“The business world has changed so radically that even the U.S. Army’s Procurement agency is forming partnerships in China,” said Barry Gander, EVP of CATA, in launching the Supply Chain Roundtable.
Global competition is well documented. Product and service companies
alike, all face enormous pressures. It is not just on price, although
Far East labour costs less than half those in Canada are challenge enough. Competition
covers the entire value chain, from strategy … to design … to
distribution … to post-sales service. Information travels
rapidly around the world, making innovation widespread and competitive
Alan Kay, Roundtable moderator, notes the 40% Canadian dollar increase in 40 months and the Canada/U.S. labour cost gap (see CIBC World Markets chart, August 2006) that have made supply chain management even more demanding. Add a looming skills shortage, and we need answers urgently.
This is the topic that brought together over 70 supply chain practitioners for a morning of Roundtable discussion.
“Supply chains directly affect your customer service levels, costs and profits,” says David Long, Program Director at the Centre of Excellence in Supply Chain & Logistics Management at Schulich Executive Education Centre, and President of Supply Chain and Logistics Association Canada.
How can supply chains help us increase market share and create strategic advantage? The purpose of this Report is to summarize Roundtable views expressed, and offer pointers to more agile supply chain strategy, structure and performance.
Looking for Value
“What is supply chain management?” Several Roundtable participants have asked this question in the context of understanding where best to place our efforts.
A supply chain or logistics network is a coordinated system of organizations, people, activities, information, processes and resources involved in moving products or services physically or virtually from supplier to customer. Supply chain activities transform raw materials and components into a finished product or service delivered to end customers.
Supply chains link value chains, a term popularized by Michael Porter to denote a framework for organizations to analyze value added activities, to create value and competitive advantage.
Supply chain or value chain – they touch most areas of your business. Supply chains also cover both manufacturing and services. Robert Crawhall, President and CEO of National Capital Institute of Telecommunications and Roundtable keynote speaker, points out that services, representing 75% of the economy and jobs, get relatively little IT investment. Small wonder that Canada lags U.S. service sector growth by 1.7% to 2.5%. Canada is now increasing investment faster than the U.S. on people and service sector technology and is in better supply chain shape than many other countries, but the outlook for Canada is still for a 20 year economic battle.
Basic SCM – “Expediting” to make it happen
Supply chain management competencies can be viewed as three cumulative and progressively more innovative stages. The basic stage is “expediting,” simply keeping the supply chain running, with goods and services flowing through the system, problems tracked and blockages removed, and commitments met.
No matter how systematized your supply chain, un-programmed occurrences must be dealt with, such as examples – container bug infestations, containers stuck in traffic accidents, random customs duty assessments – cited by Roundtable participants. Small companies see themselves at a disadvantage in such day-to-day problems. Certainly, large companies have a resource advantage. Crawhall points out that a Small/Medium Enterprise has difficulty finding a good VP Marketing let alone a supply chain manager.
However, the comparison should not be taken too far. Darryl McCoy, Director of Global Supply Chain Management at MDS Pharma Services, reminds us that the opportunity is usually quite similar and small companies tend to react more quickly. John Newell, Director Information Technology M&M Meat Shops agrees that a supply chain architect would be a pipe dream in a small company, but there are offsetting opportunities e.g. for sourcing private label products. In his job, he must be aware of technology even though he cannot adopt all of it. For him, “nimble” is a prerequisite for small business to survive; but “nimble” is easier for a small company to do.
Incremental SCM – “Improving” to make it happen better
The second stage of supply chain management is “improving.” Supply chain managers still work at keeping the system running, but they also seek out ways to improve the supply chain process continuously. Ongoing attention to cost levels and productivity are prerequisites for staying in business in an era of low-cost overseas competition.
Supply chain improvement has broad application. People scheduling in the Supreme Court is a supply chain issue for the court clerk, who with thousands of cases in progress has to make sure all those juryman are in the right place at the right time. Paul Bloom, VP Procurement and Supply Chain Management at private equity group CFM, links ideas in his group’s different supply chains, even in other industries. For Bloom, the key is leadership, curiosity and passion. He likes to enlist the engineering side where he finds greater readiness to sponsor supply chain change.
NCIT’s Crawhall recounts how Nortel’s advanced technology people worked with sales and marketing to get $10K investments in small research programs. After long time resistance, it was realized that there was attractive brand equity for small companies from being in the program, so participants made the needed trade offs. An individual in a small company is often better placed to work opportunities to extract value.
Claude Germaine, EVP and COO of Schenker of Canada Limited, notes that customs duty total added cost is highly unpredictable since 85% of rated entries to Canada are manually processed by entry level people, making duties subjective. For example, challenging coconut milk rated as a dairy product reduced the assessment from 6% to 0% and saved $100K/year, while a transformer split into two components with only a slight increase in the shipping costs came in duty free. A mid-cap oil field supply firm changed purchasing terms so that instead of supply chain costs being buried in the cost of goods sold, the contract was changed to ex-works to give visibility of the shipping cost from India and China; the company then teamed up with a large global player to reduce supply chain costs and improve on time supplies delivery.
