encourage departments not to collaborate when it impacts their reward system.
A Manufacturing VP gets rewarded when his or her unit costs go down. Since capital equipment utilization plays such a large part in this KPI it is not surprising that long production runs are favored over smaller batch sizes that more closely reflect what the market wants. The Procurement VP, on the other hand, gets rewarded on cost reductions which translates into buying more of the cheapest parts that can effect quality, manufacturing and customer satisfaction. The Sales VP gets bonuses based on top line revenue growth and is cheered-on when making bullish forecasts. Add it all up and it is no wonder we have such schizophrenic supply chains that “bob and weave” between too much and not enough supply.
Enter the new Supply Chain guy or gal who was hired to bring it all together and take a fresh look at the problem. After the polite introductions, the listening tours and the unanimous agreement that the Supply Chain is broken and must be fixed the real work begins. The most critical success factor is now how does the organization perceive the Supply Chain organization and to whom does it report to? Many companies hire someone to “study the problem and work with the stakeholders” to develop a common plan. Unless the Supply Chain Exec reports either to the CEO or COO this approach is bound to fail to meet expectations. Like governments there are simply too many special interests who have mutually exclusive goals and performance metrics to overcome the passive resistance that is sure to follow. The Manufacturing VP will agree we need to be more responsive to the customer and would be willing to run smaller batch sizes if the forecasts were more accurate. The Sales VP would be willing to forecast less defensively if Manufacturing were more responsive.. If you have kids, you get it… it is always someone else..
Most companies simply lack the vision and courage to re-invent themselves to become a customer demand driven Supply Chain. In fact, most Supply Chain organizations report into Operations and many into the Materials organization which implies it is viewed as an inbound raw material availability problem not an enterprise execution one at all. This is a clear sign that senior management does not take Supply Chain seriously as a business model success factor. It is no wonder that the last half of the 1990’s we saw inventory turns go backwards for many global companies as they stretched their supply lines further and further across the globe. Even after implementing Vendor Managed Inventory and making suppliers carry much of the costs they still find themselves with a glut of finish goods scattered all over the world chasing customer demand.
Why does this happen? Why do we spend millions of dollars on departmental software only to end up with more efficient departmental silos? The answer lies in the fundamental misalignment of our organizations to serve functional cost goals and the corrosive effect of executive bonuses to produce short term quarterly results.
Just like Washington, it becomes a game of chicken to see who will fail first while protecting ones turf, position, influence and payout while the customer is left wondering why it is so hard to get their needs met?
Which leads me to the “Green” part of this problem. First we all, we know our Supply Chains are at risk of huge increases in energy prices when the recession ends. We know that we are using oil much faster than we are finding large new reserves and that China, India and Brazil are creating a huge new middle class that will compete for this diminishing supply. We know that we are incredibly dependent on oil (>60%) from foreign sources that are either unstable states or really don’t like us at all. (Some even use our money to fund terrorism!) We know that we are pumping more and more CO2 into the atmosphere and it is a green house gas that warms the planet. We know that critical resources like copper and rare earth metals are becoming more and more scare. We also know that our manufacturing and consumer waste causes pollution that have indirect costs on health that will no longer be just “externalized” for free. The SEC ruled this week that all corporations must now spell out their environmental risks that could impact financial performance. This includes costs due to cap and trade legislation, EPA rulings, or State or Local laws requiring pollution abatement.
If we know all this why do we hear so much about “doubt, skepticism and mistrust”? Why are we not focused on solving these problems that will impact corporation and individuals alike? Could it simply be that consequences of these problems are beyond the horizon of the short term impact of turf, position and payout?
What do you think?
