Dynamic supply chains: how to design, build and manage people-centric value networks [3rd edition] 9781292016818, 9781292016832, 9781292016849, 9781292016825, 1292016817

Table of contents :
Cover......Page 1
Contents......Page 12
A word about the title: Time for a reality check and a leap of faith......Page 14
Foreword......Page 18
Preface: The power of reading and 'thought leadership'......Page 22
Author's acknowledgements......Page 24
Publisher's acknowledgements......Page 27
Introduction: Starting with the end in mind......Page 29
Part 1: Developing supply chain strategy......Page 34
1 Coping with market volatility: the 'new normal'......Page 36
2 Customer conversations: looking from the 'outside-in'......Page 74
3 Designing supply chain strategies......Page 118
4 Internal cultural capability......Page 132
5 Leading from the front......Page 172
6 Designing responsive organization structures......Page 196
Part 2: Configuring supply chains to maximize performance......Page 226
7 Collaborative supply chains: demand-side......Page 228
8 Lean supply chains: demand-side......Page 268
9 Agile supply chains: demand-side......Page 304
10 Campaign supply chains: demand-side......Page 338
11 Fully flexible supply chains: demand-side......Page 372
12 Supplier conversations: supply-side......Page 408
13 'Hybrid' supply chains......Page 436
Part 3: Executing supply chain management......Page 466
14 New outsourcing business models that drive value......Page 468
15 Service sector supply chains......Page 518
16 The new world order......Page 544
17 Joining the dots to create dynamic institutions......Page 592
Afterword: Ending with the future in mind......Page 602
Endnotes......Page 606
Selected bibliography......Page 636
A word about the author......Page 641
Index......Page 642

Citation preview

DYNAMIC SUPPLY CHAINS ARE AT THE HEART OF YOUR BUSINESS. YOU NEED TO GET THEM RIGHT. John Gattorna has been working in and around corporate logistics networks and enterprise supply chains for over three decades. In the late ‘80s, disenchanted with the lack of predictive power in the logistics theories and practices of the day, he set out to find a new business model that would better inform the design and operation of enterprise supply chains. And he succeeded. It has taken a lot of field work to uncover the secret sauce he was looking for, but the results of this journey are fully documented in this, his latest book. Those familiar with John’s work freely acknowledge that he is one of the most influential contemporary ‘thought leaders’ working in the supply chain domain. Indeed, many of the best global companies have already started to adopt his ‘dynamic alignment’ model, with significant positive results: a doubling of margins; big increases in sales revenue through increased customer satisfaction; and lower cost-to-serve across the board as a result of identifying and eliminating unnecessary over-servicing. John’s books have been translated into Chinese, Russian, Spanish, Portuguese, Polish, Romanian, Korean, Japanese and Italian. Apart from being a prolific writer on the subject, John teaches at several universities around the world, speaks regularly at international conferences, and advises boards and the C-suite of several multi-national companies on how to apply alignment principles to their businesses.

Previous books by the author:

Are your supply chains equipped to compete for a faster, more flexible future? Supply chains are not just part of your business: in many ways they are your business. They are made up of living, active people, and to really get supply chains right you need to capture the dynamism that people can bring to the flow of goods and services, both inside and outside your business.

Dynamic Supply Chains, second edition, 2010, Financial Times Prentice Hall.

FTP_T_234x153_FLAPS.indd 1

This new edition of Dynamic Supply Chains, which has been completely revised and updated, includes four new chapters on:

“There really isn’t any other work of this calibre generally available to senior supply chain executives without spending millions on high-end consulting and strategy consulting engagements.” DONALD A. HICKS,

Founder, President & CEO, LLamasoft, Inc.

How to design, build and manage people-centric value networks

“Dynamic Supply Chains impressively captures the way any business must reinvent its supply chains in today’s volatile, uncertain and complex world.” PIER LUIGI SIGISMONDI,

Chief Supply Chain Officer & Executive Board Member, Unilever PLC

YACOOB PIPERDI,

Executive Vice President (Gateway Services), SATS

£45.00 BUSINESS ISBN 978-1-292-01681-8

Cover design: Rob Day Visit our website at

www.pearson-books.com

•

Campaign supply chains, which covers the unique issues facing large-scale capital projects and the challenges of linking suppliers and project sites

•

New outsourcing business models that drive value

•

Service sector supply chains and why they should adopt the practices that have been more readily accepted for tangible products

•

The major supply chain issues facing enterprises over the next decade, including the challenges posed by growing customer expectations for sustainability and corporate social responsibility

JOHN GATTORNA

“Gattorna’s thought-provoking book is a must-read for business professionals.”

Living Supply Chains, first edition, 2006, Financial Times Prentice Hall.

HOW TO GROW YOUR BUSINESS WITH DYNAMIC SUPPLY CHAINS Supply chains are at the heart of competitive advantage in business today. If you manage your supply chains successfully, you will be able to deliver your products and services to your customers in a smart, costeffective way. And the key to successful supply chain management is recognizing that supply chains are so much more than warehouses, transport and technology. In fact it’s people who really drive the dynamic supply chains that are at the heart of your business. To make the most of them, and deliver what your customers want, when they want it, you need John Gattorna’s dynamic alignment model.

In this third edition of Dynamic Supply Chains, renowned international expert John Gattorna gives you a practical and effective new model for supply chains that will help you get closer to your customers and suppliers, and set your business on a new path to growth. John’s ‘outside-in’ philosophy is based on ‘Design Thinking’ principles, underpinned by business analytics, visualization, and the passion to get things done. This is indeed, supply chains by design.

Managing the Supply Chain: a strategic perspective, 1996 (with David Walters), Palgrave Macmillan Business.

Dynamic Supply Chain Alignment, 2009, Gower Publishing.

3RD EDITION

9 781292 016818

JOHN GATTORNA

John lives in Sydney, Australia, is married, and has two sons, two granddaughters and two grandsons.

3RD EDITION

“Dynamic Supply Chains is a masterpiece in the field of supply chain management.” Dr Rakesh Singh, Chairman, Institute of Supply Chain Management, India

Visit our website at

www.pearson-books.com

25/02/2015 21:26

Praise for Dynamic Supply Chains ‘With 40 years of experience in supply chain development, John Gattorna still is one of the most important thought leaders in the domain. Not only is his broad experience on show in this new book, but also his clear thinking about the development of supply chain ­management, which is truly dynamic. This requires clear leadership from current and upcoming supply chain executives. For them, and also for their colleagues with other ­functional expertise, this book is an excellent guide to the (near) future of supply chain ­management and potential success of their organization.’ Edwin Tuyn, Founder and Managing Director of Inspired-Search ‘John Gattorna has been studying supply chains for as long as they have existed in their ­ odern-day manifestations. He has followed, interpreted – and indeed influenced – the m dramatic ways in which operating environments and business models have changed over the years. His book reveals deep knowledge and understanding of our multi-faceted and complex supply chain universe. Gattorna’s book should be read by all practitioners.’ Dr Victor K. Fung, Group Chairman, Fung Group; and Founding Chairman, Fung Global Institute ‘This 3rd edition of Dynamic Supply Chains, is comprehensive and an easy read about l­eading-edge supply chain techniques and methodologies. The combination of thought ­leadership insights and best practice examples provides the reader with knowledge and inspiring input on how to create competitive advantage through the application of supply chain management.’ Bo-Inge Stensson, Senior Vice-President Purchasing, SKF Group ‘Does our future depend on supply chains? For over 40 years Professor John Gattorna has answered in the affirmative. But never without questioning the nature and evolution of s­ upply chain design in an increasingly complex and interdependent global economy. In this book, Professor Gattorna draws on a deep well of research and experience to ­provide a unique understanding of supply chains which incorporates a “dynamic alignment” ­framework linking market conditions, strategic choices, internal capabilities and effective leadership behaviours. The objective is to move thinking from the “logistics operations” mind-set of the 1980s to a more comprehensive “business transformation” mind-set, taking into account pressures for sustainability and corporate social responsibility. The book has been written to be as accessible to the practitioner as it is to those with a more specialized academic interest. It succeeds on so many levels as the culmination of the author’s “journey of discovery through the maze of logistics and supply chain networks that pervade our lives”, and can be strongly recommended as such.’ Professor Roy Green, Dean, UTS Business School, University of Technology, Sydney ‘Dr Gattorna’s thought-provoking book is a must-read for business professionals. He ­articulates an insightful, practical and congruous work-culture roadmap which ­invariably will help many companies in different businesses to achieve significant levels of success. Dr Gattorna demonstrates a practical approach towards implementing a resonant and ­profitable supply chain. I thoroughly enjoyed reading the book.’ Yacoob Piperdi, Executive Vice-president (Gateway Services), SATS

A01_GATT6818_03_SE_FM.indd 1

2/24/15 3:36 PM

‘The ever increasing speed of change in customer requirements makes it impossible for ­companies without dynamic supply chain capabilities to be competitive. John’s latest book is the perfect handbook for C-level and Supply Chain executives, describing the alignment of your supply chain, to ever changing customer requirements. The new insights into strategic supply chain management are also of great value.’ Burger van der Merwe, Director, Pick n Pay ‘Businesses have been shifting to “horizontal” for decades – eroding the conventional ­ ne-size-fits-all and pyramid views. Supply chains are a key driver of this shift, changing o ­everything – boundaries in and between organizations as well as how we conceptualize, design, work in, and lead enterprises. And, even though technology and capital play a big role, the secret ingredient is the human side of the enterprise. John understands this and puts his deep knowledge to work in this wonderful and accessible book that is really about the emerging enterprise and how to ensure its success by an intelligent and multi-strategy ­weaving of technology, relationships, people, and assets. Leaders at all levels as well as people in the supply chain need these insights and knowledge.’ Patricia McLagan, author of Change is Everybody’s Business and The Age of ­Participation: New Governance for the Workplace and the World ‘Anyone who has led a company and/or worked in what we traditionally call the ­“Supply Chain” function knows that human behaviour is at the core of making things work. In his thinking John brings in some of the most poignant observations on how culture and ­behaviour affect supply chain efficiencies. When you hear of the challenges in IT system implementations in the supply chain, they generally lead you to people, structures and of course leadership. “Supply Chains are your business.” The Dynamic Supply Chains framework is detailed and implementation focused, but will take you time to fully understand and digest. To start understanding our world, firstly it is really important to be alive to the fact that we deal with multiple supply chains within our ­organizations, even with a ‘seemingly’ homogenous customer base. The second is that ­systems must be designed and people must be aligned to deliver to these differing pulls from our customers. The good news is that there are five dominant types of such customers that we need to deal with, which John goes into great detail to describe and investigate. This is a must read for individuals designing new supply networks, diagnosing the ­effectiveness of their current operations, or leading transformational efforts in any part of their businesses. In this latest edition John brings “Campaign supply chains – how to deliver in full on time to project sites” which is an important new addition to our Supply Chain thinking.’ Vivek Kamra, President and CEO, NatSteel Holdings Pte Ltd ‘Dynamic Supply Chains impressively captures the way any business must reinvent its supply chains in today’s volatile, uncertain and complex world. A real business view about agility and responsiveness that can only be provided by a veteran like John Gattorna.’ Pier Luigi Sigismondi, Chief Supply Chain Officer and Executive Board Member, Unilever PLC ‘In Dynamic Supply Chains, John deftly illustrates the multiple iterations of supply chain models while cautiously underscoring the urgency of designing with the end goal in mind. His unique and fresh perspective on dynamic supply chains is a cogent read for senior ­leaders who need their value chains to drive continuous, customer-driven growth.’ Kevin Brown, Chief Supply Chain Officer, Dell Inc.

A01_GATT6818_03_SE_FM.indd 2

2/24/15 3:36 PM

‘Should you transform your supply chain? Which supply chain should you design and adapt – Collaborative, Lean, Agile, Campaign, Fully flexible or a hybrid? Is your supply chain balancing an “outside-in” perspective with the reality of your internal culture and capabilities? And can you lead the dynamic supply networks needed for success in today’s turbulent global business ­environment? The latest edition of John Gattorna’s book answers these and related questions with clarity, brilliance and the authority of deep practical and theoretical knowledge. It is a MUST read for any corporate leader since the implications of the book go beyond the traditional field of logistics and supply chain, to the needed transformation of most businesses.’ Yoram (Jerry) Wind, The Lauder Professor of Marketing, Director, SEI Center for Advanced Studies in Management, Academic Director, Wharton Fellows ­Program, The Wharton School, The University of Pennsylvania ‘This book is not only a remarkable historical survey about the evolution of supply chains, but Gattorna also gives us a focused view in the different and heterogenic layers of corporate actors and framework conditions. This all leads to an innovative and convincing analysis and development of a dynamic approach for the explanation of the supply chains at the time.’ Professor Dr-Ing Herbert Sonntag, Head of Transport Logistics, TH Wildau, ­University of Applied Sciences ‘In a world of pundits and talking heads, John Gattorna is the real deal. He’s the voice and the vision that CEOs are listening to and thinking about to get ahead of the competition. Many leading organizations around the world have started to realize that truly understanding the nature of demand is the key to designing resilient and robust supply chains. What they don’t understand is that John has spent decades fleshing out the implications for technology, strategy, and even organizational design. Dynamic Supply Chains lays out these strategies like a blueprint for enterprise excellence. Save yourself millions on consulting strategy and read this book. John Gattorna is unique among thought leaders in the supply chain space. In this 3rd e­ dition of Dynamic Supply Chains, John continues to define and refine his insight and wisdom regarding how to design supply chains and organizations around the concept of segmented demand signals. This would be important theoretical work, but John bases his ­framework and design imperatives on actual case studies and real companies. He has ­numerous ­examples collected from senior executives and CEOs. John Gattorna’s work bridges and ­synthesizes the theoretical and practical, making this book an invaluable resource. There really isn’t any other work of this calibre generally available to senior supply chain executives without spending millions on high end consulting and strategy consulting ­engagements. John Gattorna’s Dynamic Supply Chains stands out as a truly invaluable ­mountain of knowledge, observations and guidance for those who want to transform their supply chain organizations in the future.’ Donald A. Hicks, Founder, President and CEO, LLamasoft, Inc. ‘Dynamic Supply Chains is a masterpiece in the field of supply chains. It will broaden the ­ nderstanding in terms of designing the right supply and delivering value through people. It will u help Supply Chain leaders to build ‘outside-in’ capabilities in their supply chains. It will  widen and deepen classroom teaching, and add a much needed systems view to discussions and learnings.’ Dr Rakesh Singh, Chairman, Institute of Supply Chain Management, India

