Many supply chain managers have difficulties explaining to their executive management that supply chain is about more than customer service, logistics, or S&OP. You would think that recent disruptions like COVID19, a blockage of the Suez canal and the global shortage of micro-conductors has changed the understanding on the importance of supply chain. Even if it does, the question remains, what is the importance of supply chain and how do we better articulate it?
In a recent training with senior supply chain executives on the “Strategy-Driven Supply Chain”, one of the participants said: “Now I finally know how to have that discussion”. So what is it that we teach in that training? It is the five key pillars of the Strategy-Driven Supply Chain which we briefly explain below.
1. Supply Chain Management is about creating value, as measured through the Return On Capital Employed
In our first book “Supply Chain Strategy and Financial Metrics”, we introduced the concept of the Supply Chain Triangle of Service, Cost and Cash. We illustrate how companies struggle with balancing this triangle. We explain how balancing the triangle is not optional but mandatory, as balancing the triangle is about optimizing value, as measured through the Return On Capital Employed. It also links supply chain to finance. Supply chain and finance basically have the same mission.
2. Strategy impacts the balance in the Supply Chain Triangle
Strategy is about making choices. Whether you look at the early strategy work of Michael Porter, or at follow-on work of Treacy & Wiersema or Crawford & Matthews, or recent work like Blue Ocean Strategies from Kim & Mauborgne. Strategy is about making choices. Different strategies lead to a different balance in the triangle. Low-cost players will banish complexity and sweat the assets to come to the lowest cost. Differentiation players will add complexity and require more assets but compensate with premium margins. Different strategies result in different supply chains and are just different ways to generate the same ROCE.
3. Supply chains should be designed in response to a market and the chosen value proposition
Many supply chains are designed for cost and are not aligned with the strategy. In our latest book “The Strategy-Driven Supply Chain” we propose a methodology on how to analyze the key value drivers in a market, how to define your strategic value proposition, how the market and the value proposition result into complexity and variability, and how to design a strategic supply chain response which translates into a given cost and a given level of capital employed. The strategic supply chain responds to the strategic value proposition. Strategic means we make choices and we understand the consequences. Together they result in a value model that shows how we will generate ROCE.
4. To better balance the triangle and generate more value we need to integrate strategic, financial, and operational planning into what we call “Integrated Value Planning & Execution” or “IVP&E”
Clearly, strategic planning has an important impact on the balance in the supply chain triangle, on the level of complexity, our service model, our desired responsiveness, and as a result on the level of cost and the capital employed. Financial planning as well has an important impact. In the budgets, we define targets for financial metrics like inventory turns and we decide on CAPEX which defines our level of fixed assets. Budgets are typically used for target setting and linked to incentives which are a primary driver of behavior in the triangle. It can basically make or break the triangle.
Operational planning is confronted with operational decisions where conflict in the triangle is common. Shall we start producing that order even if we do not have the formal customer commitment to be able to respect lead times but knowing it could lead to unsold inventories? The different planning layers have a primary impact on the triangle, but are in many companies disconnected, which leads to conflicts. The conflicts indicate a loss of value. Better integration is needed for more value generation.
5. We need to change the role of supply chain from operational-tactical to tactical-strategic
So how do we drive a better balance in the triangle? It will not happen through shared targets. In my experience, if everybody is responsible for inventory then nobody is responsible. On top of that, I believe in strong functions for sales, operations, finance, with a strong focus on functional KPIs like growth/market share, efficiency/cost, or free cash flow. But we’ll have to balance strong functions with a strong balance. We propose to put the Chief Supply Chain Officer (CSCO) at the heart of the triangle, with ROCE as a metric and with Integrated Value Planning & Execution (IVP&E) as the tool.
So we make the CSCO responsible for strategic planning, financial planning, and operational planning. Not that the CSCO will define the strategy. Supply chain will moderate the strategic debate to come to sharper choices. A bit like supply chain today is moderating the S&OP process. Finance may not be ready for this, supply chain may not be ready for this, but after years of struggling with the triangle, it is time to get over it. We can help to turn your supply chain into a competitive edge.
