Often executives view Supply Chain solely as cost generation area. They often overlook the complexity of operational processes. Why is it like this in so many organizations?
According to a survey conducted by Korn Ferry, most people on executive boards have a commercial or financial background. What they don’t have is direct experience in logistics.
As CEO or Managing Director you are responsible for the entire organization. You cannot go into Logistics in detail because you don’t have time for it. You need the Supply Chain running smoothly so the rest of the company can focus on running the business.
As a Logistics Director you need to get your boss’s attention about Supply Chain challenges. You don’t have time either. You need to speak a common language. The success of your team and your own career depend on it.
In this article, I outline 6 things you should talk about. I explain why you should answer the question if:
- the supply chain model fit with the sales strategy?
- the supply chain was built with a real foresight?
- we have the right talents in the logistics area?
- we use the right performance measures?
- quality is a component of our logistics?
- we are really working on efficiency?
Enough to create a platform of understanding.
WAS THE SUPPLY CHAIN BUILT WITH FORESIGHT?
It’s possible that your supply chain is not aligned with the future needs of your organization. Worse still, it may not fully meet current needs of your customers.
Has been logistics taken into account when planning the company development? Unfortunately, investments in logistics & supply chain may take some time.
It usually takes 3 to 12 months to implement a new planning system. Even up to 2 years to start using all capabilities of the system. Opening a new distribution center usually requires 12 to 18 months. Assuming you have the land and need to “just” build halls, buy equipment, and then train the team.
If organization grows rapidly it may be easier to enter into cooperation with a logistics operator. However, the time between the decision and operation start also may take 3 to 6 months. Assuming no specialized requirements are involved.
Therefore, the mismatch between the needs Supply Chain capabilities for sure affects the yearly P&L. Understanding this simple fact is not easy and requires some business maturity.
Thinking several moves ahead is required not only in chess.–Anonym
In the short term, it may be necessary to align the company’s financial plans with current operational capabilities. Medium term, interventional investment in Supply Chain, in information systems, or in logistics infrastructure might be crucial.
In the long horizon, the best practice is to regularly review business plans in relation to Logistics capacity. Every developed organization conducts such a process. We call it variously (road to market, strategic business review, etc.).
However, the name is not important. What is important is that the review takes place at least once a year and it’s an open dialogue. Most preferably spread over 2-3 stages at intervals of about 2 weeks each.
Stepwise approach allows to coordinate plans of various functions in the organization. Including plans to build the logistics capabilities of the enterprise.
DO WE HAVE THE RIGHT TALENT IN THE SUPPLY CHAIN?
Let’s face it, nowadays Logistics does not mean the same as it used to. Unfortunately, many people still perceive logistics only as the process of physical storage, reloading and transport of goods.
In today’s business, with increasing number of products, growing expectations on delivery times, the function changed. It’s not concerned as much on “how,” but more on “what” and “when” to deliver.
What is the difference between Logistics and Supply Chain? I will come back to this questions in another post. In the context of what every CEO should know, it’s more important how the needs for leaders’ competencies are changing.
The role of hard competencies is growing. Knowledge and statistical reasoning are becoming increasingly important. A better understanding of IT systems and the optimization algorithms programmed into them is required.
Several years ago, when even large manufacturing companies worked on 200-300 SKUs and a large retailer had 3000-4000 SKUs in its offer, the demand was more stable. It was possible to succeed even without complex methods of sales forecasting, inventory optimization and warehouse operations.
Today, simple solutions are no longer sufficient in many businesses. Logistics without IT tools simply does not function at the required level of process and cost efficiency.
Note: if you want to know – How to chose a supply chain planning system? Read the previous article on the blog. I have put there experiences from several projects.
On the other hand, the importance of soft skills required to manage large teams and communication with stakeholders both inside and outside the company has not diminished. On the contrary, soft skills are becoming increasingly important at every level.
From specialists creating demand forecasts, distribution plans and convincing others higher up in the hierarchy of organization. Through managers who lead increasingly larger teams in distribution and fulfillment centers.
That’s why in Supply Chain diverse talent is needed. Companies needs managers who can work with systems and processes as well as people.
How to develop such broad competencies in the supply chain? This requires a focus on employee development through temporary cross functional experiences, training, and sometimes going outside the organization. I’ll write more about this in my next article on Supply Chain team development methods.
DOES THE SUPPLY CHAIN MODEL FIT SALES STRATEGY?
… and vice versa? Supply Chain is a competence needed by the entire organization, not just the Logistics staff. A lack of understanding of logistics can be as costly as digital illiteracy when it comes to Sales or Customer Service.
In many companies, however, relationships have not been built between Logistics and Sales teams to allow for open conversation. As a result, both make decisions without consensus and without awareness of the consequences in other area.
Imagine a product manager in a retail chain who independently approves a contract with a supplier to deliver only cartons containing a mix of products. He gets better front margin terms this way.
He assumes that in the warehouse, receiving kits is a simpler process than handling individual products. Sounds very logical right?
In reality, the workload increases in the warehouse as products needs to be unpacked from the carton containing different products sold separately to the customer. Or in-store inventory increases if the warehouse manager decide to fulfill store demand for individual products by shipping every time the entire carton.
Imagine a supply chain manager who implements a stock optimization policy on a product category without informing the sales director. He moves an assortment that customers order in irregular manner from so-called make-to-stock to make-to-order.
Reduction inventory value by getting rid of the safety cushion in warehouses is significant. However, he has no access to commercial contracts. So he doesn’t realize that the customer actually has the right to expect delivery within 7 days. Otherwise a contract penalties can be applied.
Alternatively, he approaches the director with the information before making the change. He asks for approval before switching products to make-to-order… and gets the answer that, assuming the current level service level, there is no objection.