A01_GATT6818_03_SE_FM.indd 3

2/24/15 3:36 PM

‘Those of us that have drunk the Dynamic Alignment Kool-Aid know that the design and management of an enterprise supply chain is not just another functional responsibility within the business, it is the business. John Gattorna’s thinking brings clarity to the need for supply chains to be the operational catalyst for aligning the enterprise to the ever-changing ­buying preferences and behaviours of customers. Further, the beauty of this “next ­chapter” of ­Gattorna’s model is that he now more clearly defines the importance of balancing ­flexibility with the need for creating clear pathways for delivering on the many discreet value ­proposition commitments made across markets. John does not pretend this is a simple A + B = C formula – without compromise or apology for complexity, he more strongly than ever before demonstrates that supply chain performance reflects leadership’s understanding of the ­customers they serve and their willingness to invest in resources and networks that are accountable to delivering on their promises. This book is not about creating new terminology or processes – John’s breakthrough is more based on creating parameters for supply chain design thinking. That is, he provokes leadership to be less dependent on traditional organizational rules or boundaries, and to raise their consciousness for the importance of having a culture and operating model that can respond as needed to today’s “new normal”. So, if you buy into the theory that your supply chains will continue to be uniquely challenged by the ongoing advancement and volatility of the customers and markets you serve, you will find this book a bridge to helping you lead your organization into a future where supply chains are considered the “transformation engine” of the enterprise.’   Bill Marrin, Executive Director, World 50 ‘John has cracked the code in the same way that Billy Beane of the Oakland A´s and Paul Azinger in the 2008 Ryder Cup did in their fields. But here he has done it for a ­customer-centric supply chain. He puts the customer at the heart of everything, and then builds the supply chain around customer behaviours, with a number of different ­solutions based on this behaviour that runs through the whole supply chain from the customer, through the sales organisation, manufacturing, right back to suppliers. The trick is not the alignment of this behaviour, but rather how the organization builds multi-functional teams aligned to these behaviours, by focusing on organisation design, the people that fit into these chains, and aligning individuals’ natural behaviours with the ­behaviour of the supply chain. And then be able to dynamically re-adjust and re-configure. The book contains some fantastic examples, from the lowest cost, most basic, but highly efficient and effective supply chains of the Dabbawalas of Mumbai, through to the most expensive example of Formula 1, via the most sophisticated supply chain that is Inditex, with its global Zara brand. We have here the most complete set of analysis and solutions for today´s business ecosystem, that must adapt to its customers and be constantly adapting to meet their changing needs. It offers a complete set of tools to analyse our supply chains and develop solutions to gain a competitive advantage. This is the most insightful book ever written on supply chains. Fact.’ Duncan McIver, VP Operations Iberia, General Cable Corporation

A01_GATT6818_03_SE_FM.indd 4

2/24/15 3:36 PM

‘It was a pleasure reading this book. John has done an outstanding job of framing challenges and complexities that leaders are facing today. His usable approach to dynamic and tailored solutions to address complex supply chains is most valuable. I like the emphasis on strong organizational culture and leadership as a prerequisite to intentional design of robust supply chains. John’s point of view on lean and agility is most impressive and helpful.’ Mehran Ravanpay, Director, Supply Chain, Google Inc. ‘In his new book, John Gattorna not only reminds us of the fundamentals of the “dynamic” way in which supply chains operate, he also challenges us to adapt these principles to deal with the complexity and volatility of the environment we find ourselves in. Perhaps the greatest achievement of the book is how the various components of the “dynamic alignment” framework are integrated into a fully connected whole that both extends our thinking and inspires us to act. As before, John reinforces that the true driver of change and source of value are the people that inhabit not only our own organizations, but also those within our customers and suppliers. This book will become an invaluable resource to help in understanding how to align and connect organizations and people across boundaries in ways that make sense to them, and will also allow us to truly achieve the potential of our investments in marketing collateral, new products and services, and smart business models.’ Dr Christine Pitt, General Manager, Value Chain Innovation, Meat & Livestock ­Australia

A01_GATT6818_03_SE_FM.indd 5

2/24/15 3:36 PM

A01_GATT6818_03_SE_FM.indd 6

2/24/15 3:36 PM

Dynamic Supply Chains How to design, build and manage people-centric ­value networks

3rd Edition

John Gattorna

A01_GATT6818_03_SE_FM.indd 7

2/24/15 3:36 PM

PEARSON EDUCATION LIMITED Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk

First published 2006 (print) Second edition 2010 (print and electronic) Third edition published 2015 (print and electronic)

© Pearson Education Limited 2006, 2010, 2015 (print and electronic) The right of John Gattorna to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. Pearson Education is not responsible for the content of third-party internet sites. ISBN: 978-1-292-01681-8 (print) 978-1-292-01683-2 (PDF) 978-1-292-01684-9 (ePub) 978-1-292-01682-5 (eText) British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly ­permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the author’s and the publishers’ rights and those responsible may be liable in law ­accordingly. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners.

10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 Cover design: Rob Day Print edition typeset in 10/14 and Plantin MT Pro by 71 Print edition printed in Malaysia NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

A01_GATT6818_03_SE_FM.indd 8

2/24/15 3:36 PM

To Simon, Nicky, Tim and Alison, in recognition of your hard work and life’s achievements – we are very proud of you all

A01_GATT6818_03_SE_FM.indd 9

2/24/15 3:36 PM

A01_GATT6818_03_SE_FM.indd 10

2/24/15 3:36 PM

Contents

A word about the title: Time for a reality check and a leap of faith

xiii

Forewordxvii Preface: The power of reading and ‘thought leadership’

xxi

Author’s acknowledgements

xxiii

Publisher’s acknowledgements

xxvi

Introduction: Starting with the end in mind

xxviii

Part 1: Developing supply chain strategy

1

  1 Coping with market volatility: the ‘new normal’ Making the case for a new paradigm in supply chain design

3

  2 Customer conversations: looking from the ‘outside-in’ How to reduce complexity and associated costs

41

  3 Designing supply chain strategies How to formulate strategies that reduce cost and improve service

85

  4 Internal cultural capability How to align internal capabilities to propel multiple supply chains

99

  5 Leading from the front  How to revolutionize supply chain performance through inspired leadership

139

  6 Designing responsive organization structures How to get your people working together, and focused on customers

163

Part 2: Configuring supply chains to maximize performance

193

 7 Collaborative supply chains: demand-side  How to nurture the relationships cherished by truly ‘collaborative’ customers

195

 8 Lean supply chains: demand-side How to routinely deliver lowest cost outcomes for customers

235

· xi ·

A01_GATT6818_03_SE_FM.indd 11

2/24/15 3:36 PM

Contents

 9 Agile supply chains: demand-side How to design and deliver capacity for a fast response

271

10 Campaign supply chains: demand-side How to deliver-in-full-on-time, every time, to project sites

305

11 Fully flexible supply chains: demand-side How to design for major unexpected disruptions

339

12 Supplier conversations: supply-side How to give the supply-side better customer visibility

375

13 ‘Hybrid’ supply chains How to bring the demand-side and supply-side together

403

Part 3: Executing supply chain management

433

14 New outsourcing business models that drive value How to turbo-charge your supply chain operations

435

15 Service sector supply chains How to apply proven supply chain principles in the service sector

485

16 The new world order How to set your agenda for the decade ahead

511

559 17 Joining the dots to create dynamic institutions How to move from an operations mind-set to full ‘business transformation’ Afterword: Ending with the future in mind

569

Endnotes573 Selected bibliography

603

A word about the author

608

Index609

· xii ·

A01_GATT6818_03_SE_FM.indd 12

2/24/15 3:36 PM

A word about the title Time for a reality check and a leap of faith

T

he first book in this troika was titled Living Supply Chains (FT ­Prentice Hall, Harlow, 2006). Some of my readers were a little bemused by my choice of the word ‘living’ in the context of supply chains, implying that our supply chains are brimming with the same living, organic eco-systems that we find in nature. Based on this reaction I decided to adopt a more widely accepted word in my second book, but one that had a similar meaning. The title Dynamic Supply Chains (FT Prentice Hall, Harlow, 2010) was much more popular with my readers, and the accompanying sub-title ­reinforced the message I was trying to send – enterprise supply chains are propelled by the people that populate their length and breadth. This title has built a strong reputation among the book’s 20,000 plus readers, but there is still room for further refinements, especially around the term ‘supply chain’. For a long time I have been of the school that resisted the temptation to continually introduce new terminology in what is a relatively new field of management science. Instead, I prefer to simply widen the definition of the term ‘supply chain’ as we learn more about its significance in our daily lives. The original term, supply chain management, was coined by the c­ onsulting house Booz Allen Hamilton (now Strategy&) circa 1982. It was never a great term from the start, because it immediately conjured up a mental ­picture that focused more on the supply-side, rather than the whole e­ nterprise, and its upstream and downstream partners. The accompanying ‘chain’ descriptor is also somewhat restrictive, as it implies that we are dealing with 2-D linear chains or strings of enterprises, when in reality we are dealing with 3-D network arrays of enterprises, with supply chains running through them at all angles. I said it back then and I am more than ever convinced now, that our world has moved inexorably towards one that could be characterized as a ‘network of networks’. Indeed, there is no better example of this than the April 2013 alliance formed between the two global airlines, Emirates and Qantas, which has resulted in each

· xiii ·

A01_GATT6818_03_SE_FM.indd 13

2/24/15 3:36 PM

A word about the title

enjoying the benefits and competitive advantages of participating in each other’s extensive networks; Qantas in Europe, and Emirates in Australasia. Back in 2010 when I was writing the second book in the troika, I had already made up my mind that we needed to take a leap of faith and embrace the new term – ‘value networks’ – but at the time I felt it was just a bit too early. However, five years on, I am convinced that now is the time to ­introduce the notion of ‘networks’ into the title, albeit in the subtitle. Hence the title for this third edition: Dynamic Supply Chains: How to Design, Build and Manage People-Centric Value Networks. The expression value networks beautifully encompasses everything we want to include: the supply-side component; the demand-side component; and the idea that the c­ ombination of the two creates pathways through a 3-D matrix or network of supply chains. So the new hierarchy is as follows: 3-D value networks, which are straddled by strings of dynamic supply chains in 3-D space, which in turn contain elements of logistics infrastructure and operations at the enterprise level. And people are in the mix everywhere. This new terminology allows us to more comprehensively explain the concept of dynamic alignment between certain types of enterprise supply chains and their corresponding customer segments. It also facilitates the required adjustments in supply chain configuration and membership as these market segments change and evolve over time, hence retaining the all-important alignment between parties arraigned along these supply chains and the businesses they are an integral part of. This is the new ‘dynamic’ capability that we otherwise call flexibility. By finally embracing value networks as part of the accepted vernacular, we are automatically including all parties that interact in these networks: customers (at all levels), suppliers (at all levels), orchestrators of all kinds, including third-party providers (3PLs), and all other relevant stakeholders. All parties involved in what is in effect an industrial strength ‘social network’ have a role to play and a contribution to make, as well as share in the benefits derived through their interactions. With this shift in thinking and terminology we are able to brush aside one of the major impediments to progress since the early days of physical ­distribution management (PDM) circa 1965. Now we must fight to get the new terminology understood and widely accepted because it is n ­ aturally right and appropriate in the context of the wider field of management science.

· xiv ·

A01_GATT6818_03_SE_FM.indd 14

2/24/15 3:36 PM

A word about the title

This paradigm shift is timely because the best companies in the world, with the most sophisticated supply chain configurations, are already b ­ ridging the gap between linear 2-D chains and 3-D networks; practice is already ahead of the theory, so it is time to catch up. The suggested relaxation in the way we think about and understand supply chains will open up more pathways for innovation, and is exactly what is needed at this point in the development of such a relatively new management discipline. Innovations that lead to high-performance supply chains, in the c­ ontext of larger global networks, will create value for all of us, and do so in a ­sustainable way. The best companies are already ahead when it comes to sustainability and social responsibility. In the twenty-first century world, we are still ‘in business’ (and fiercely competitive at that), but a ‘network of n ­ etworks’ creates shared activities and responsibility for all the ­parties involved: the myriad of suppliers and customers, and collectively the ­commercial world they’re serving. Customers want to know what happens in the supply chains that supply the products and services that they buy; they want to ensure that labour relations, safety and the environment are managed ethically, with sound ­governance structures in place. We all want to make sure that if there’s an emergency, or another GFC, our supply chains won’t be threatened or ­disrupted. Supply chains are no longer invisible; they’re pervasive. Our ­powerful new ‘living’ supply chains will operate within a borderless world, albeit within acceptable boundaries for all societies. In this respect, we are seeing the emergence of a new ‘Independent Republic of the Supply Chain’1: a global force for the greater good.

1A

phrase first coined by Auret van Heerden, Head of the Fair Labor Association (FLA) in a prominent TED Global address in July 2010.

· xv ·

A01_GATT6818_03_SE_FM.indd 15

2/24/15 3:36 PM

A01_GATT6818_03_SE_FM.indd 16

2/24/15 3:36 PM

Foreword

I

t must have been in early 2006 when I first discovered John ­Gattorna and was introduced to the concept of dynamic ­supply chain ­alignment. While I was fully aware of segmentation strategies, I hadn’t seen many segmentation strategies that had been implemented ­successfully, and fewer still that had really driven customer loyalty and its desired b ­ usiness benefits. Segmentation was usually applied around the ­go-to-market ­channels, the regional structure or, worse yet, the commercial organizational structure. I had never seen segmentation of the supply chain applied around the customer, and certainly never around customer buying behaviours. Even using the word ‘behaviour’ in discussions about the supply chain was a new and curious concept. At the same time I found myself leading the supply chain in a ­company that had more customer data, at that time, than any other company in the world. Dell had incredible insight into its customer buying behaviours, yet its supply chain structure and strategies really had not capitalized on this data. I was intrigued by this and asked myself, ‘Could John’s dynamic ­alignment concept be an answer to the question of how to serve our customers?’ Over the next six years, I became a student of John’s principles and took what was one of the most powerful and disruptive supply chains in the world and modernized it with the objective of aligning our supply chain operations with changes occurring in the business and, most importantly, changes in our customer buying behaviours. Dell successfully implemented the dynamic alignment approach for its customers. This came at a critical time as the make-to-order environment for desktops, laptops and servers was becoming heavily commoditized and the foundation of Dell’s business model and supporting supply chain were under attack. Not only did dynamic alignment work for Dell, it created the proper cost structures to appropriately serve – and not ‘over serve’ or ‘under serve’ – our customers. It is a clear foundational element of the ongoing privatization and transformation of the company today.

