“Collaboration” and “supply chain” go hand in hand, or you might think they should. But there are two kinds of collaboration with respect to supply chains. While many companies are focused on working with suppliers to arrive at more efficient and effective solutions, our studies have repeatedly shown that far fewer work cross-functionally inside the organization to achieve the same result.
At manufacturing companies, procurement and inventory management most often report to finance, while planning and logistics report to manufacturing. With rare exceptions, though, the work groups operate independently of one another. It’s not a collaborative environment.
Why that’s the case is a question that has stumped me in the past. Why would a process that is responsible for investing, handling, and managing company capital not be designed and built to function collaboratively? The answer I’ve now found, thanks to some recent experiences with clients, is simpler than you might think.
Organizations continue to segregate roles and responsibilities based on their internal impact on the organization, rather than their external (or end-customer) impact. Consider the typical supply-chain structure described above. The responsibilities of sourcing and procurement departments, to invest and manage capital, are overseen by finance. Planning and logistics departments have a direct impact on the efficiency and effectiveness of production. All these roles are built and managed based on internal impact.
You might be thinking, so what? Here is the problem: lack of collaboration across the supply chain drives tactical actions, not strategically focused decisions. And tactical actions often increase costs and reduce efficiency, with poorer customer service the result.
One of the single most effective solutions we have brought to organizations is improved collaboration between supply-chain functions and such key stakeholders as engineering, design and project management. Building cross-functional teams promotes increased awareness of decision impacts.
At one of my client companies, the CFO had decided that a key objective was to reduce its cost structure. Sourcing and procurement interpreted that and said “OK, we’re going to go out and buy in bulk, we’ll get a reduced price.” Well, this was a technology company, for which certain supplies quickly become obsolete. The company was taking in 100 units, say, when it really needed only 50 in the short term. The other 50 were sitting on the shelf going obsolete, and the inventory manager had to write the stuff off and send it to scrap.
The ultimate reason for that poor outcome was that sourcing wasn’t looking at the end customer’s needs. It made an interpretation of the CFO’s objective and took tactical actions on its own. They should have gotten together with the inventory department and said, we’re looking to bulk-buy in these areas, what do you think? That conversation should have involved engineering, too.
At some point in your corporate training you may have experienced the Beer Game, a logistics exercise in which teams manage four areas of a beer-distribution chain, developed in the 1960s at MIT’s Sloan School of Business Management. Instructions given to participants, and their resulting decisions, lead to stockpiles of work-in-process inventory and, ultimately, the dreaded “bullwhip effect.” But after communications channels are opened up across the supply chain, decisions become collaborative, they reduce inventory, and they improve work flow and lead time.
Despite actually knowing that decision-making must be collaborative across the supply chain, many organizations do little to facilitate it. Collaborative decision-making requires that business leaders and staff work closely to support the organization’s strategy. Building cross-functional working groups and holding frequent (yet brief) cross-functional meetings serve to improve communications and build a foundation for strategic decision-making.
Focus on the Right Customer
Who is the supply chain built to serve? Who is ultimately affected by the decisions and actions the supply chain takes? Sometimes, it’s not who you might think. Consider the typical response to this question in a manufacturing environment:
- Demand Planning supports Marketing and Manufacturing.
- Purchasing supports Marketing and Planning.
- Logistics supports Procurement and Manufacturing.
- Inventory supports Manufacturing, Maintenance and Finance.
Sound familiar? If so, then you have a problem. Developing a strategic focus begins with understanding who the real customer is, and that customer is not internal. Focusing on what’s in the end customer’s best interest drives increased collaboration and a strategic approach to decision-making.
Let’s consider a revision to the scenario above in a manufacturing environment with a clear focus on the consumer:
- Demand Planning serves to satisfy customer demand.
- Procurement serves to maintain a competitive market price with desirable quality.
- Logistics serves to deliver goods to the consumer in a timely and cost-effective manner while avoiding damage.
- Inventory serves to provide effective inventory turns to ensure the consumer always receives the latest revision or model.
A focus on the end customer forces each functional area to consider how its decisions affect other functional areas in order to satisfy the end customer.
Right Measures, Right Behaviors
I am often asked to determine what the “right” measures are to monitor supply-chain performance. The answer, not surprisingly, is “it depends.” The right measures drive supply-chain collaboration and strategy, and the wrong measures drive the wrong behavior.
Measures and rewards – which also should be directly connected to the end customer – will vary by industry and customer demands. Consider, for example, that in pharmaceuticals, quality and integrity are much more valuable to the customer than price. In produce, freshness, consistency and food safety are at least as important as price. In the automotive field, price drives virtually every decision. Identifying the right measures starts with the customer, and having the right measures drives collaboration.
So before you look outside the organization to drive supply-chain collaboration, first determine how collaborative you are internally. I use the following to help my clients build a more collaborative environment: focus on the customer drives collaboration; collaboration drives strategy; strategy drives growth; growth drives profits. Start making collaborative decisions with the customer in mind, and profits are soon to follow.
Shawn Casemore is president of Casemore & Co., a consulting firm specializing in supply-chain management.