Both situations presented seem unbelievable? I have personally witnessed both. They occurred in large organizations. The first one in a major manufacturing company. The second in an international retail company.
In order to ensure that the company achieves the assumed results it is necessary to adapt the Supply Chain model to the strategy of the whole organization. Not just on paper. Alignment at the level of understanding what is actually being done. Along with all the implications of the model being adopted.
ARE WE USING THE RIGHT PERFORMANCE MEASURES?
One indicator of the maturity of Supply Chain is the range of metrics used. Mature Supply Chains are usually accountable for metrics that assess how they support organization’s overall strategy. Evolving Supply Chain are usually measured just on how well they execute their own core competencies.
For example, if company primary strategy is “everyday low prices” then the first Logistic’s KPI should be costs over sales. If the market strategy is “no substitute” then the first KPI might be the perfect customer order rate.
Furthermore the KPIs at board level must be translated into requirements for other level of management. Logistics Manager, Distribution Center Manager, Transportation Manager, Demand Planning Manager should be accounted differently.
Of course, you can include logistics costs in the objectives of the warehouse worker. You can post it on a board in the warehouse or even inside the lockers in the checkroom. However, there will be no effect other than frustration of the employees.
A better solution is to select at each level of organization metrics that are:
- directly visible for the employee
- contribute to the results one level higher
Below I present an example of KPI structure for Supply Chain. You can enlarge the picture by clicking on it.
Also, it’s worth remembering that no one can keep track of too many metrics at once. What exactly does “too” many mean? In my own opinion, not more than five at once. No matter how many KPIs you will chose, remember – if you’re wondering if you’re using too many metrics… then you’re using too many.
Finally, the KPI system used in Supply Chain cannot only cover Logistics. It should also go into other functions in the organization, Suppliers, and even Customers.
Only when Supply Chain share KPIs with Sales, Marketing, and partners outside the organization then we can speak of a mature organization. An enterprise capable of running its business effectively.
IS QUALITY PART OF OUR LOGISTICS?
Active quality management in production, storage, and distribution is one of the elements of the Supply Chain that constitutes a real competitive advantage.
In addition to its direct impact on customer satisfaction, quality in the supply chain translates into company effectiveness. Resolving complaints and accepting returns is 4 to 5 times more expensive in any logistics network than other distribution processes.
Therefore, monitoring the quality of logistics processes is important from the very beginning of the Supply Chain. Ongoing communication with suppliers, control of incoming and outgoing goods is a must. Otherwise problems are transferred to other processes closer to the customer.
In internal quality control, it’s important to assign responsibility to specific employees and to provide feedback as quickly as possible. Preferably on an ongoing basis during the work. Even within 2-3 hours after making a mistake which allows for understanding the reasons and introducing changes in behavior.
Even small changes in the process or employees’ behavior are worth implementing. With a large scale of company’s operations small mistakes can translate into significant values. This can be well illustrated by reporting quality problems calculated as Defects per Million Opportunities.
Is quality management so systematic in your Logistics? The answer is probably no in most organizations. However, it is only when you implement the “least waste possible” instead of the “least cost possible” approach that you can expect long-term improvements in operational and financial performance.
ARE WE REALLY WORKING ON SUPPLY CHAIN EFFICIENCY?
Finally, are we really working on efficiency in Logistics? In many companies, working on Supply Chain productivity remains a mere declaration.
On the surface, everyone agrees that they want to achieve operational efficiency. However, they expect this to happen as a result of optimizing internal processes within the warehouse, transport or planning departments.
Few people realize how the logistics productivity depends on the agreements with suppliers and customers. Agreements that are often signed off by other teams.
Therefore, to achieve a real improvement in Supply Chain effectiveness you need a broader look at the company’s processes. Being open for the possibility of changes in the level of Customer service. You need to discuss what needs to be achieved and what can (if necessary) be sacrificed for that purpose.
The first step should be to segment the company’s customers and products in terms of turnover or margin. Depending on what is currently the organization’s top priority.
Only when a common view on customer classification is achieved. Only when you have information on cost of service (and cost of inventory) you can make decisions affecting logistics.
In most industries, it does not make business sense to treat every customer (or market, or store) the same. It’s also not economically sensible to apply a uniform approach to customer service at different times of the year. It is worth considering optimization in the level of service or additional services provided.
However, the highest efficiency in Logistics does not always mean the most effective Supply Chain. Efficiency in itself is not the goal. The ultimate goal is the profit achieved by the company. Many organizations learned this lesson the hard way during Supply Chain crisis created by Covid-19.
IT ALL STARTS WITH AN OPEN CONVERSATION
If you ask yourself the questions discussed above you are already one step closer to understanding your Supply Chain situation. I’m sure the answers will still require a series of more specific questions. But your own questions are better than someone else’s answers.
For Supply Chain to be truly not just a cost in the organization but a source of market advantage you need open discussions about your target expectations and current capabilities.
The mind is like a parachute. It doesn’t work unless it’s open.— Frank Zappa
Sometimes an external advisor is helpful in such a discussion. He will look at the situation objectively, provide market-verified know-how, and arbitrate between departments within the organization.
He won’t do the day-to-day work or build relationships with employees or supervisors for you. However, he will help you put the ropes together before you throw yourself into the whirlwind of change.
I hope that after reading this text you will look in a new way on the logistics strategy. Please share your thoughts in the comments. If you would like to contact me then the easiest way is through the contact form.
I also encourage you to sign up for ‘Logistics Simply’ newsletter. Once a month you will receive logistics news & tips helping you to create supply chain really serving your business needs.
In the meantime, good luck managing your own business!