· xvii ·

A01_GATT6818_03_SE_FM.indd 17

2/24/15 3:36 PM

Foreword

Fast forward to Schneider Electric, a company that is also in the midst of a transformation. Schneider Electric is at the critical juncture of the Internet of Things, big data, and the energy dilemma facing our society. Not only are we creating solutions that allow customers to leverage their energy data and devices in ways that help solve the world’s energy challenges, but also we are a very large supply chain company with real opportunities to leverage our size and scale. The question we continually face is how to leverage scale while actually enhancing customer loyalty and servicing customers based on their buying behaviour. The answer is to understand the customer buying behaviours and design the supply chains to service those needs. The evolution of John’s thinking, even from his initial research, has helped Schneider Electric to formulate a path that isn’t simply about ­planning, ­manufacturing, purchasing and logistics, but about change management, customer value propositions, organizational structure, ­ ­measurement s­ ystems, leadership and, most importantly, people. We are leveraging dynamic ­alignment principles to tailor our supply chains for our customers. Three years into the journey, we are seeing the real benefits of dynamic planning and tailoring our supply chains to the way we plan with customers, configure products and solutions for our customers, and deliver to our customers – most importantly, creating real value for our customers, and doing so while optimizing cash and productivity in a very balanced way. The science behind supply chains is endlessly fascinating to me. The more I learn the more I realize that supply chains are truly the heartbeat of the business and certainly the important foundation for the value ­proposition to customers. At a time of ‘segmentation’ buzz words and various approaches that we’re seeing in the field of supply chains today, John makes sense of this landscape and helps us understand how the principles of dynamic alignment can make the difference for the customer and ultimately the business. In this third edition of Dynamic Supply Chains, John takes us through his four decades of discovery and shows us how to navigate the path of a complex and volatile business environment – the ‘new normal’ – that we are all trying to operate within. He trains us to find the patterns in the data and the recipes for successful dynamic alignment of customer buying behaviours, supply chains and business priorities. When you read Dynamic Supply Chains it will have an impact on your future business path; it will help you to create an enlightened leadership approach to accepting inherent complexity

· xviii ·

A01_GATT6818_03_SE_FM.indd 18

2/24/15 3:36 PM

Foreword

head-on, and focus more on your customer than your competitor by using them as the ultimate framework for designing your supply chains. Dynamic Supply Chains isn’t only a book about supply chains, but a book about business. While we know the importance of people to business, John shows us that people and their behaviours inside and outside the enterprise are at the heart of supply chains, and that supply chains in turn are critical to business transformation. Ultimately, this is what will create a successful company. Annette K. Clayton Chief Supply Chain Officer, Schneider Electric Hong Kong, 4 September 2014

· xix ·

A01_GATT6818_03_SE_FM.indd 19

2/24/15 3:36 PM

A01_GATT6818_03_SE_FM.indd 20

2/24/15 3:36 PM

Preface The power of reading and ‘thought leadership’

I

had an interesting conversation during the early stages of writing this book. I was visiting the city of Salalah in Oman, and Ahmed Salem Mohammed Al Amri, the Commercial Manager for the Port of ­Salalah, was showing me around this great container and general cargo terminal, perched on the Omani coast, facing east across the Arabian Sea, in the middle of one of the world’s most important shipping lanes. He told me the story about how his father had always encouraged him to read books, because he said, ‘You can listen to someone through their books.’ It was his contention that through reading, you learn about people, you start to understand the context of the book itself, and more importantly, the important messages that it carries. What an enlightened point of view. Just as importantly, Ahmed’s father espoused the belief that ‘You should never jump straight into a book.’ In his words, ‘Go gently, ease yourself into the pages, get to know the author and his/her circumstances, and then you will understand the messages he/she is sending.’ I recall this story because it is so relevant to my life’s work, researching, and spreading particular messages that I think are important, through my speaking engagements, writing, research, teaching, and corporate advisory work. For the purposes of this book, I am endeavouring to capture the best ­thinking in the overlapping worlds of supply chains and value networks, add my own personal touches, and send these messages to senior executives everywhere so they may digest and bring them to life in their own daily work. This is the very essence of ‘thought leadership’. It is all about conveying unique ideas and content to a target audience, in this case senior executives in the worlds of industry, commerce and government. Indeed, the over-arching theme of this book, dynamic alignment, which I first wrote about in Managing the Supply Chain:   A strategic perspective (Palgrave Macmillan Business, London, 1996), is at last being accepted in the ­boardrooms of the best global companies, and applied with p ­ romising results.

· xxi ·

A01_GATT6818_03_SE_FM.indd 21

2/24/15 3:36 PM

Preface

However, it is still early days and much remains to be learned through the wider application of this pivotal concept. On that basis we must continue to challenge the boundaries between theory and practice; this latest book is another stage in that ongoing quest. In particular, the leap in terminology from supply chains to value networks is more than semantics and long overdue; it opens up a rich new vein of investigation and considerably broadens the scope we have to work with. I hope you enjoy the read, just as Ahmed’s father surely would have. Dr John Gattorna Salalah, Sultanate of Oman 12 April 2013

· xxii ·

A01_GATT6818_03_SE_FM.indd 22

2/24/15 3:36 PM

Author’s acknowledgements

A

s usual, in a work of this nature and sheer scale, there are a lot of ­people to thank. In respect of the many new ideas generated in these pages, I am particularly indebted to our [Gattorna Alignment] clients spread across the globe, who have been unfailing in their support during this endeavour. You simply can’t sit at a desk and dream up this material – it comes out of observing what is happening inside (and outside) enterprises, day-to-day, and trying to make sense out of it. Annette Clayton (Schneider Electric), Mat Regan and Marco Tasselli (CBH Group), Jonathan Guyett (DKSH), Alfons van Woerkom (Unilever), Dr Christine Pitt (Meat & Livestock ­Australia) and Huub Janssen and Bas de Jonge (Shell Development Australia) provided us with the ‘laboratories’ to work in, develop, and test our ideas. These are the modern day corporate heroes who have been prepared to place a bet on new thinking, and challenge the status quo. For this I am especially grateful. Then there are those close colleagues who have acted as sounding boards all along the way, and here I am blessed with some very special s­ upporters. First amongst equals is Deborah Ellis, who has been a close colleague and fellow supply chain enthusiast for over two decades, and is the calming ­influence when I get over-excited about new ideas and concepts. She is the one who thinks through the detail of how these new beaut ideas will or won’t work in practice. Thank you for all your perseverance, Deb. Niklas Hedin at Centiro is always ready with innovative ideas, and Ivan Crestani is my ‘go-to’ source of knowledge for anything to do with culture, that mysterious force that plays such a pivotal role in the success or failure of organizations. Maeve Magner is my reference point when researching humanitarian ­supply chains, especially where public health is involved. Ray Ledford (Toshiba Logistics), Bill Antonace (Clough), and Ravi Balasubramanian (DKSH) all provided much needed guidance as I struggled to get my head around the nuances of project supply chains. When it comes to research assistants, I have also been fortunate to have worked with five exceptionally high calibre young people, who have gone the

· xxiii ·

A01_GATT6818_03_SE_FM.indd 23

2/24/15 3:36 PM

Author’s acknowledgements

extra mile when researching new material for this book. Tran Huyen Le from Vietnam, Laure Boudeville from France, Maslada Nobhandhu from Thailand, Anja Wolf from Germany, and Jilles Verheggen from The Netherlands all spent extended periods with us in Sydney in our consulting offices as analysts during their gap years, and all of them performed in an outstanding fashion. We will follow their respective future careers with interest. As the manuscript came together during 2014, I sent it out to people I trusted for their critical review and comment, and they did not disappoint me. I received comprehensive feedback from Annette Clayton (Schneider Electric); Prof.Yoram (Jerry) Wind (Wharton); Dr Victor Fung, (Li & Fung) Burger van der Merwe (Pic n Pay); Pier Luigi Sigismondi (Unilever); BoInge Stensson (SKF); Kevin Brown (Dell); Vivek Kamra (NaSteel); Don Hicks (LLamasoft); Dr Christine Pitt (MLA); Prof. Roy Green (UTS Business School); Edwin Tuyn (Inspired-Search);Yacoob Piperdi (SATS); Patricia McLagan (GoalStreams); Prof. Dr-Ing Herbert Sonntag (TH Wildau); Bill Marrin (SC50); Dr Rakesh Singh (Indian ISCM); Mehran Ravanpay (Google); and several other colleagues, all of whom gave insightful feedback, for which I am deeply grateful. Indeed, some of their testimonials are printed on the jacket of the book for all to see. In addition, I am especially grateful to all the great people who participated in the 2012 Global Supply Chain ‘thought leadership’ Business Summit that I hosted in Singapore in June 2012; the conversations we had at that unique ‘by-invitation-only’ event had a real influence on my thinking as I was writing this new edition. In September 2015, we will again be venturing into the world of new ideas and ‘thought’ leadership. As I co-host a similar event in Athens with my friend and colleague, Evangelos Angeletopoulos, Founder of the Value Network Management Forum (VNMF) in Greece. Indeed, this is the occasion we have chosen for the global launch of this new book. Beyond that, we already have plans to conduct another ‘thought leadership’ event in Sydney in 2017, this time in the new Frank Gehry designed University of Technology, Sydney (UTS) Business School. Watch this space! Of course a lot goes on behind the scenes in a production like this. ­Jacqui Turner, my Executive Assistant, worked tirelessly on the diagrams and the emerging text. Carmel McCauley of Future Perfect ­Communications did a superb job, taking my original words and turning them into plain ­English, something I considered essential if I was to attract C-level r­ eaders. Jodie Warters at Mint Design helped me with various design ideas. Nicole

· xxiv ·

A01_GATT6818_03_SE_FM.indd 24

2/24/15 3:36 PM

Author’s acknowledgements

­ ggleton, Senior Commissioning Editor at Pearson Education, smoothed E the passage of this book through the early internal approval stages at ­Pearson. Laura Blake, Senior Project Editor took over during the copy editing stage, and David Crosby, Senior Commissioning Editor worked on the jacket design and content. To all these wonderful people I owe a debt of thanks for their sheer professionalism, dedication, and support over an extended period. Finally, I have to make special mention of the person who launched me on what has been a four-decade long journey of discovery, culminating in this book – Dr Mark Doctoroff. I was fortunate to have Mark as a professor when I was studying for my MBA at Monash University, way back in 1970–71. Mark, was visiting from Canada for three academic years and I was just lucky enough to be the beneficiary of his wisdom and inspiration. Indeed, he was the first person to teach Physical Distribution Management at Monash University. Forty-four years on we have recently been back in touch with each other, and what a thrill that was for me. The world is truly serendipitous! For all those mentioned by name above, and all those who helped in some way and are not mentioned specifically, I hope you are as delighted as I am with the content and thrust of this book. As we say in golfing parlance after hitting a great drive, straight down the centre of the fairway: ‘I can’t hit the ball better than that’! Now it’s over to you, the readers, to pass final judgement and see if you agree with that sentiment. Dr John Gattorna Sydney, 8 January 2015

· xxv ·

A01_GATT6818_03_SE_FM.indd 25

2/24/15 3:36 PM

Publisher’s acknowledgements

We are grateful to the following for permission to reproduce copyright material: Cartoons Figure 4.12 from Dilbert cartoon by Scott Adams (2004), DILBERT © 2004 Scott Adams. Used By permission of UNIVERSAL UCLICK. All rights reserved.; Figure 16.3 from Dilbert cartoon by Scott Adams (2014), DILBERT © 2014 Scott Adams. Used By permission of UNIVERSAL UCLICK. All rights reserved. Figures Figure 14.6 from Global Supply Chain Control Towers; achieving end-toend Supply Chain Visibility’, a White Paper prepared by R. J. van Doesburg, Capgemini Consulting, p.9. May 2011; Figure 16.4 adapted from Adapted from a presentation by Jeffrey Vail, CMO, Quintiq at Quintiq World Tour Event, Singapore, 23 June 2014, Jeffrey Vail; Figure 17.2 adapted from The Design of Business, Harvard Business Press (Martin, R. 2009) p.8, Figure 1.1 Picture Credits The publisher would like to thank the following for their kind permission to reproduce their photographs: Getty Images: Mike Hewitt/Staff p.24/Photo 1.1; Lou Jones/Lonely Planet Images p.249/Photo 8.1; Rainer W. Schelegelmich/Contributor p.272/ Photo 9.1; Soekyong Lee/Bloomberg via Getty Images p.279/Photo 9.2; Floresco Productions/OJO Images p.566 / Photo 17.1

· xxvi ·

A01_GATT6818_03_SE_FM.indd 26

2/24/15 3:36 PM

P u b l i s h e r ’ s a c k n o w l e d g e m e n t s

All other images © Pearson Education Every effort has been made to trace the copyright holders and we apologise in advance for any unintentional omissions. We would be pleased to insert the appropriate acknowledgement in any subsequent edition of this publication.

· xxvii ·

A01_GATT6818_03_SE_FM.indd 27

2/24/15 3:36 PM

Introduction Starting with the end in mind

T

his book is the culmination of my 40-year (1975–2015) journey of discovery through the maze of logistics and supply chain networks that pervade our lives, day-to-day. Without them we could not ­survive. But then again, a lot has changed in the last four decades, and supply chain networks today are very different to those of yesteryear, and operate under much more pressure to perform. The defining difference is the much higher degree of volatility in the current operating environment, and this very factor demands that new solutions be found to satisfy customers in ­ever-more ­cost-effective ways; continuous innovation is mandatory under these conditions. When I started my journey in 1975, the prevailing philosophy in what then was known as ‘distribution management’, focused primarily on f­ inished goods distribution; and it was centred on the belief that ‘one-size-fits-all’. This philosophy is depicted diagrammatically in the top section of ­Figure I.1. The idea was to seek the best configuration of resources in the business to satisfy all customers, equally. There was no distinction made between customers in the marketplace: no segmentation took place as all were assumed to require the same service level. This made life relatively easy for those working on the supply-side, but uncomfortable for their customers, who at that time had little leverage to change the situation. By the mid-1980s it was becoming obvious that this ‘single supply chain’ mentality was seriously flawed, and by the early 1990s when customers became empowered by the arrival of e-commerce, there was little doubt left that we had to find new solutions to serving customers – one that r­ecognized their different preferences. In other words, if ‘one-size-fits-all’ was no longer valid, how many supply chains did an enterprise typically need to design and build to adequately service its target market? That is the question which has occupied my mind since 1989. At the time, I remember thinking how little theory there seemed to be in the field of ‘logistics’, and being ­concerned that where there is little or no theory, there is correspondingly little p ­ redictive capability.