Challenges vary from sector to sector. However, electronic commerce being adopted by every sector is creating a commonality of issues and speeding up the rate of adoption. Crawhall observes more enthusiasm for supply chain management in the health care sector. This perhaps reflects that supply chain awareness is only now showing up in this sector. It is not just about your own organization, rather making different organizations in the chain work seamlessly, e.g. hospitals want blood when it is needed, while Canadian Blood Services wants economical blood distribution.
Strategic SCM – “Leading” to make it happen differently
The third stage of supply chain management builds on day-to-day expediting and incremental improvements with visionary supply chain management. The goal is strategic “leadership” – to create and fulfill new customer needs, differentiate our organization, and disrupt the competition. Shaping supply chain strategy is neither easy nor an every day occurrence. However, it is an imperative, to stay a step ahead of low cost suppliers around the world who are increasingly thinking strategically themselves. This was the main theme of Crawhall’s keynote address. We have a long way to go in establishing supply chain strategies and teamwork led from the top of the organization.
When Crawhall was at Nortel in the late 1980s, the digital phone system was considered cool technology. But it was the supply chain strategy not technology that brought success. Nortel’s 48-hour inventory replenishment enabled its customer, BT, to eliminate its own warehousing; a supply chain quality program resulted in minimal defects.
The Canadian military emphasizes strategic outsourcing by opening up the entire supply chain and determining the full cost of business. It favours keeping technology and processes in house, maintaining management teams, and integrating the supply chain. Coca-Cola’s current product strategy challenge is how to handle niche markets within a large scale distribution system.
Supply chain management must be directly represented at the executive table. IT, finance, marketing and other areas must be more seamlessly integrated with supply chain management. The culture must support innovation right across the enterprise, not just siloed productivity improvement. Tracking performance must be aimed at producing measurable results and corrective actions – topics explored in the next section.
Making Your Supply Chain Strategic
Strategic supply chain change is quite different from tactical and incremental changes to raise productivity and lower unit costs in which Roundtable participants are engaged day-to-day.
Cultural aspects of change must be tackled and the benefits of change made more tangible. This is easy to say, and indeed some participants are clearly impatient with high level discussion that never seems to produce much action let alone measurable results. How are we to break out of the incremental supply chain straightjacket and achieve market leadership breakthroughs?
In this section we review several areas requiring urgent attention – technology, collaboration, organization, and culture.
Technology for Competitive Advantage
Crawhall of NCIT sees a potent brew of supply chain technology emerging: broadband wireless with location capability, Voice over IP with alerting capability that automatically notifies you if something happens, XML-based standards for open information exchange, and sensor networks including RFID technology. Major advances are coming in data bases, data fusion, information search and query, knowledge management, business intelligence, and visualization.
This will mean shifting from a “product design” approach to designing the product with the complete customer fulfillment system included – not just design-for-test, design-for-manufacturer, and design-for-shipping. Organizational barriers and resistance to untried technology must be overcome before product design is sufficiently supply chain friendly. Product design must incorporate supply chain factors such as supply and demand variability into the product specifications. For example, identifying price sensitivities if demand spikes or supply chokes. Optimization is the goal, not just cost reduction.
As Bloom says, platform standardization to keep down costs runs the risk of rewarding people for the wrong answer. For example, McCoy is facing consequences of technology just being dropped in without process design and is now having to redesign the technology. Up front preparation is vital and impatience can be counterproductive.
Collaboration and Value
Global supply chain integration cannot simply be overlaid on traditional
organizations. Sam Palmisaro, CEO of IBM, has said that it “involves
significant changes in organizational culture, new forms of partnership
among multiple enterprises and segments of society, and many new standards
for managing a much more complex marketplace (The Globally Integrated Enterprise, Foreign Affairs, May/June 2006)”.
Outsourcing starts with knowing when not to outsource. A breakout session suggests the presence of: intellectual property, core strengths, strategic implications, and management intense processes. The advice is to keep the supply chain in-house when the cost of outsourcing failure would be high, or there are out of control or undocumented processes, or outsourcing might compromise quality. In contrast, you should outsource when: the costs are well understood, outsourcing allows you to grow, you lack investment funds in the geography, there is a service that you do not have, or there is an opportunity to do it better.
Governance of an outsourced supply chain operation is critical, and with it a new management competency of managing service providers and sourcing. Bob White, President of RJ White & Associates says the role of logistics companies is changing from that of “Travel Agent” to “Tour Operator” managing the entire experience.
