Supply Chain Digest: Supply Chain, the CEO, and Opportunity
By Dan Gilmore
Through a special arrangement, what follows is an excerpt of a current article from Supply Chain Digest, presented here for discussion.
If the anecdotes in a recent Harvard Business Review article on supply chain management are any indication, many companies are still very early in the SCM game. The article – Are You the Weakest Link in Your Supply Chain? – has a catchy premise, that the CEO’s lack of knowledge and engagement in matters of supply chain either lead to operational problems or fail to capture potential opportunities.
It’s a great article, and the first I’ve really seen that doesn’t talk all around the role of CEO and supply chain performance without quite getting to the point.
Here
are just a few of the many insights worth noting:
- If the CEO views the supply
chain as a “black box” in which stuff happens
to move products from source to customer, it’s not only very hard to create
the right supply chain focus but even to pick the right supply chain leaders
and assess their performance. - Similarly, CEOs who aren’t engaged and knowledgeable
in supply chain are likely to have under performance, as it is hard to push
an organization for which you have little understanding. Not said in the
article, but a natural corollary to this idea, is the common condition of
supply chains being mostly driven by the basic metrics, like standard manufacturing
costs, not total supply chain costs, since the former is much easier for
a CEO to focus on. As a result, sub-optimal decisions are made. - Interestingly, the
article says CEOs must get much more engaged in matters of supply chain technology
– an area where few spend much time at all – as well as key trends, such
as Lean and Six Sigma. It suggests that if CEOs were stronger here, the common
case of companies underutilizing technology they purchased might be mitigated.
But in the end, what really struck me were the many recent anecdotes in the
article that showed the challenges or issues so many companies face. Examples:
- The
company whose sales team promised a customer shipping from regional DCs rather
than the plant-direct shipments they had been using, adding significantly
to logistics costs with no balancing concession from the customer. - Another manufacturer
that lets obsolete inventory sit in warehouses for years so it doesn’t have
to take the write-down. - A major railroad that frequently lets high volume
customer shipments sit in terminals, sometimes for days, because terminal
managers are incented on how many railcars are moved with available engines,
not on keeping great customers satisfied. - What is probably a majority of companies
whose supply chains are driven by quarterly ordering patterns that have nothing
to do with actual consumption but everything to do with promotions, incentives
and discounts.
Discussion Questions: Is lack of knowledge and engagement on supply chain matters by CEOs a real barrier to performance? How so? Can supply chain managers really “educate” the CEO in this area?
To be up front, as a “store” person I have my bias. I see many things that make the warehouse operations more efficient but to the detriment of the stores. I don’t think we ever make an analysis as to the total efficiency. I’m not sure it can be accurately measured anyway.
Each side selfishly sees only their side but the warehouse side always wins because they can accurately measure the operation whereas the stores cannot. The warehouse measures the whole of their operation in one location whereas the stores must measure small increments over numbers of locations. I would love to learn the net effect but that’s only a pipe dream.
For most retailers supply chain is a systems (Big ‘S’) issue–not a logistics or IT or vendor relationship issue.
Done properly, improving the supply chain takes waste out of the system, allowing the ‘costs’ of the removed waste to be redeployed so as to better enhance the value proposition for the customer. It’s not that hard to do it properly so long as the CEO has the basic knowledge and commitment to expect, drive (and occasionally demand) change within his organization.
Wal-Mart is the obvious example of a retailer whose CEO rose from the supply chain ranks. In fact, lowering costs through effective supply chain management has been a key part of their strategy for gaining market share through the years.
It’s hard to imagine after years of focus on more effective logistics, supply chain and IS management that any CEO running a major retail company isn’t tuned into this issue. However, most retail CEOs have probably risen from the merchandising or store management ranks and need to rely on a team-management approach to this issue. Wal-Mart’s struggles with merchandise content and store operations may, in fact, reflect the background and priorities of their CEO.
On the one hand of course it’s a limitation on CEO effectiveness. On the other, how many currently sitting CEOs really have a grasp on much beyond increasing shareholder value, managing their board and Wall Street and negotiating a great exit package for themselves?
For large companies the CEO sets the tone and general direction and trusts he or she has the right people in place to execute effectively. Then their job is to be the external face of the company. In smaller companies the CEO is obviously much closer to supply chain issues, but those issues are now so complex they may be better addressed by a supply chain expert.
I see difference by type of company. In CPG companies, the supply chain is such a small cost that the CEO considers it just something you have to do in business. Those companies that outsourced to China are learning otherwise. Even fewer understand the idea of a competitive advantage that a modern supply chain can achieve for a company.
We see some differences in retail. CEOs understand that if the merchandise does not get to the store they cannot sell it. But, by just comparing the operating costs between a wholesaler and chain, you see the differences. The wholesaler works to drive cost out of the system while reducing the time cycle. Chain retailers appease the stores, rather than improve the store operations. Too much of the lack of understanding, as happens with senior management running the company by the accounting numbers rather than understanding what could be done better.
It’s not surprising that Supply Chain Digest would run an article claiming CEOs need to learn more about supply chain issues. Guarantee: HR Digest could run an article claiming CEOs need to learn more about HR issues. Guarantee: Marketing and Sales Digest could run an article claiming CEOs need to learn more about marketing and sales issues. Any business function’s champions could run similar articles about how important their issues can be. Successful CEOs find the best executives for each function. They don’t try to be the expert on everything.
Supply chain issues are going to become dramatically more prominent as retailers slowly move to merged channel. But even single channels today pose problems. How many brick-and-mortar customer service reps can accurately identify what merchandise is slated to arrive tomorrow and the next day, let alone further down the supply chain?
For all of the supply chain talk the last few years, the largest retailers are–for the most part–still way behind.