· xxviii ·

A01_GATT6818_03_SE_FM.indd 28

2/24/15 3:36 PM

A01_GATT6818_03_SE_FM.indd 29

Fi gure i.1 ◆

CEO

The enterprise

Strategy

Market

Marketplace

Logistics

Functions/BUs/geographies

CEO

Logistics strategies

Logistics strategies

From ‘static’ to ‘dynamic’ design of enterprise supply chains

Organizational clusters

COO

Dynamic alignment configuration – multiple alignment (push + pull)

Strategy

Technology + infrastructure

Culture

Business enterprise

Leadership style

Business processes

Dynamic alignment model

Functions/business units/geographies

IT

Static configuration – ‘one-size-fits-all’ (push)

Procurement Manufacturing Marketing Sales

Procurement strategies

Procurement strategies

Source market (supply)

Source market (segments)

Future

Current Sales market (demand)

Sales market (segments)

introduction

· xxix ·

2/24/15 3:37 PM

Introduction

Logistics in the mid-1990s seemed very descriptive to me, and held little or no prospect of yielding any radical breakthroughs. So my ­co-workers and I decided to look elsewhere. We started top down, at the enterprise level, and developed the ‘dynamic alignment’ concept, which in essence represents a new theory of the Firm. This model sought to tie the Firm to its market as depicted in the middle of Figure I.1. The idea was to align the internal capabilities and leadership of the enterprise, with its marketplace, using operational strategy as the bridge, i.e., through each of the four levels. Once we had the concept in mind, we set out to validate it to a very granular level, something that could only be accomplished in the field, working with companies in a range of industries, and product/service categories, across many geographies. This was a case of creating the theory out of empirical observations, not the other way around. Over time we began to recognize various patterns in the data, and ultimately we arrived at the refined multiple supply chain alignment configuration depicted in the lower part of Figure I.1.This is the future, and where I plan to take you in this book. In brief, we found that most enterprises that serve customers need at least four or five supply chain configurations to provide coverage of about 80 per cent of the target market, and the dynamic within that market, because ­customers change their buying behaviours as their situation changes. We also found the same applies to source markets on the supply-side. The content of the book follows the sequence broadly indicated in this short introduction. Chapter 1 argues the case for a new paradigm of dynamic ­alignment, particularly as we are experiencing increasing volatility in so many ­markets. Chapter 2 describes the starting theory around customers and their b ­ ehaviours, which led us to crack the code for the whole alignment model. In Chapter 3 we define the various supply chain strategy ‘recipes’ that c­ orrespond to the array of customer segments identified in the ­market. I  call them recipes because each is a combination of strategies unique to the ­customer and the market. Chapter 4 focuses on how to shape the ­corresponding array of subcultures inside the business to successfully propel these strategies towards customers, otherwise called implementation. And finally, to complete the model, we delve into the vagaries of leadership style in Chapter 5, looking for the appropriate mix of styles in the top team to enable formulation of the subcultures that underpin and propel the ­operational strategies. This requires a leadership team that has a good understanding of

· xxx ·

A01_GATT6818_03_SE_FM.indd 30

2/24/15 3:37 PM

Introduction

the final marketplace, and the ability to shape and manage internal resources and capabilities according to pre-defined design principles. And one of the success factors in all of this is to tackle the problem of organization design as described in Chapter 6, and have the will to make the necessary changes. In my view, it is out-dated and flawed organization designs that are holding back performance improvement in many enterprises. Chapters 7 through 11 provide detailed treatment of each of the most commonly observed types of supply chain configuration identified in our dynamic alignment field research; these are collaborative, lean, agile, campaign and fully flexible. Note, for this edition I have changed the name of the s­ upply chain serving the ‘collaborative’ segment. The previous name (­continuous replenishment) conflicted with definitions in other domains, resulting in unwanted confusion. Of the five, campaign is new, and seeks to fill the gap between theory and practice for supply chains when it comes to serving large-scale capital projects, both greenfield and brownfield. There is plenty of literature about the management of such projects on-site, but virtually nothing about the challenges involved in linking suppliers and the project sites, particularly over a long, and carefully staged, timeframe. Chapter 10 seeks to fill that gap. In Chapter 12 we continue to develop the thinking around s­ uppliers, and in Chapter  13 we expand our previous treatment of the ‘hybrids’ (­combinations of demand-side and supply-side supply chain components) to take account of the newly identified campaign supply chain. Chapter 14 revisits the contemporary issue of outsourcing models, and in particular examines ways that 3PL service providers will have to develop if they are to have a meaningful role in future outsourcing operations. Chapter 15 seeks to question why service sector organizations have not yet fully embraced supply chain principles developed for tangible products; there is a lot of value to be captured by those enterprises that choose to go down this path. But progress has been very slow. Chapter 16 reviews the major supply chain issues facing enterprises over the next decade, highlighting both the old and the new, because this sets the agenda for the foreseeable future. It discusses the challenges posed by growing customer expectations for sustainability and corporate social responsibility. No corner will be left unexamined by customers in the future. Finally, in Chapter  17, we conclude by taking a fresh look at how ­enterprises can and should move away from the old ‘logistics ­operations’

· xxxi ·

A01_GATT6818_03_SE_FM.indd 31

2/24/15 3:37 PM

Introduction

mind-set of the 1980s, towards a more comprehensive ‘business ­transformation’ mind-set. True transformation involves every function in the enterprise accepting that they must contribute to the ultimate act of ­serving and satisfying customers, because only in this way will the enterprise survive and thrive in today’s ‘new normal’ of volatility. That’s our goal and our destination. Let’s get going.

· xxxii ·

A01_GATT6818_03_SE_FM.indd 32

2/24/15 3:37 PM

Part 1

Developing supply chain strategy

· 1 ·

M01_GATT6818_03_SE_C01.indd 1

2/24/15 3:38 PM

M01_GATT6818_03_SE_C01.indd 2

2/24/15 3:38 PM

Chapter 1

Coping with market volatility: the ‘new normal’ Making the case for a new paradigm in ­supply chain design

D

uring 2008 the world changed in a precipitous way as the global financial crisis (GFC) hit and the ensuing global recession affected people across the world. The flow of money froze, and so did the corresponding flow of goods and services. What had been obvious for some time became painfully clear – we need to move away from the old static view of business and embrace a more dynamic business model. By reinvigorating moribund supply chains, we can capture the dynamism that people bring to the flow of goods and services inside and outside an enterprise. We can do this by embracing a new d ­ efinition of supply chains that recognizes they are living organisms composed of active and dynamic people. All institutions have supply chains (or pathways) running through them, connecting a diverse range of human activities. In effect, supply chains in aggregate are the business, which makes supply chain thinking a whole-of-business concept. This ­chapter breaks with convention and introduces the concept of dynamic ­alignment in supply chains, where dynamism can be captured across the business. Alignment will equip us to cope with what I call the ‘new normal’: the volatile times that surely await us. As I write this opening statement in 2014, the world is still e­ xperiencing the economic effects of the GFC of 2008 and 2009, and more recently we’ve had to witness the antics of a minority few in the United States ­Congress over the level of the US debt ceiling, which triggered a shutdown of the

· 3 ·

M01_GATT6818_03_SE_C01.indd 3

2/24/15 3:38 PM

Dynamic Supply Chains

US Government for several days. The paralyzing effect of the US debt crisis, occurring so soon after the devastating GFC, sent shivers through the world’s economies. I can’t help feeling that the importance of supply chains went up a few notches when we e­ xperienced the full and ongoing impact of these events. We can now see that too many companies (and governments) are in trouble, and it’s their leadership (or lack thereof) that has got them there. The business models of many financial institutions are no longer sustainable in the wake of ongoing credit crunches. The impact of these global forces is spreading rapidly from the financial world to the real world economy, seriously affecting the many businesses that rely on the free flow of capital and credit. The impact on business supply chains, which operate inside and across businesses throughout the economy, is no less ­serious. Weak financial institutions now represent a major risk to supply chain continuity. With all the financial turmoil we’ve seen in the past decade, it’s nigh on exasperating then to read that leading companies such as investment banker Goldman Sachs are exploiting the system by taking advantage of legislative loopholes and in the process, costing consumers billions of dollars.1 I refer to the ‘merry-go-round of metal’ used by Metro International Trade Services in Detroit, a Goldman Sachs subsidiary. It deliberately moves large tonnages of stored aluminium between its warehouses, and in the process collects additional storage fees, lengthens delivery lead-times, and pushes up prices to its customers such as brewers and soft drink manufacturers. Ultimately of course, consumers pay a premium for this practice, which is the very antithesis of what we are trying to do in operating our enterprise supply chains. Indeed, the ‘new normal’ operating environment which we now find ­ourselves in is characterized by such paradoxes. We need to commit resources in the known present – to an unknown future; we must take risks, yet minimize risk-taking; we need to drive costs down, but value up; we have to run today’s business cost effectively, but reinvest for tomorrow; to seek group harmony, but avoid ‘group think’; to centralize power, yet decentralize empowerment; to automate, yet create jobs; and for chief executive officers (CEOs), to spend more time inside the company and more time outside too; and so the list goes on. When I have previously written articles2 about the consequences of a volatile operating environment for customers and the supply chains that serve them, I have usually drawn responses such as, ‘Yes, but what can we

· 4 ·

M01_GATT6818_03_SE_C01.indd 4

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

do about it?’ Others in the business world are seeking answers, because they can see the knee-jerk way in which many companies have been responding to crises. Supply chain and technology research Firm Gartner (previously AMR Research) put it this way, ‘. . . the natural reaction in a downturn is to retreat, cancel all new initiatives, pull back to the basics, and tighten up the ship. But the smart companies across [all] industries will be much more ­strategic, targeting areas that will not only see them through a rough ­economy [in the short term], but help them thrive during and after it passes’.3 Forget the short-term ‘actions’ of cancelling the daily n ­ ewspapers and the ­flowers in reception: that is mere posturing. Such measures will not save the ­enterprise – we need something more fundamental at this ­pivotal point. Suffice to say that now is the time for business leaders to adopt new and innovative models for enterprise supply chains that will help their firms get closer to their customers and establish a new growth path for their ­businesses. Sadly, however, the cost-cutting mentality persists. Indeed, investment columnist and author David James couldn’t have put it better in his column for Business Review Weekly magazine, when he remarked that, ‘. . . cost-cutting is not exactly the last refuge of a scoundrel, but it is probably the first refuge of managers having difficulty with direction’.4 He was commenting on the strategy of Australian retailer Coles in 2006, which at the time was slashing costs in a last-ditch effort to survive. This once-iconic national firm has since been acquired by Wesfarmers, an Australian conglomerate, and is gradually recovering under the leadership of CEO Ian McLeod.5 Outside of Coles’ predicament, the cost-cutting ­accusation applies equally well to businesses that were caught ­unprepared in the ensuing credit crisis of 2008. We need look no further than the actions of General Motors, which went from being the world’s largest ­automotive maker and the symbol of industrial innovation for most of the ­twentieth ­century, to financial collapse in 2008. After asset sales, staff cuts and $50 ­billion in government loans, the new General Motors Company of 2009 announced its rebirth with ‘a vow to start listening to its customers’.6 After two weeks in the job, the new Chief Executive, Edward Whitacre, said the company could no longer afford to adopt a ‘business-as-usual’ mind-set.7 A statement of the obvious perhaps? But if it’s not business as usual, what then? For many businesses it’s time to start over and ‘re-set’ their strategies – if not their supply chain belief system – to prepare for the increasingly volatile operating environment that

· 5 ·

M01_GATT6818_03_SE_C01.indd 5

2/24/15 3:38 PM

Dynamic Supply Chains

lies ahead. No previous management experience can prepare us for this difficult and complex task. We have to adopt the mantra of ‘learning by doing’ rather than simply chant it. It’s in this context that we propose a new business model for contemporary supply chains: dynamic alignment. We can look no further than the world-leading companies such as Apple, Dell, IKEA, Inditex (Zara), Ralph Lauren, Unilever, Li & Fung and Cisco. Many of you will know them, but do you really know them? Do you know what lies beneath their dynamic supply chains? Business leaders around the world admire their superior performance; they deliver products and services to their customers in a way that makes it look easy. But not many of us understand how they do it. Let’s consider first the classic business goal of ‘alignment’. Companies have been seeking to match their strategies and goals to the needs of the customer for a long time. Alignment in the supply chain is similar, but different. It means aligning your supply chain operational strategies to target customer segments. Dynamic alignment is something different again, because it uses customer buying behaviour as its direct reference point; and we all know customers change their behaviour from time to time! Dynamic alignment is a concept I have been developing over more than 25 years working as a consultant and advisor to global companies, ­helping them to transform their supply chains. Just as the term suggests, it ­captures the idea of dynamism, or life, in the supply chain. Seeking dynamic ­alignment means treating your supply chains as living organisms, rather than ­inanimate mechanical structures. It’s all about energy, execution, and the dynamism of people and movement. If you can capture that you’ll be in the type of ‘zone’ that top athletes achieve at their peak, but with a bottom line to match. My proprietary alignment model, originally conceived in 1989, brings together the two critical dimensions of internal and external environments, as depicted in Figure 1.1. The external dimension is about achieving a deep understanding of customers’ expectations and corresponding behaviours, and ultimately grouping these into a small number of behavioural segments for the purposes of focus and manageability. I call this dimension ‘external awareness of the market’, and the research tools I use here are a combination of conjoint analysis and customer satisfaction indices (CSIs). On the internal dimension I have ‘internal capability’. The tool I use to assess this dimension is the culture mapping instrument, which I will describe in more detail later (in Chapter 4).

· 6 ·

M01_GATT6818_03_SE_C01.indd 6

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

Internal capability

Low

High

Flying blind Major misalignment?

Market driven Low internal alignment?

Market driven or product driven Low external alignment?

Effective alignment Internal and external

Low

High

External awareness of the market

Figure 1.1 ◆

Alignment framework

Source: Gattorna Strategy (1989)

Alignment involves bringing the two dimensions together to reveal four quadrants. In the bottom left quadrant, where awareness of market is low, and internal capability is high, the organization is clearly focused on driving product into the market, somewhat arrogantly; this condition is sometimes called ‘marketing myopia’. In the top right quadrant we have the opposite condition. Here, awareness of market is high, but internal capability is low, meaning that the company is ‘market-driven’, which is good up to a point, but not if it is incapable of delivering on its promises. For the top left quadrant, we have the worst case scenario where awareness of market and internal capability are both low, and in aeronautical terms the company is ‘flying blind’, literally. This is where the entire Australian wool industry found itself in 1991,8 mainly as a result of the adoption of a protectionist reserve price scheme in 1973; more about this in Chapter 17. Finally, the desired position is in the bottom right quadrant, where awareness of market and internal capability are both equally high; hence, perfect alignment.

