Sunday, November 16, 2014

Supply Chain in Contemporary Organizations: Conceptually Connected but Practically Disconnected?

Unlike science and technology which keep getting enriched continuously with new developments, management of organizations, by its very nature, has little to show in terms of continuous original developments over the years. Yet, in an effort to stay relevant, management tries to reinvent itself or its functions through new nomenclature, and its processes through new jargon. At a very gross level (of course, in a subtly misused manner) management has carved out a new space of leadership. As contrasted with the earlier days when leadership is all about the one and the only one at the helm, today scores of managers are allowed to call themselves leaders. At a more detailed level, old functions are renamed; long range planning as corporate planning, business planning or strategy, time and motion study as industrial engineering, productivity management or operational excellence, and personnel as human resources management and people management, for example. Some core functions like manufacturing, quality, sales and marketing or research and development, in contrast, could see no semantic innovation, mercifully.

There has, however, been one discipline that seemed in the 1990s to revolutionize the field of operations management which comprised multiple functions such as sourcing, purchase or procurement, production, production planning and inventory control (PPIC), scheduling, warehouse management, supply, distribution, logistics and delivery under one umbrella concept called supply chain management. This has been evolutionary, in that initially purchase, PPIC, and warehousing got clubbed under materials management. Amalgamation of inward-oriented materials management with outward-oriented distribution, logistics and delivery led to a broader concept of supply chain, which promised to bring hitherto unseen connectivity and efficiency to management of firms. The concept became so fashionable, as with many a managerial nomenclature, that some companies began to include even manufacturing as a part of the supply chain organization in the 2000s. Yet, a full two decade plus later, supply chain in most organizations remains only an outbound function; ie., from one plant to the other or from a plant to the warehouse and a warehouse to the customer.

Connected disconnect

The concept of identifying and procuring the entire bill of materials of a product and manufacturing the finished product through in-house or outsourced facilities and delivering to the customer in the most efficient manner, all of it supported by optimized inventory management is clearly a well-merited concept to optimize an important part of a business’s value chain. The Japanese have recognized inventory and planning as the key drivers of such integration regardless of whether supply chain is christened as a department. Pull-type demand cum production planning and just-in-time (JIT) inventory had, for long, been, integrated in their production and sales systems. The Western management model which seeks a clear structure and process for everything, existing or new, had embraced supply chain as an integrating or connecting concept. Again, as is the wont with the Western models huge expectations preceded the evolution and institutionalization of the supply chain concept. As a result, and also due to certain specific factors discussed below, an integrated, monolithic supply chain organization continues to be more an exception than a rule in contemporary organizations.

Three factors that took shape in the 1990s and 2000s have, in fact, created some dampeners for an integrated supply chain function. The first is the rapid emergence of the globally dispersed organization with multiple sourcing, manufacturing and marketing locations across the nations with establishing local organizations becoming one of greater priority. The second is the emergence of information technology, more specifically enterprise resource planning (ERP) systems, as a connector or integrator of all functions, even globally. The third is the unpreparedness of the educational and career systems to develop competencies that integrate the specializations as varied as purchase, production, distribution, quality etc. These factors ensured that heads of operational management continued to operate with functional specializations rather than with a broader function that corresponded with a logical value chain. Given that the first two factors are now an established reality, it remains to address the competency based dampener in greater detail.

Function is business

The important aspect of supply chain management that the function as a whole (or in its competent parts) deals with external businesses on a wide range of techno-commercial parameters. Several of the functions have hues that are deeper and broader than the traditional ones. For example, sourcing is not just scanning a supplier directory and choosing someone who offers a material or component at the desired price. Sourcing is truly vendor development, which develops the material or component supplier’s capabilities in a holistic manner. Similarly, distribution is not merely choosing a delivery trucking operator for the least cost. Distribution is the science of operations research at one level and the discipline of good transportation practice at another level, both of which require enlightened business management on the part of distribution provider. Even the seemingly number oriented functions like PPIC cannot be effective unless they understand the nuances of product-market segments (and not merely the SKUs) and the subtleties of manufacturing processes (not merely processing times). While every function in an organization needs to have a business perspective, the functions in the broad group of supply chain need to have the techno-commercial perspectives of their stakeholders’ businesses as well.