Getting what Taimour Zaman (President, the Access Group and Roundtable convener) calls the supply chain model right for your business has become a strategic necessity. Several participants noted supply chains’ lack of recognition in the organization and their absence from the executive suite. Supply chain managers must take the initiative as an advocate with the CEO. The business case must be made to make supply chain design an integral part of product design. Skills must be promoted, so a supply chain architect is seen as a contributor along with product management. Supply chains managers must drive integration with other functions. A supply chain strategic plan must be developed that looks at least two generations ahead, and deals with complexity, margins, customer expectations, shorter product cycles, and greener business trends.
Colonel Marie LeLoup reports that Canadian Forces devolved supply chain responsibility to a decentralized management but lost a crucial element of oversight, so now the pendulum is moving back to centralized metrics.
Changing the Culture
Without getting the culture right, solving other issues will not be sufficient for sustained results. Crawhall sees culture coming under increasing scrutiny. He often observes cultural differences between young designers and older supply chain managers, and recommends hiring designers into the supply chain team as Merck did in its blood research group, even overriding existing compensation and organization structure.
Organizational style can be viewed as a Continuum. The firm progressively moves itself to higher levels of achievement, lifting performance at each of three levels (see “Putting an Innovation Culture into Practice”, Ivey Business Journal, January-February 2006).
Moving from a hierarchical and risk-focused culture with emphasis on transactions and keeping costs in check, an “advanced” culture integrates organizational silos for individual departments to work with each other for productivity improvements and greater flexibility of response. More operating decisions are pushed down to the front line. Selected supply chain metrics are measured, but the ability to use the data to fine tune business decisions may lag the ability to generate the data. Advanced companies outsource non-core activities when it improves performance and streamline supply chains with quality and lean processes. They collaborate with their customers and suppliers in product development.
Early adopters find this will only take them so far. Aspiring to supply chain innovation “breakthroughs,” they change the culture – extending strategy alignment to goal alignment with an adaptive, knowledge and learning culture in which performance improvement is not just cascaded down but also self-directed. Innovation becomes the driving force.
Supply chain leadership capabilities; front line supervisory skills that produce employee retention; cooperative and creative business practices including integration of the supply chain into senior management; organization-wide self-actualization – these all lead to a shared knowledge and learning supply chain organization. The payoff is strategic competitive advantage, self-sustaining even as the market continues to change.
Interestingly, a consensus is building in supply chain circles for national initiatives that will foster Canadian competitive advantage. Several Roundtable participants reinforced the growing desire to be organized at sector and national levels.
Three thrusts stand out as having strong support.
- Environmental: concerns are growing around sustainability, traceability in the food chain, energy use, pollution reduction, etc. – and the expectation is that Environmental certification is coming and with it a potential branding competitive advantage, calling for Government programs to provide a framework, remove anti-competitive regulatory hurdles, encourage technology investment, and promote education on business benefits, e.g. Return on Invested Capital
- People talents: Canada can capitalize on diversity and cultural ties to global markets through immigrants, and has a particular advantage in historical links with the Commonwealth to build a more critical mass in SME supply chain innovation, for example in working with India to help address some of the repercussions of their rapid growth and a still changing environment
- Transportation: a national strategy would build a Canadian competitive supply chain advantage on existing shipping and logistics infrastructure and expertise
Several industry groups were represented at the Roundtable, and it is to be hoped that they will carry these ideas forward.
The Canadian Advanced Technology Alliance says that “looking at a pure cost, Canada can’t compete at the level of India or China; (but) when you move up in the engineering class or the highly innovative manufacturing talent, Canada ranks right up there.” Collaboration must be built into global supply chain management to make this happen.
Conclusion – We are not there yet!
The Roundtable gave us anecdotal evidence of many advances in supply chain management, e.g. Bell Canada self-funding continuous improvement, Celestica aligning metrics for right behaviors, Health Connections’ talent awareness, MDS focusing metrics across the enterprise rather than internally, and Alberto Culver articulating a strategy linked to success measures.
This is only a beginning. The Roundtable has made a solid contribution to continuing on the road to breakthrough supply chain management, but much work remains.
Appreciation is expressed to all concerned – participants, panelists, facilitators and sponsors – for making the three hours of discussion a good step in the right direction.
November 27, 2006
Robert Crawhall, President and CEO, National Capital Institute of Telecommunications
Claude Germaine, EVP and COO, Schenker of Canada Limited
Darryl McCoy, Director of Global Supply Chain Management, MDS Pharma Services
John Newell, Director Information Technology, M&M Meat Shops
Paul Bloom, VP Procurement and Supply Chain Management, CFM
Sponsors & Partners
The Access Group
Supply Chain Alliance
Alan Kay, The Glasgow Group
David Long, President, Supply Chain and Logistics Association Canada
Bob White, President, RJ White & Associates
Rick Wolfe, PostStone Corporation
Taimour Zaman, The Access Group
Robert Angel, President, The Gilford Group Limited
© The Access Group, January 2006,
All Rights Reserved. Reproduction without this copyright notice
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of writing and are subject to change. Registered trademarks are
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