· 7 ·

M01_GATT6818_03_SE_C01.indd 7

2/24/15 3:38 PM

Dynamic Supply Chains

In this context, let’s look at the performance of some of the world’s top brands. Nokia successfully transformed itself from a rubber boots and timber company in the early 1980s to become a world-leading ­electronics high-technology company. It has since lost its way due to competition from Apple, dropping from a market share of 40 per cent in the handset ­market in 2007 to just 15 per cent in 2013, and achieving only a 3 per cent share of the newer smart phone market. It’s easy to see why Nokia sold its smart phone division to Microsoft in 2013.9 In the meantime Nokia is trying to transform itself yet again, this time from a device manufacturer into a ­full-line personal communications solutions company. That sounds like ­‘realignment’ to me. Or how can we explain the variation in performance of a national icon, Marks and Spencer, which lost its way in the 1990s – and its customers, while others, such as Nestlé, continued to strengthen their position. ­Thankfully, Marks and Spencer has since mostly recaptured its former glory, owing to strong leadership by its former chairman Sir Stuart Rose, and returned to full alignment through investment in new technology and facilities to handle both online and store deliveries.10 Lego is a similar story. In 2004 it was a broken company, until a new CEO, Jøgen Vig Knudstorp, introduced ‘a new approach to making toys – and money’11 and building a greener supply chain.12 W   e can also see that it’s ­possible for a company such as Dell to change a whole industry through ­innovation in its distribution channels and supply chains, while its ­competitors were still ­worrying about removing costs from conventional structures. For example, in 2013, Dell changed strategy. In addition to its configure-to-order (CTO) models, which take 7–10 days to ship, Dell now offers ‘smart ­selection’. This involves pre-building what it believes will be the most popular c­ onfigurations or SKUs (stock keeping units), and shipping them within 24 hours. This i­nitiative is expected to lower costs and drive revenue.13 Similar dynamism can be seen in Daewoo’s Korean shipyards, which can produce a supertanker every 36 hours; more about this phenomenon in Chapter 9. Clearly, some can reach ‘the zone’ while others languish behind them! In other words, all roads to success lead towards the bottom right quadrant in Figure 1.1. We will expend considerable effort later on (in Chapter 2) explaining the external dimension of this model, and similarly (in Chapter 4) for the internal dimension. The secret lies in aligning both dimensions, simultaneously. Before we explore dynamic alignment in detail, let’s start by shedding the conventional definition of the supply chain. It is no longer all about

· 8 ·

M01_GATT6818_03_SE_C01.indd 8

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

technology, warehouses and distribution centres (DCs), or trucks, trains and planes. Agreed, they are all elements – the hard assets. But a modern supply chain is comprised of a lot more than that. We must therefore embrace a far more liberal view of supply chain configurations and define the supply chain as: Any combination of processes, functions, activities, relationships and pathways along which products, services, information and financial transactions flow in and between enterprises, in both directions, end-to-end. The supply chain therefore involves any and all movement of these elements from original equipment manufacturer (OEM) to ultimate end-user or ­consumer; and everyone in the enterprise is involved in making this happen, a key point which is often overlooked.

Solving the problem of complexity in supply chains If we accept this new definition of contemporary supply chains, then every enterprise on earth has supply chain configurations of some sort ­embedded in them. These could be manufacturers, service companies, public ­sector ­agencies, private sector Firms or even non-government organizations (NGOs). Supply chains are omnipresent. They are out there! Most ­enterprises contain literally hundreds of supply chains that together look more like a bowl of spaghetti than finely tuned, linear conveyor belts. This innate complexity has led to two critical problems. The first is that many executives are blind to the presence of supply chains in their midst. They can only see the physical movement of products and/or the capital assets involved. Complexity makes the true supply chain invisible. The ­second problem is that even if people recognize these complex supply chains for what they are, they attack the inherent complexity in inappropriate ways. Failure to see the full end-to-end extent of supply chains that a company is involved in can be damaging; however, seeing the myriad of supply chains, and then confronting them with the wrong solutions, can be fatal. If you are a service organization, companies in your sector are the most likely to suffer from supply chain blindness. They think that because their products are intangible, logistics and supply chain principles and practices don’t apply. Wrong. (More about the status quo in service

· 9 ·

M01_GATT6818_03_SE_C01.indd 9

2/24/15 3:38 PM

Dynamic Supply Chains

supply chains in Chapter 15.) If you are in the manufacturing or retail industries, ­companies in your field are likely to see the complexity but attack it with an operational sledgehammer. These people are convinced the solution lies in reducing the internal operational complexity that they can see, and making things more manageable. As a consequence, they are busily standardizing and re-engineering internal processes and installing new technologies, all designed to reduce complexity in the way they deal with customers. However, such enterprises rarely become easier to deal with from the customer’s perspective, in fact, quite the contrary. It would be much more productive if they were to accept and confront this inherent complexity head-on, and then set out to master it. The tools and techniques are all available, but only the conscious desire to attack the problem in this way remains in question. Understanding complexity will come from first accepting that the time has come to fundamentally rethink how we design and operate the ­supply chains that link our own enterprise with suppliers upstream and ­customers downstream, whether they are ‘just around the corner’ or around the world. For too long, there has been an unhealthy preoccupation with infrastructure and asset utilization, driven mainly by the obsessive desire to cut costs, mostly brought on by the relentless requirement for quarterly financial reporting on national stock exchanges. Unfortunately, even today many executives think of logistics and supply chains purely as areas ripe for cost-cutting. While acknowledging that ever-lower levels of operating cost are important, achieving and maintaining future competitiveness demands more sophistication. You cannot grow the business by continuously cutting costs, a lesson learned the hard way by Al ‘Chainsaw’ Dunlap in the 1990s.14 He relentlessly drove cost-cutting programmes in every company that he led, because this delivered a short-term improvement in performance. The improvement, however, often proved to be unsustainable. He was incapable of taking the next step: growing the company. Dunlap has a lot to answer for. Even today, senior executives in many major corporations continue to emulate his one-dimensional, cost-cutting mind-set. You may have seen this type of behaviour before. It almost always brings on a bout of anorexia industrialosa15 – the excessive desire to be leaner and fitter, leading ultimately to total emaciation and death. In supply chain terms this approach has also encouraged senior executives to engage in endless benchmarking and process re-engineering exercises that go nowhere

· 10 ·

M01_GATT6818_03_SE_C01.indd 10

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

(witness the early efforts in Six Sigma), and innumerable on-going initiatives in the name of ‘continuous improvement’. Cost-cutting, re-­engineering, benchmarking and continuous improvement might have a place in the ­corporate arsenal, but they are not the answer to supply chain complexity. Seldom have these activities had the customer in the frame. In short, there has been a lot of effort and activity for relatively little gain. What is required now is sustained investment in performance-­enhancing supply chains. Look again at Nokia. It has delivered positive cash flow return on investment (CFROI) for more than two decades and this has ­underpinned its capacity to invest in competitive-building capabilities on a sustained basis.16 But even after all that, Nokia now finds itself overrun in the cellphone market by Samsung, which has seemingly come out of nowhere.17 The old Hollywood saying rings true again: ‘you are only as good as your last performance’. Nokia has a lot to do to recover its former premier position. Let’s see how good they are. Another challenge facing CEOs is the fact that so many people ­working in businesses think that systems technology is the one-stop shop for s­ upply chain solutions. It’s a mind-set that started in the run up to the year 2000. No doubt you remember the Y2K phenomenon. Resources were poured into new information technology to avoid a global system crash as the clock ticked over to the twenty-first century. This affected all areas of the e­ nterprise for limited returns, and the world did not end as some had predicted. The same mind-set is now saying information systems will be the saviour of the supply chain and business generally – especially in this new age of terrorism, where the hope is that technology will magically make your business secure and manageable. Beware such prophets.

It’s the people, stupid In early 1997, Australia’s largest processed food manufacturer, Goodman Fielder Ltd, had a rare opportunity to achieve a major transformation of its conglomerate-like business. It had business units in breakfast cereals, oils and margarine, poultry, food ingredients and milling and baking. David Hearn, the new Managing Director, arrived from United Biscuits in the United Kingdom and was intent on boosting financial performance. He chose to start by transforming the existing logistics arrangements, which

· 11 ·

M01_GATT6818_03_SE_C01.indd 11

2/24/15 3:38 PM

Dynamic Supply Chains

were messy and duplicated across several business units.18 A new ­corporate strategy was devised and ready for implementation by mid-1997, but it never happened. In effect, the managing directors of the business units ­overpowered Hearn, and the transformation simply limped along before eventually fizzling out. Suffice to say, the financial performance of the ­company went the same way. This is a powerful example of how internal resistance can slow down, or worse still, stop, what should have been a very successful change to improve performance. A great opportunity was lost and the company has since struggled through ownership changes, privatization, and most recently, re-listing on the Australian Stock Exchange (ASX). The company only returned to profit in 2013, after languishing for years in the wilderness.19 In the meantime, supply chain thinking has advanced into new terrain. This terrain is well populated, but in ways not normally recognized by executives. Yes there are technology systems and trucks, which in a ­literal sense are mechanical, inanimate and complex. But if you look more closely, it’s people who are designing and running these physical assets. Supply chains are living systems propelled by humans, their behaviour and the d ­ ecisions they make day to day. This fact is slowly being understood in some business quarters, even if from a different perspective. Harvard ­Business Review convened an elite panel in 2003 to discuss future supply chain ­challenges and one member concluded that ‘.  .  .  despite years of process breakthroughs and elegant technology solutions, an agile, adaptive supply chain remains an elusive goal. Maybe it’s the people who are getting in the way.’20 Indeed, it is the people. But we’re not interested in how people might be a barrier to performance. Our goal is to harness their influence and bring the supply chain to life. I can see the potent presence of human behaviour, both inside and outside the enterprise; I’ve been observing the influence of people throughout my career. Customers, suppliers and third-party providers are driving the supply chain from the outside, while staff, managers and board members are seeking to manage and respond from the inside. If you can understand and correctly apply a more enlightened approach to managing this ‘human presence’ in the supply chain, you’ll discover a primary source of performance improvement in the foreseeable future. It’s all there for the taking. And because people are involved throughout value networks and along supply chains, patterns can be detected if you know what you’re looking for.

· 12 ·

M01_GATT6818_03_SE_C01.indd 12

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

The key is to start in the external market and work inwards – that is how to resolve complexity. If you work the conventional way, from ‘inside-out’, it’s a bit like kissing a girl in the dark – you know you’ve done it, but no one else does! There is a wonderful story about Billy Beane, General Manager of the Oakland A baseball team, which illustrates the point. He discovered a way to predict potentially talented players well before they had built their ­reputations, and by signing them up early, he was able to reduce his team’s s­alary bill by two-thirds. Beane defied conventional wisdom because he looked deeper into the statistics – beyond the usual metrics that ­talent scouts looked for – in search of the underlying code, and found it. The story of Beane’s ­success21 is essentially about ‘market ­inefficiencies’, where ­conventional rules are exposed as flawed, and someone such as Beane ­discovers the underlying code, enabling him to pay less while achieving ­better results on the field. That is dynamic alignment in action. And as with every business discovery, Beane’s legacy lives on.22 I will discuss further this issue of discovering the underlying ‘code’ later (in Chapter 2), because I believe I’ve found the code that will allow better alignment of enterprise ­supply chains with customers and markets. It requires ‘out of the box’ ­thinking, which is what a growing chorus of voices have been calling for. The insight that people are the true drivers of supply chain p ­ erformance means we must stop thinking of supply chains as a 50/50 mix of ­infrastructure and information systems technology. The ideal mix is more like 45/20/3523 – human behaviour, systems technology and asset infrastructure. Whether we accept it or not, we are already shifting from Newtonian-style ­thinking to a more organic model. Once we accept this reality, a new world of ­performance improvement beckons, at every intra- and inter-organizational interface throughout our supply chain network. Some more enlightened executives in adjacent fields have been on this wavelength for some time. David Smith, head of knowledge management at Unilever, commenting in the Financial Times in 1998, mused that ‘. . . [organizational] alignment is 50 per cent of the game. Processes are 30 per cent. IT [systems] no more than 20’.24 He was referring to what goes on at the intersection between knowledge management and supply chains. (More about this topic in Chapter 16.) By the way, Unilever’s revenue has increased by 10.5 per cent and its stock price by 75 per cent since 2009.25 That’s a success story we’ll return to in Chapter 9.

· 13 ·

M01_GATT6818_03_SE_C01.indd 13

2/24/15 3:38 PM

Dynamic Supply Chains

If you need any more reasons, consider that during the next decade it will become progressively more difficult for enterprises to stand alone and ­compete successfully in their respective marketplaces. What we will see, and are already seeing, is the formation of supply chains comprised of ­parties that consciously choose to work together in a preferred alliance (on either ­supplyor demand-sides), competing with other similar supply chain a­ lliances or networks. The various airline alliances such as OneWorld, Star Alliance and SkyTeam are early examples of this phenomenon at work, ­sharing facilities, routes, reservation systems and maintenance among members in their own alliance, but competing with airlines in competitor alliances. In this world, you’ll need to find and acquire completely new capabilities simply to stay competitive. Talent will be at a premium, as will the ability to select and m ­ anage new alliances and relationships with parties who bring specialized c­ apabilities to help us ‘realign’ with customers, fast. At the same time, we’ll need to ­transform in other ways by embracing completely new business models. Commentator Thomas Friedman had something to say on this topic of ­talent in The NewYork Times.26 He quoted Andreas Schleicher, a leading education analyst for the OECD, as saying that ‘knowledge and skills have become the global currency of 21st century economies, but there is no ­central bank that prints this currency.’27 ‘The thing that will keep you moving forward,’ says Schleicher, is always ‘what you bring to the table yourself’.28 Thomas Friedman brings us some further insights in his book, The World is Flat,29 when he says that the ‘connectivity’ resulting from convergence of communications technology, computer technology and the explosion of software has led to the levelling of the global playing field, or a ‘flat’ world. He cites what he calls ‘supply-chaining’ as one of the 10 flattening forces that have caused this new phenomenon over the past decade. However, even Friedman hardly acknowledges the underlying human forces at work in this massive transformation. He seems to be more concerned with all the effects rather than looking more deeply into what is driving them. But to give Friedman his due, his more recent writings and interviews are insightful. In a television interview in Australia he reminded the ­audience of the words used by Roy Scheider in the 1975 blockbuster Jaws, when S ­ cheider first catches sight of the great white shark that is circling his small fishing boat.30 ‘We’re going to need a bigger boat,’ he says to his captain. The 2009 disaster movie 2012 echoes the same idea of how to

· 14 ·

M01_GATT6818_03_SE_C01.indd 14

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

deal with a seemingly insurmountable problem when its hero, played by John Cusack, looks at his map and observes, ‘We’re going to need a bigger plane.’ F ­ riedman was using this powerful metaphor to impress upon his audience that the s­ ystemic f­ ailures and consequent global recession of the past few years will take a far bigger effort to correct than governments and businesses seem to ­comprehend. Similarly, witness the many attempts by nations to agree on how to address the enormously complex problem of global warming, and what actually happened at the UN Climate Change Conference in Copenhagen in 2009. It’s another reason for fundamentally changing the way we approach a problem and find a solution. We’re going to need a bigger plan!

