Rising complexity in supply chain operations combined with its growing role in assuring enterprise profitability means executives up to the CEO level should devote more attention to this part of corporate operations, according to a research report.
As risks pile up in supply chain operations globally, companies are being forced to continually reinvent their systems to make them more agile, transparent and competitive. This requires senior executive oversight and involvement, said management consulting firm McKinsey & Co. in a recent report. The authors said companies are being compelled to bring together more functional operating areas into the supply chain and these require asking senior executives to oversee these activities, said analysts at McKinsey & Co. in a recently published book titled Excellence in Supply Chain Management.
“Senior executives tell us that supply chain issues are increasingly demanding their attention,” noted Christoph Glatzel, Alex Niemeyer and Johannes Röhren in a recent article based on their book. “Yet achieving supply chain excellence is getting harder. Production and distribution networks are increasingly complex and global, and their effective operation is vital for profitability and resilience. At the same time, risks across the supply chain have increased, and improved transparency is critical to the coordination of effective responses.”
The growing complexity explains the need for top executive involvement in supply chain operations. However, while many of the best-in-class companies have raised the profiles of their supply chain units by naming senior executives to head the division, this trend has not extended to most midsize and smaller enterprises. At some companies today, the supply chain division is often relegated to a lower level staffed by professionals struggling to explain the growing significance of their units to the overall enterprise’s profitability.
One major challenge supply chain professionals face in this regard comes from the difficulty of determining the actual contribution of their work to corporate sales and profitability in specific dollar amounts. With divisions like sales and engineering, it is easier to pull up profit and loss statements showing how the unit contributed to corporate profitability. The supply chain, which has many more units – manufacturing, procurement, logistics, post-sales warranty fulfilment, etc. – under its ambit can quickly turn into a complex division with limited visibility into actual dollar contributions to a company’s bottom line.
Even now supply chain departments at leading manufacturers and in other sectors of the economy are constantly being reorganized in response to changing market needs, further complicating the task of assessing their contribution to the enterprise. The McKinsey analysts don’t see this exercise ending anytime soon, however. The reinvention of a corporate supply chain will remain an ongoing exercise, they said.
“Critically, the very best companies continue to evolve and reinvent their supply chains, even if they have already achieved a leading position in their industry,” the authors said. “By doing so, they are able to manage risks; respond to changes in the economic, technological and competitive environment; and exploit new opportunities more effectively than their competitors.”
They recommend CEOs should ask the following questions about the enterprise supply chain to ensure continued relevance and identify areas of improvement:
What is your customers’ experience of your supply chain? How does it stand out from your competitors?
What is your supply-chain strategy, and how does it support your business strategy? For which customers, products, and segments does your supply chain target the best performance? Where does it optimize for cost rather than for service?
Do you have clear supply-chain performance and cost targets? Which key performance indicators do you use to measure these?
Who is ultimately responsible to deliver against these performance targets? How do you ensure every function in your business supports those efforts?
How quickly can you ramp up production of a new product or a new sales region?
Is your supply chain agile enough to flexibly respond to external changes?
The authors also identified three critical areas where CEOs can make a definitive impact on the corporate supply chain. These include helping to differentiate the supply chain and incorporate this into the overall business objectives, assuring the creation of a modern supply chain and setting specific performance standards for the organization. The McKinsey paper can be download by clicking here. The three areas where top executives can help influence an enterprise’s supply chain follow in the authors’ own words:
Differentiate your supply-chain and corporate strategies:Whether the strategy of your business is superior service, product innovation, or costleadership, ensure your supply chain is helping to deliver the key points of that strategy.Bring together leaders from across your business to define the supply chain that will workfor you—and make sure they provide the data your organization must deliver. Marketingshould tell you what your customers value most from your service, how those needs varyamong customers, and what will differentiate you from your competitors. Your commercialfunctions have to identify which customers justify the cost of the highest service and whichwould be better served using a more standardized approach. Together, your supply-chainand product-development functions can find ways to create innovative products that suitthe needs of all those customer groups while keeping overall costs under control.
Create a modern, end-to-end supply-chain organization:The times of managing the supply chain in separate tiers is over. Sophisticated data analysis enables companies to manage supply chains end to end and, in industries such as retail, almost in real time. Appoint a single leader with responsibility for end-to-end performance and for delivering improvement projects across tiers and traditional functions such as marketing, manufacturing, and procurement. Make sure your supply-chain organization combines operational excellence with strong analytical capabilities and data-driven, cross-functional decision making. Create analytical teams to support decision making and identify hidden risks and opportunities in unstructured data. Ensure your IT function is supporting them with nimble applications and platforms that enable collaboration and analytical decision making.
Set performance standards for the entire organization:Give incentive to your supply-chain organization to work in ways that deliver the most value for your business while protecting against its biggest risks. That means using more than the traditional metrics of cost, service, and capital. The right key performance indicators depend strongly on the needs of the business, the product, and the market segment: the cost of production for value players, the stability of supply for staples and critical products, agility in volatile markets with fluctuating demand, and launch excellence for new products are essential. If a metric doesn’t matter in your business, don’t misdirect the organization by using it.