The above indicated aspects of supply chain have found their early roots in the Japanese automobile industry. The practice of concurrent engineering and collaborative planning that knits together all the internal functions of automobile and ancillary companies, amongst themselves and between themselves, has been a great enabler for integrated supply chain management. Issues such as new product, material and component technologies, material substitution, tool and die development, facility upgrades, resource requirements are placed on the table to develop feasible and viable solutions. This level of enlightened collaboration becomes even more inevitable when proprietary product development is involved. This requires the vendors to appreciate that their long term business is protected not by the supply rate contract for materials or transportation but by the business success of the end-product.  Similarly the end-product company would need to appreciate that procurement economics of the materials, important as they are, need to be supplemented by the business economics of the vendors. In fact, progressive vendor development is the core of successful supply chain management.

Vendor development

Most organizations tend to have multiple buyers but few vendor development executives; in fact, in many organizations vendor development may not exist at all. This situation is ironical because the work and challenge involved in vendor development is many times over the work involved in negotiating a rate contract. Vendor development ensures that the supplier becomes a micro-replica of the principal in terms of having good R&D, manufacturing and quality capabilities, among others. The principal by investing its own techno-commercial resources in the vendor may add to its operating costs but would ensure longer term business competitiveness. In some cases, the vendors tend to have good technical ideas but lack the managerial will or financial resources to evaluate and upscale their ideas. Under such situations, the principals could take on the role of venture capitalists to take the ideas forward. Many Japanese automobile companies take direct stakes or indirect stakes (through their trading or investment conglomerates) in their component suppliers which meets the need for such vendor support.

Vendor development, even in those organizations that house such function or in supply chain treatises, tends to be viewed as a functional activity and not as business enabler. Typically, either a buyer or a designated vendor development executive identifies potential vendors and selects the appropriate one through due diligence studies by other functions such as quality and business development. This process may identify a vendor (who will be transferred to, or assigned with, a buyer) but will not make the vendor a fully competitive and sustainable vendor. Vendor development in an organization needs to be handled by a fully institutionalized team with multiple skills resident or deputed on a continuing basis. Vendor development must cover not only suppliers of components and raw materials but also providers of distribution and logistics service providers. Proactive and objective vendor development ensures the most effective procurement relationships, logically and automatically.

Re-positioning supply chain

The foregoing discussion leads us to two important aspects of repositioning supply chain as the effective enterprise connector. The first relates to developing the required supply chain competencies through educational and career options. There is need to develop supply chain educational stream on par with other established streams such as financial management, operations management or marketing management. It should also be developed as a multi-domain skill set with blending together of technology and non-technology subjects, and quantitative and behavioural subjects. Contract management and business development should be part of the essential toolkit in the supply chain program. The second relates to providing the appropriate career options, from foundational careers to rotational careers across all the functions of supply chain such as sourcing, vendor development, purchase, production, production planning and inventory control (PPIC), scheduling, warehouse management, supply, distribution, logistics and delivery, eventually leading on to the top job as the head of supply chain, and even to higher positions thereafter.  

The re-positioned role of supply chain would be one of developing a total organizational ecosystem of all the vendors and input providers who understand and support the value chain of the organization with ownership and oneness so that the firm and its stakeholders can participate in the combined prosperity. The head of supply chain in this re-positioned supply chain function would be a strategic leader who understands the techno-commercial needs of the firm but also the various vendor firms who provide the inputs and deliver the outputs. He or she would also be a leader of balance who understands the benefits of scale economics but also recognizes the need for risk mitigation, both through demand and supply assurance to and from the vendors. Though not much known in the global strategy literature, the eco system of India’s leading commercial vehicle manufacturers, Ashok Leyland and Tata Motors, with pervasive component manufacturing and logistics groups such as TVS is a great proof of how integrated supply chain is not merely a transient conceptual vision but a durable practical accomplishment. It is time that management institutions and leading corporations appreciate the need for re-positioning supply chain as a leading new age integrative discipline.

Posted by Dr CB Rao on November 16, 2014


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