Where did this transformation start? To understand the current transformation of the supply chain, it’s ­helpful to go back and see where it all began. Despite seminal articles by ­academics R ­ obert Neuschel and John Stolle almost half a century ago, ­nothing ­immediate happened. Neuschel was one of the first to recognize that ­distribution activities stretched across a ‘no man’s land between ­functions’ in organizations. He argued that any effort to reduce costs in logistics needed to be balanced with reaching the desired level of customer ­service and ­product ­availability.31 Stolle observed that physical distribution was ­easier to ­analyze than to ­manage.32 Logistics costs could be ­readily ­calculated; however, activities and tasks were scattered throughout the ­business and often under the control of divergent departments. The result? A fragmented approach to distribution – not unlike what a lot of companies have, even today. Businesses in those days focused primarily on managing finished product as it came off manufacturing lines. The production function of the ­enterprise was all powerful. Product was stored in various places and then transported through a limited number of channels to consumers. At the time, with c­ ustomers just starting to feel their buying power, it became obvious that the greater levels of service being demanded could not be sustained unless more was known about the in-bound side of the ­business. By the early 1980s, the demand and supply ends of the organization had been connected and the ‘logistics’ function formally established. Initially,

· 15 ·

M01_GATT6818_03_SE_C01.indd 15

2/24/15 3:38 PM

Dynamic Supply Chains

logistics was structured only as a ‘coordinating’ role, but despite this other managers in the e­ nterprise saw the new development as a grab for power by the fledgling function. Unhappily, even to this day, many senior executives are still confused about the distinction between ‘control’ and ‘coordination’. By the late 1980s, three important sub-systems were clearly emerging in the enterprise. At the upstream end there we had the in-bound logistics sub-system, consisting of procurement, in-bound transportation, inventory management, materials handling, facilities management and c­ orresponding information systems. Downstream from production was the finished goods (or out-bound logistics) sub-system. This was a mirror image of the in-bound side, consisting of facilities management (including depots, warehouses and distribution centres), transportation links, inventory management, materials handling and information systems. Where was production in all of this? It was caught firmly in the middle. While the production sub-system held out for an independent existence, this self-centredness would gradually disappear in many enterprises over the ensuing decades. Indeed, these days production is effectively an integral part of the overall logistics effort in most forward-thinking enterprises. The combination of in-bound/out-bound logistics and production is sometimes called ‘operations’. Meanwhile, service organizations have not even started to think about any of these definitional matters; sadly, they don’t even have them on their radar. So for the enterprise to perform well, all three sub-systems in this ‘bow tie’ style organizational structure have to be in synch. Once any one of them gets out of synch, the outcome is very predictable – either stock-outs or overstocks, both of which are extremely expensive. By the 1990s, events conspired to cause a great leap forward, like some accidental chemistry experiment. The ‘discovery’ of the Internet by c­ ommerce and industry33 opened up endless channels for humans to ­communicate, one-to-one. Coincidentally, a plethora of user-friendly ­software suites arrived on the scene. And the speed of ­telecommunications improved immeasurably. Now we could move forward from the ­previous ­preoccupation with internal integration and begin to link with parties upstream and downstream in a genuine network of supply chains. In almost a single stroke of genius (or good fortune), we had moved from talking about the concept of supply chain management to operationalizing it as depicted in Figure 1.2. The wavy lines in this diagram depict the many possible s­ upply

· 16 ·

M01_GATT6818_03_SE_C01.indd 16

2/24/15 3:38 PM

M01_GATT6818_03_SE_C01.indd 17

Out-bound logistics

Broad focus of integrated supply chain management

Internal interfaces

Internal operations

Manufacturers

Operationalizing the concept of supply chains

In-bound logistics

Source: Adapted from Figure 1.1 in Gattorna (2006), p. 9

F igu re 1. 2 ◆

Suppliers

Narrow focus of traditional logistics

External interfaces

Retailers/ distributors

Customer demands (by segment)

Coping with market volatility: the ‘new normal’

· 17 ·

2/24/15 3:38 PM

Dynamic Supply Chains

chains in which firms are implicitly or explicitly involved as they deliver their products and services to customers. Let us consider what we mean by supply chain management, as it’s a term bandied about today to cover all sorts of things. Supply chain management involves parties upstream and downstream agreeing to work together by joining their respective ‘logistics’ systems together. Simple? In concept, yes. But working together in complex chains, or networks, is quite difficult to achieve in practice. In supply chain management, ‘logistics networks’ are a subset of supply chain networks, the key difference being the crucial interfaces between each supplier–buyer combination. Value is either created or destroyed through the management of these interfaces along the ‘chain’ or across the network in three dimensions. Given that a supply chain is the combination of multiple logistics networks, the potential to improve performance is much greater than within a single logistics system. In practice, all product, service and public sector enterprises have multiple supply chains running through them in a complex three-dimensional array.34 Another key difference in old and new ways of thinking is the approach to managing supply chains. The old belief in logistics as largely ­infrastructure and operations-based led to an all-pervasive ‘operational excellence’ ­mentality, which still prevails in some quarters today. Management focused on costs, and treated logistics as a cost centre. Not too exciting for those who worked in it! We now understand that managing extended supply chains involves far more than keeping costs in check (or working to reduce them). However, managing supply chains actually involves understanding the interaction between human behaviour, information technology and ­infrastructure. Unfortunately, this is the antithesis of what actually happens in business today. Since all types of enterprises have supply chains of various c­ onfigurations running through them, you can see the extent of the oversight. How can we expect to start solving operational problems without first recognizing that the primary driver of goods and services moving through supply chain ­networks is people? So far, there is only a small body of knowledge that goes beyond the hard assets of the supply chain – systems, infrastructure and equipment – to get to what really drives performance: the soft intangible assets of human behaviour and knowledge.

· 18 ·

M01_GATT6818_03_SE_C01.indd 18

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

Watch the customer not the competitor Management thinker Michael E. Porter caught everyone’s attention in the late 1970s when he launched his quest for ‘competitive strategy’;35 and he is still saying that ‘. . . every organization must have a clearly defined strategy to deliver superior profits’.36 Competitive analysis and strategy are obviously critical to success, but we should not get things out of perspective. We know now that there is much more involved. First, we have to start re-thinking the boundaries of the business – and understand what is going on inside the boundaries – before ­charging ­headlong into competitive analysis. Porter’s philosophy seems to have ­transfixed ­generations of managers into watching their competitors. The result? They have failed to develop the same degree of sensitivity towards internal resources and the internal dynamics of their own firm. They are even less aware of the interactions at the edges of their business. A myopic focus on competitors and the external environment can only limit understanding of internal cultural capability, which is so critical to executing strategy. It’s like pulling up the drawbridge and only concentrating on the marauding hordes over the parapets rather than looking at what’s going on inside. With such a focus, it’s not surprising there has been such a mismatch between strategy and implementation, and many costly failures to boot. In reality, organizations can inflict much more harm on themselves by the very way they behave internally, than any external competitor is capable of inflicting. Maybe it would be more appropriate to adopt Maria S ­ harapova’s philosophy in winning the 2004 Wimbledon tennis championship: ‘I like winning. I love competition. But I try to be myself. I worry about what I want to achieve. Not what everyone else does.’37 This is also a winning formula for business, because it avoids over-emphasizing external factors at the expense of internal factors; you need to consider both. It has certainly worked for Sharapova – she was ranked World No. 1 in women’s tennis in August 2005, and after a succession of injuries in the intervening years, is on an upward arc again in 2014. If more enterprises were prepared to ‘zero base’, or go back to the ­fundamentals, rather than ‘copycat’ their strategies, we would surely see fewer corporate failures. It would also put a stop to the endless progression of new initiatives being rolled out in search of the next ‘silver bullet’.

· 19 ·

M01_GATT6818_03_SE_C01.indd 19

2/24/15 3:38 PM

Dynamic Supply Chains

Rob Murray, the former CEO of Lion Nathan National Foods, one of the Asia Pacific region’s biggest food and beverage companies, expresses a similar philosophy: ‘Right now, we’re focused on trying to drive our own economic model and trying to make our own business work. You often end up losing if you obsess about what your competitors are doing. So I don’t really care much what they are doing.’38 A man after my own heart! Murray has since moved on but Lion continues to thrive.39 Can you see why we need to watch the customers, consumers and endusers of our products and services first and foremost? Unless all our energies and resources are focused on improving the ‘alignment’ between our business and customers (and suppliers too), then we are most likely wasting everyone’s time and debilitating the company in the process. If we are sensitive to customer needs and buying preferences, it will be obvious what we have to do, and, like Sharapova, we won’t have to worry so much about our competitors – they’ll be worrying about us. The relevance of these insights to the design and operation of supply chains will become obvious later when I explain the inexorable principles that link an enterprise (internal cultural capability and leadership) with its external marketplace, through operational strategy. All of these parameters interact in a multidisciplinary way, yet executives continue to separate them into silos in the false hope that it will simplify their management task. Wrong. The paradox is that we’re only adding further layers of complexity if we operate that way.

Internal ‘forces of darkness’ Strategy is, in effect, just a set of intentions, which acts as a bridge between the enterprise and its marketplace. Until the intentions are brought to life and executed as actions, there is little difference between ‘good’ and ‘bad’ strategy. In fact, some would argue that an ‘ordinary’ strategy well implemented is better than a ‘brilliant’ strategy poorly executed. The military would probably agree. We can continue to debate this point, but we know from experience that 40–60 per cent of the original intentions articulated in business plans are dissipated or lost before ever being executed. While some of this loss is clearly a result of changing market conditions, competitor actions and the negative influence of excessive government regulations, the biggest factor in the failure to execute the best-laid plans is the cultural

· 20 ·

M01_GATT6818_03_SE_C01.indd 20

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

resistance inside the enterprise itself. How often have we been in meetings where leaders have presented their strategies, and assumed that their vision and accompanying instructions would be automatically followed by all those present? Yet it’s obvious that deep down some people, while appearing to agree with the implementation plan, are often quietly making up their minds to resist, or even opt out entirely. This is the insidious ‘dark side’ of culture at work inside the enterprise. The ‘forces of darkness’ can undermine perfectly good strategies because particular people have different values to those needed to propel the strategies into action.

Organization design is the key How can we anticipate and stymie such negative and unwanted responses? Well, apart from the clues already provided, we need to consider the two factors that have perhaps most inhibited the development of business logistics and supply chain management as commercial disciplines over the past 48 years. The first is confusion around ‘terminology’. Terminology is still an issue, as new terms are introduced on an almost annual basis, but we can at least be reassured by the fact that managers are becoming better educated and are more likely to understand what is really involved in moving goods and services, irrespective of the attached labels. The second is inappropriate organization design. We cannot dismiss its pervasive negative impact quite so easily. The fact is that functional organization designs, which have seemingly served us so well for so long, together with matrix and partnership variants, are being rapidly marginalized. This is happening as increasing competitive intensity in many industry-market combinations drives customers towards more aggressive and demanding buying behaviours. The result is that while enterprises cling to these outmoded designs as markets move away, the degree of ‘misalignment’ is inexorably increasing. Worse still, it seems as if few enterprises have found ways of staying in dynamic alignment with their marketplace. New organizational formats are now urgently required to work in parallel with existing formats. More about this vexed topic in Chapter 6. The four principles for designing more effective organization ­structures proposed by former McKinsey & Company partners Lowell Bryan and

· 21 ·

M01_GATT6818_03_SE_C01.indd 21

2/24/15 3:38 PM

Dynamic Supply Chains

Claudia Joyce provide a useful guide for the future.40 In essence, they ­suggested that organizations need a ‘portfolio’ of coexistent structures that mirror the mix of dominant buying behaviours found in the marketplace. This means that successful organizations will blend all their disciplines in different configurations to match their various customer groups. Spanish fashion manufacturer-retailer (Inditex) Zara does this perfectly. It forms cross-functional teams for a merchandise category such as ‘women’s fashion’, combining the efforts of design, logistics, production, sales operations and marketing. The result is a ‘cluster’ that can respond in close to real time, to a specific customer group, globally. Such customer-focused and flexible configurations are actually fundamental components of different supply chains. We are witnessing the early days of the way all enterprises will work in the future.

Looking beyond conventional wisdom To reach a new understanding of supply chains, we have to leap ahead of another quest popular in the world of ‘logistics’, and that is the determination of academics, consultants and practitioners in the 1990s to extract the full potential of internal integration. Despite advances in technology that saw the introduction of enterprise resource planning (ERP) systems, integration was always going to be a mirage. Why? No one during this period confronted the real blockage: the functional organization designs prevalent in most enterprises. Such structures set people to work in a straitjacket environment and offered little or no prospect of ever aligning with customers. Indeed, the conventional functional style of organization design is still used by most enterprises in the world today, even though it is at least 90 degrees out of phase with the way customers prefer to buy. It was not until the early-1990s, when the Internet arrived, that things moved forward again. The convergence of the Internet as a communications medium, and the coincidental development of a myriad of new software applications, brushed aside many of the internal and external organizational obstacles to integration. This effectively connected and operationalized the supply chain for the first time. However, there was still something missing – an understanding of how the ‘people factor’ played out in all of this.

· 22 ·

M01_GATT6818_03_SE_C01.indd 22

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

In search of dynamic alignment As long ago as 1989 it occurred to me that ‘logistics’ as an emerging field in management science lacked any substantive theoretical underpinning. Without this much-needed conceptual foundation, it offered little prospect of further breakthrough developments, at least in the short to medium term. It seemed that we had hit a type of ‘conceptual ceiling’. In response, I set out in search of ideas beyond the boundaries of conventional logistics thinking, in adjacent fields of management science. This proved to be an inspired move as it ultimately opened up rich new avenues of investigation, helping to reveal the workings of modern logistics networks and supply chains. What we started in 1989, and continue to develop today, is a holistic view of how enterprises function, a type of ‘new integrated theory of the firm’. The logic that underpins this approach is that casting a wide net could potentially produce new insights into how enterprises, and their constituent enterprise supply chains, work. And so it proved to be. ‘Alignment’ itself is not a new idea. In fact it has quite ancient ­origins. One of the earliest forms of alignment was observed in nature – the flight of wild geese.41 Remarkably, a flock of geese flying in V-formation can fly 70 per cent further than a single goose on its own, so powerful is the ­aerodynamic effect in formation. A more contemporary example is the ­Australian 4,000 metre men’s pursuit cycling team competing in the 2008 Beijing Olympics (Photo 1.1),42 where all four cyclists ride in line astern, wheels millimetres apart, chasing around the oval cycling track at high speed. That’s alignment par excellence! ‘Alignment’ is an enterprise-to-enterprise concept, but by applying it to supply chain design, I am seeking to emphasize the dynamism involved – the type of movement we can see and measure when it comes to a flock of geese or an Olympic cycling team. We want to capture the underlying mechanisms in supply chains, which themselves are integral to all enterprises. We call this overarching concept dynamic alignment, because it holds true under changing conditions, and for the first time gives us an opportunity to design and operate supply chains that are capable of staying abreast of customers and consumers as they move and evolve over time. The economist R.H. Coase, in his 1937 essay ‘The Nature of the Firm’, first introduced the notion of ‘moving equilibrium’, where internal ­components interacted in such a way as to cause the Firm to either expand

· 23 ·

M01_GATT6818_03_SE_C01.indd 23

2/24/15 3:38 PM

Dynamic Supply Chains

The Australian 4,000 metre men’s pursuit cycling team competing in the 2008 Beijing Olympics ph o t o 1 . 1 ◆

Source: Getty Images/Mike Hewitt

or contract in size.43 It is very likely that Coase was primarily thinking only of economic elements and did not consider the behavioural dimension, but this concept is very relevant to contemporary supply chains. Indeed, Robert J. Shiller, Professor of Economics at Yale University, has acknowledged as much in a TV interview shortly after the GFC in 2009 when he remarked that ‘. . . we have been advocating going back to psychological fundamentals to try to understand macroeconomics, how economies move’.44 Shiller is all for acknowledging the human effect in the economy! Some 60 years after Coase, authors George Labovitz and Victor Rosansky went part of the way towards redressing the situation with their dual concepts of vertical alignment (linking strategy and people inside the organization) and horizontal alignment (linking processes and customers).45 They also introduced the notion of the self-aligning organization, but their work was based mainly on anecdotal evidence and as such lacked predictive power. Perhaps the first real indication that strategy and culture in an ­enterprise could be systematically linked came from Norman Chorn’s unpublished ­doctoral research in 1987.46 Subsequently, Chorn, myself and other ­co-workers in our consulting firm47 set out to study the leadership styles of individual executives. This led us to Carl Jung’s seminal work on personality

· 24 ·

M01_GATT6818_03_SE_C01.indd 24

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

types48 and ultimately to Ichak Adizes49 and Gerard Faust,50 who developed the ‘P-A-E-I’ (Producer-Administrator-Entrepreneur-Integrator) coding system to categorize different management styles. This was the code that eventually cracked the whole alignment puzzle for us. Our collaboration during the period 1988–95 proved to be f­ ortuitous, as we were able to combine this important research on leadership and ­personality types with my earlier work in customer segmentation and c­ orporate vision development. It led directly to the first genuine m ­ ultidisciplinary dynamic alignment framework that linked marketplace and strategy with i­nternal ­cultural capability and leadership styles in the enterprise. The seminal ­framework, depicted in Figure  1.3, evolved from our earlier alignment framework seen in Figure I.1. Here strategy is the bridge that now links the internal and external operating environments permanently; one without the other simply can’t deliver the dynamism we’re seeking. Our coding system was key to making this leap.

Figure 1.3 ◆

Culture

Leadership style

’Rules‘

Technology + infrastructure

Strategy

Business processes

Human performance

Strategy

Customers and marketplace

‘Playing the game’

‘Internal capabilities’

Underlying logic – An organization must be aligned with its operating environment Usefulness – Shows the interaction between customers’ needs, the formulation of appropriate strategic responses, and the successful execution of these strategies by shaping the necessary internal capabilities and corresponding leadership styles

Prerequisite ‘Shaping and – Understanding of creating’ customers’ fundamental needs and buying behaviours that ultimately drive sales, revenues and profit

Elements of the dynamic alignment business model

Source: Adapted from Figure 1.2 in Gattorna (2003), p. xiii; also Gattorna (1998), p. 5; and Gattorna (2006), p. 16

· 25 ·

M01_GATT6818_03_SE_C01.indd 25

2/24/15 3:38 PM

Dynamic Supply Chains

We realized that the P-A-E-I behavioural coding methodology (or ‘­logics’ as we now refer to them) which were initially developed by Adizes and Faust to describe different management styles of individual ­managers, applied equally well at the aggregate level – this was the step-jump in logic we made at the time. In other words, groups of people inside enterprises with similar values/expectations could be identified and described as ­subcultures. Similarly, groups of people on the outside who shared similar dominant buying values for specific product or service categories could be identified and classified as behavioural segments (otherwise known as external subcultures). We had indeed found the ‘missing link’ (or code) which turned out to be a behavioural metric (or logic) that could be used to describe (and measure) what was happening at all four levels of the emerging multi-disciplinary dynamic alignment model. This new behavioural metric is indeed the DNA of business in general and enterprise supply chain designs in particular, a topic we will explore in more depth in Chapter 4. Just as importantly, this new coding regime facilitated comparative analyses of all four levels of our model in search of potential ‘misalignments’. As engineers well know, you cannot make meaningful comparisons unless you express everything in a common metric. We had found that unique metric – something that had evaded previous researchers – mainly because no one had been looking across all the fields of management science, concurrently. No one had been eclectic enough or indeed mad enough.

Behavioural forces at work in supply chains The behavioural coding system that we developed forms the foundation of the new insights on supply chain design that I describe in later chapters. The roots of this system are firmly embedded in Carl Jung’s theory of psychological types, which states that all conscious mental activity occurs in two perceptual processes: sensing and intuition; and two judgement processes: thinking and feeling. Adizes and Faust resolved and simplified Jung’s original framework and identified four key behavioural types or ‘logic sets’ that might exhibit a dominant tendency. These are best represented as two pairs of countervailing (behavioural) forces, which are always in dynamic tension, and are present in all human interactions, as depicted in Figure 1.4.

· 26 ·

M01_GATT6818_03_SE_C01.indd 26

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

I Integrator

Developer D

Force for creativity, change and flexibility

’

‘F ee lin

g’

on iti tu ‘In

Force for cohesion, cooperation and relationships

Behavioural forces

Force for energy, action and results

‘T

g’

hi

sin

nk

en

in

‘S

A Administrator

Figure 1.4 ◆

g’

Force for analysis, systems and control

Producer P

General characteristics of the four dominant behavioural forces

or logics Source: Adapted from Figure 29.1 in Gattorna (1998), p. 474; see also Gattorna (2006), p. 17

In the context of supply chains, we are particularly interested in the specific interaction between buyers and sellers. Adizes and Faust ­originally labelled these behavioural forces P-A-E-I as described earlier, but we ­subsequently relabelled the ‘E’ to ‘D’ and defined them as follows: P 

(Producer): the force for action, results, speed and focus.

A      (Administrator): the opposing force to D, and represents stability, control, reliability, measurement, logic and efficiency. D   (Developer): the force for creativity, change, innovation and flexibility (originally labelled ‘E’ for Entrepreneur by Adizes and Faust). I         (Integrator): the opposing force to P, and represents cooperation, ­cohesion, participation and harmony.

· 27 ·

M01_GATT6818_03_SE_C01.indd 27

2/24/15 3:38 PM

DynamiC SuPPly ChainS

The four elements of the P-A-D-I coding system come together in different ways to produce 16 possible combinations, all of which are in dynamic [tensile] equilibrium; each dominant logic combination has a different ‘centre of gravity’. For example, if we are describing a particular buying style we may discern an overriding preference for speed, results and performance to specifications (P logic), and a lesser preference for reliability, consistency and price (A logic). There may also be some preference expressed for flexibility (D logic) and cohesion (I logic). So the overall summary of this particular buying behaviour can be represented in shorthand code ‘Pa’, as depicted in Figure  1.5. Note that we have opted only to use ‘primary’ and ‘secondary’ parameters to describe the ‘dominant logic’, whereas Adizes originally used all four parameters in his descriptions of management styles. Our more abbreviated coding regime doesn’t lessen the value of the approach, but has the advantage of making it simpler to use in practice. The important insight to take on board here is that all customers have hierarchies of values. We are seeking to bring the most dominant buying values to the surface as these will ultimately drive behaviour and therefore are the values with which we need to align our responses. In the example in Figure 1.5, although the centre-of-gravity is in the P quadrant, and there is a secondary tendency towards the A quadrant, some overlap into the D and I quadrants suggests that there is also an influence of each coming into play. However, these forces are significantly less than the primary P logic and secondary A logic that defines the dominant centre-ofgravity. Horizontal and vertical logics can be combined (e.g., DI, or Di, Ia or

I=5

D=7

ILLUSTRATIVE

A = 10 Secondary P = 15 Primary

Figure 1.5 ◆ typical spread of attributes that define customers’ buying behaviours – Pa

logic

· 28 ·

M01_GATT6818_03_SE_C01.indd 28

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

IA, etc.) but it is impossible to combine diagonal logics, i.e., I and P logics or D and A logics, as they are at the opposite ends of a continuum. This is because the more a buyer moves along the diagonal towards one end of the continuum, the less the influence of the opposing logic.

The four elements of dynamic alignment So let us consider the logic of the new model and see what impact it has on our thinking. The key driver in the marketplace is the dominant buying behaviour or natural preference exhibited by customers for a particular product or service category in a specific marketplace. This is Level 1 in the dynamic alignment framework, as depicted in Figure 1.6.

UNCERTAINTY Forgiving

Turbulent

Market threatened with decline Stable patterns now under threat Customer-led changes and development ◆ Loyalty and relationships valued ◆ Quality (relationship) emphasis

New and unstable market Rapid changes in suppliers, distribution channels and technology ◆ Entrepreneurial ◆ Innovative solutions, ground-breaking solutions ◆ Supplier-led

◆ ◆ ◆

LOW COMPETITIVE INTENSITY

D

◆ ◆

HIGH COMPETITIVE INTENSITY

I

Behavioural forces

Stable markets, established patterns Supplier-dominated Commodity products ◆ Price sensitive ◆ Standards and procedures ◆ Precedences important ◆ Systems emphasis

Market is established and growing ◆ Low loyalty ◆ Concern for increased volumes and new distribution channels ◆ Customer-led demand

◆ ◆ ◆

◆

Stable A

Figure 1.6 ◆

Competitive CERTAINTY

P

Level 1 – marketplace logic framework

Source: Adapted from Figure 29.2 in Gattorna (1998), p. 474; see also Gattorna (2006), p. 19

· 29 ·

M01_GATT6818_03_SE_C01.indd 29

2/24/15 3:38 PM

Dynamic Supply Chains

PROACTIVE POSTURE

I Protective

D Pathfinder

LOW RISK

New and unstable market Rapid changes in suppliers, distribution channels and technology ◆ Entrepreneurial ◆ Innovative solutions ◆ ◆

HIGH RISK

Growth through extra value-added services ◆ Emphasis on quality ◆ Ability to develop long-term, dependent customer relationships ◆

Behavioural forces

Growth through penetration Focus on product improvement Emphasis on efficiency and process engineering ◆ Ability to provide value for money and security

Growth mostly through market development ◆ Emphasis on ‘getting it right’, focused and practical ◆ High energy approach, reliability, accuracy, responsive to customer needs ◆

◆ ◆ ◆

Evolutionary A

Figure 1.7 ◆

Operational

REACTIVE POSTURE

P

Level 2 – strategy logic framework

Source: Adapted from Figure 29.3 in Gattorna (1998), p. 476; see also Gattorna (2006), p. 20

Level 2 is the strategy element. This is the bridge that links the enterprise’s internal cultural capabilities with the external marketplace, as shown in Figure 1.7. Having an aligned set of subcultures (sitting on top of a set of enterprisewide shared values, otherwise known as corporate culture) is crucial to the successful implementation of operating strategy. This is Level 3. Figure 1.8 shows this third level in the dynamic alignment framework. Finally, Level 4. Effective leaders understand the aggregate values of their enterprise, and can mould from these the appropriate subcultures to align with the preferences being expressed by customers in the marketplace. There are four primary leadership styles identified: Visionary (D); Company Baron

· 30 ·

M01_GATT6818_03_SE_C01.indd 30

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

INDIRECT CONTROL

I Group

D Enterpreneurial

Creativity and innovation abounds Focus on broad concepts and the hypothetical Proactive orientation towards environment Inspiration and entrepreneurship are encouraged

EXTERNAL FOCUS

INTERNAL FOCUS

Emphasis on people and teamwork Decisions are based on consensus Internal, individualistic orientation Loyalty and commitment to the group are highly valued

Behavioural forces

Traditional administration Process is more important than content Strong internal orientation – what is good for the company Stability and order are valued

Emphasis on action Goal-directed, results count High environmental awareness Productivity valued

Hierarchical A

Figure 1.8 ◆

Rational DIRECT CONTROL

P

Level 3 – culture logic framework

Source: Adapted from Figure 29.4 in Gattorna (1998), p. 477; see also Gattorna (2006), p. 21

(P); Traditionalist (A); and Coach (I). These different leadership styles are depicted in Figure 1.9.

Time to re-invent the enterprise Let us consider the need for organizations to adapt to new market conditions and the integral role that supply chains play in this transformational process. In 1996, Levi Strauss & Co undertook what at the time was heralded as the most dramatic change programme in American business.51 Despite solid growth in revenue and profits, Levi’s management felt their customers were

· 31 ·

M01_GATT6818_03_SE_C01.indd 31

2/24/15 3:38 PM

Dynamic Supply Chains

D

THINKING PREFERENCE Coach

Visionary

Sensitive to people, offer emotional support ◆ Ability to empower subordinates ◆ Good negotiation skills ◆ Consensus building

Move very quickly Apparently haphazard Tolerance for ambiguity ◆ Flexible ◆ Good understanding of industry

CONSENSUS ORIENTATION

◆

◆ ◆ ◆

INDIVIDUAL ORIENTATION

I

Behavioural forces

Logical, analytical Provide clear structure for subordinates ◆ Good analytical skills ◆ Logical, desire for stability

Drivers Set clear objectives for subordinates ◆ High energy ◆ Clear focus on objectives

◆ ◆

◆ ◆

Traditionalist A

Figure 1.9 ◆

Company Baron DOING PREFERENCE

P

Level 4 – leadership logic framework

Source: Adapted from Figure 29.5 in Gattorna (1998), p. 478; see also Gattorna (2006), p. 22

telling them they should change – and they were listening. As the project unfolded it became very clear to team leader Thomas Kasten that Levi’s customer service problems were deep-rooted and they involved the entire supply chain, from concept to end-consumer. The resulting transformation was timely for Levi’s because it set up the company for strong growth for another decade or so.52 How many enterprises are as sensitive to the need for change as Levi Strauss? But how many either wait until the last moment or get lost in the change process itself? We have another less complimentary anecdote about Levi Strauss, which we will relate in ­Chapter 2. You will be amazed that it is the same company. At this point it is well to remember the comment by economist and systems scientist Kenneth Boulding, ‘Nothing fails like success because we

· 32 ·

M01_GATT6818_03_SE_C01.indd 32

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

don’t learn from it. We learn only from failure.’53 For those interested in cricket, the same might be said for the English Cricket Team during 2012 and 2013. After winning the Ashes contest on home soil in England in mid2013, a result that perhaps was over-complimentary, the same team toured Australia for the 2013/14 Southern Hemisphere season and was thrashed 5–0 by the same Australian team that had been beaten in England. Funny game, cricket! The Australian team has since gone on tour to South Africa and won the series against the world’s number 1 team, 2–1. The dynamic alignment model can make the difference between success and failure. The model provides both a map and a tool to help you achieve superior performance across your corporate supply chains. It’s a map to help you navigate your way through the increasingly complex network of supply chains out there today. And it’s a tool because it helps to pinpoint how to align specific supply chains to particular customer behaviours. This is why it’s such an important breakthrough for management thinking in general, and for the design and operation of supply chains in particular. It explains for the first time how the softer science of human behaviour can be integrated with the more tangible – and generally better understood – world of infrastructure and technology. The underlying logic of the dynamic alignment framework is that an enterprise needs to be aligned with its customers or markets in the context of the prevailing operating environment. The power of this framework lies in its ability to reveal the interaction between customers’ preferences, helping to formulate appropriate response strategies, and successfully to execute those strategies through the shaping of internal cultural capabilities via the appropriate leadership. The essential starting point for successful dynamic alignment is a comprehensive understanding of customers’ fundamental needs and matching dominant buying behaviours. This particular subject will be explored in greater depth in Chapter 2. However, it’s not difficult to observe the difference between successful and unsuccessful enterprises as measured in terms of organizational effectiveness metrics, revenue and CFROI performance. Successful organizations generally have a leadership that is in close touch with, and empathetic to, their customers and prevailing market conditions. Empathetic leaders tend to formulate relevant strategies and shape the most appropriate cultural capabilities to underpin and drive those strategies into their target marketplace. Tesco (until recent events), IKEA, Cessna, Nokia, Nestlé, Caterpillar, P&G, Unilever, Ralph Lauren, Walmart, Dell, CBH and Schneider Electric are just a few examples of successful dynamic alignment in

· 33 ·

M01_GATT6818_03_SE_C01.indd 33

2/24/15 3:38 PM

Dynamic Supply Chains

their respective marketplaces. And in the competitive world of sport, the way Lord Coe and his bidding team dramatically won the 2012 Olympic Games for London54 is another example of superior dynamic alignment, beautifully conceived and executed to perfection. There is no real size limitation on the application and usefulness of dynamic alignment – it applies equally well to large and small enterprises. An example of the latter is the chain or ‘charm bracelet’ (as she refers to her store group) of fashion retail stores developed by Belinda Seper in Sydney under her ‘Belinda’ branding. While there is clearly a common theme across all stores, each is different in its own way. Each store has its own personality in response to the lifestyle needs of women in each store’s catchment area.55 Less successful enterprises, on the other hand, fall at the first hurdle. Their leadership appears to lose touch with customers and corresponding market conditions, and the strategies and underpinning cultural capabilities put in place become progressively more misaligned, until finally the responsible Board is forced to move and replace the CEO, and start the process all over again, often resulting in huge expense to the business with an accompanying negative impact on the share price. We saw clear evidence of this when IBM got into trouble in the early 1990s, and the subsequent much publicized demise of Carly Fiorina at Hewlett-Packard. Other examples of significant misalignment include such high-profile names as Enron in the USA, Marks and Spencer and J. Sainsbury in the UK, Parmalat in Italy, and AMP and Coles in Australia. This phenomenon knows no borders. All of these organizations are working hard to regain their former glory through radical initiatives designed to overcome serious misalignments with their customers which resulted in progressively worsening operating and financial performance. But as they’ll all tell you, it’s very hard to come back from the abyss. This phenomenon occurs in all types of organizations, from religious to political and from public to private businesses. And they all have one thing in common: people and their behaviour. Indeed, taking a leadership position these days is far riskier than yesteryear, because there is little or no time allowed to learn on the job. In many ways it’s akin to what is known in aeronautical circles as ‘fly-by-wire’.56 We have to accept that the enterprise will be in a state of ‘dynamic instability’ all or most of the time, and therefore it is vital to learn fast how to manage under these most trying conditions. Aeronautical engineers learned to work with this ‘dynamic instability’ in aircraft as flight speeds increased exponentially. It’s now up to managers and

· 34 ·

M01_GATT6818_03_SE_C01.indd 34

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

leaders in commerce and industry to do the same and increase the speed of their decision cycles. We will consider this notion further in Chapter 9 when we discuss agile supply chains.

Responsiveness at last We did not set out to solve world hunger, but it’s increasingly obvious that little or no progress can be made to improve corporate performance unless we take a more eclectic, albeit holistic, approach than is currently in vogue. By going well beyond the accepted boundaries of conventional management theory and practice, we can embrace a new approach to designing and managing enterprise supply chains, but this will always remain something of an art form. Fortunately, the more holistic whole-of-enterprise perspective offered by the dynamic alignment framework points to a new way forward. A fertile new world awaits if we pursue this line of thinking, a world where more value can be released and higher performance achieved, on a sustainable basis. Indeed, logistics networks and supply chains (comprising multiple organizations in 3-D arrays) are largely driven by people power, either as customers, ­suppliers or employees. Systems are the next most critical area because these deliver information to people for visibility and decision-making, such as ‘make or buy or act’ in some way inside the enterprise. So it appears that the whole concept of dynamic alignment, when applied to logistics systems and the broader context of supply chains, is simply another way of expressing optimal cost-­service effectiveness. This is the realm where customers are serviced ­appropriately, no more, no less, eliminating over- and under-servicing forever. At last we have a way around the service problem that confronts every manager every working day, epitomized by the words, ‘We know we are over-servicing some customers and under-servicing others, but we don’t know which is which’.57 Dynamic alignment principles bring with them a paradigm shift, away from conventional thinking which suggests that as service levels are p ­ rogressively increased, cost-to-serve increases at a faster rate, approaching infinity at very high levels of service. This does not necessarily follow if resources are ­subtly ­re-allocated to align better, and more accurately reflect, customer ­buying behaviours. Armed with a clearer understanding of the implications of improved alignment between an enterprise and its marketplace, the potential exists to move to a best-of-both-worlds strategy, where improved service comes at a lower overall cost-to-serve, at least up to a point, as depicted in Figure 1.10.

· 35 ·

M01_GATT6818_03_SE_C01.indd 35

2/24/15 3:38 PM

M01_GATT6818_03_SE_C01.indd 36

Logistics cost (% of sales)

Logistics cost (% of sales)

New paradigm

Traditional paradigm

Source: Developed in discussion with Deborah Ellis, Carpenter Ellis, 2009

Paradigm shift to a ‘best-of-both-worlds’ strategy

Time

Time

(%)

Time

(%)

Customer satisfaction

Time

F ig ure 1.1 0 ◆

(%)

(%)

Customer satisfaction

Dynamic Supply Chains

· 36 ·

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

Building more responsive supply chains means building more ­responsive enterprises overall, because service means different things to different p ­ eople, and customers do not split hairs between functions inside the enterprise. Indeed, supply chains are the business. The 2 × 2 matrix in Figure 1.11 illustrates in more detail the four primary customer-service logics that result in at least 16 possible combinations; some types are more often observed than others, but they all exist in practice. For one class of customer, good service means surprising them with an innovative response to meet their unique needs, at speed. This is the D logic. For another class of customers with a different mind-set, good customer

I

D Early/young market No clear patterns/traditions yet to be established New product/technology High level R&D (e.g., CDs) Supplier-led risk Entrepreneurial Lower price sensitivity

Integration Mature – imminent change? Loyalty and long-term relationships Brand loyalty ‘Joint venture’ mentality ‘Quality’ emphasis Teamwork Consensus Customer service = Empathy, understanding, relationship

Customer service = Innovative, creative response to unique needs

UNDERSTAND ME

SURPRISE ME

Stable market, patterns are established Commodity Drive for efficiency – ‘experience’ culture Value for money High price sensitivity Procedural Standards Structure

Patterns emerge – growth Customer-led demand Sales, promotion, distribution important Strong commercial attitude – antirelationship (e.g., price sensitive); opposite to loyalty ‘Hollywood’ syndrome – only as good as your last performance Product differentiation

Customer service = Reliability, predictability, consistency

Customer service = Responsiveness in a commercial way

BE CONSISTENT

RESPOND

A

Figure 1.11 ◆

P

Primary customer service logics

Source: Adapted from Figure 2.4 in Gattorna and Walters (1996), p. 31; see also Figure 1.10 in Gattorna (2006), p. 27

· 37 ·

M01_GATT6818_03_SE_C01.indd 37

2/24/15 3:38 PM

Dynamic Supply Chains

service means delivering a reliable, predictable service, on a consistent basis. For this type of customer, consistency is essential. This is the A logic. For yet another class of customer, good service means being responsive to their demanding requirements in a commercial way. For them, straight out responsiveness and timeliness is paramount. This is the P logic. Finally for another group of customers, the opposite is true, as they seek service that is empathetic and understanding, generally delivered in a quietly consistent way. For them the crucial ingredient is having suppliers understand their special need for a close and sharing relationship, which ensures they are not taken out of their comfort zone. This is the I logic. Figure 1.12 contains further expressions of these P-A-D-I logics which will become useful when you are coding a particular customer for positioning in a particular segment. Following these logics leads us to conclude that the concepts of ‘responsiveness’ and ‘flexibility’ (much sought after by all supply chain practitioners and theorists) are not about doing one thing well after all, but rather having the capability to do several things well, concurrently. It is an ‘and’ rather than an ‘either/or’ world. We will explore this theme further in Chapter 2. If you have any doubt about the importance of managing modern supply chains look no further than the example of some leading companies mentioned earlier. Why is it that one national icon, Marks and Spencer, could lose its way, while another, Nestlé, could move from strength to strength? Both had secure positions in their respective markets, enjoying a strong brand and loyal customer following. But one misunderstood its customers and made the wrong sourcing decisions; the other was in touch with its customers and was unfazed by supply chain complexity. Nestlé knows what dynamic alignment means. Meanwhile, Marks and Spencer is now well on the way back to alignment with its traditional customer base. And why is it that retailer J. Sainsbury was rudderless in the changing world of supply chain and globalization, while Tesco expanded its business to capture the advantages offered by changing times? Sainsbury acted like a large steamer moving slowly through the market waters. It lost market share due to huge stock-outs, high costs and lower margins. But Tesco navigated through changing times, expanding from food into non-food categories such as petrol and insurance. It secured its position through strong leadership and clear supply chain strategy. Again, one company could capture the benefits of smart supply chain management, while another was overcome by supply chain complexity. But things can change. J. Sainsbury’s fortunes have rebounded, and the company is now outperforming Tesco.58 It is possible! · 38 ·

M01_GATT6818_03_SE_C01.indd 38

2/24/15 3:38 PM

Coping with market volatility: the ‘new normal’

I

D ◆ Empathy

◆ Innovative

◆ Caring

◆ Flexible ◆ Creative

◆ Interaction ◆ Spend

time with their problems

◆ Comfort

◆ What's

new?

◆ What’s

different?

◆ Unstructured

◆ Teamwork

◆ Ideas

◆ Participation ◆ Harmony

◆ Bend

rules

◆ New

technology

◆ Sensitivity

◆ Dislike

◆ Quality

◆ Individualistic

◆ Joint

◆ Freedom

ventures

◆ Low

◆ Partners ◆ Lower

forms, procedures

price sensitivity

◆ Why?

price sensitivity

◆ Better

◆ Loyal

ways of doing things

SURPRISE ME

UNDERSTAND ME

◆ Accuracy

◆ Demanding

◆ No

◆ Sense

frills

◆ Reliable

◆ Time

of urgency, action, energy sensitive

◆ Consistent

◆ Problem

solved first time

◆ Predictable

◆ Problem

solved quickly

◆ Routine

◆ Want

one person to solve problems

◆ Regular

◆ Want

prompt attention

◆ Planned

◆ Breakdowns/faults

◆ Discounts

◆ Want

best possible deal

◆ Reduce

◆ Price

aware; part of the package

◆ Very

costs

price sensitive

◆ Efficiency

◆ Competitive

focus

◆ Shop

◆ Savings

◆ Not

◆ Standards ◆ After-sales ◆ Account ◆ No

◆ Only

service

as good as last performance

◆ Results

rather than procedures

◆ ‘Movers

administration

and shakers’

nasty surprises BE CONSISTENT

RESPOND

A

Figure 1.12 ◆

around style

loyal

P

Additional expressions of service logics which are useful for ­coding

purposes

· 39 ·

M01_GATT6818_03_SE_C01.indd 39

2/24/15 3:38 PM

Dynamic Supply Chains

Trying to navigate your way through the spaghetti bowl of today’s supply chains is not easy for any enterprise, regardless of its age, experience, market penetration or financial resources. But some do it better than others and reap the rewards. Successful organizations understand that building more responsive, customer-focused supply chains is the key to the future. Dynamic alignment of supply chains means being able to see the life within those supply chains, capturing the energy and opportunity, and lining that up with the demands of customers. In the coming decade, little else is going to happen in an enterprise outside the domain of its supply chains. Supply chains are the business, and you better believe it!

Key ideas 1 In this ‘new normal’ era, where volatility reigns, your best strategy to survive – and be a leader – is to align your supply chains with customers, suppliers and third-party providers. As global consulting firm Accenture found, ‘winners pull away after recession’.59 2 Take a more liberal view of the definition and scope of contemporary supply chains. We are in effect talking about the central nervous system of all business and commerce. 3 When you start to comprehend the complexity of your supply chains, don’t get out your sledgehammer. Understand the complexity; understand your customers, and work back from there. 4 Use the behavioural metric (or code) to re-design your enterprise supply chains. Dynamic alignment will breathe life into your supply chain network, and set you apart from your competitors. 5 Stay connected and in synch at all times, even when you’re distracted by change. You cannot afford to let your market move away from you, unnoticed. 6 Build more responsive supply chains because by definition this will build a more responsive enterprise. Supply chains are your business.

Your challenge Are you doing enough in your enterprise to fully engage with your customers and suppliers, to understand their respective expectations? Are you using such insights to inform the design of your enterprise supply chains? · 40 ·

M01_GATT6818_03_SE_C01.indd 40

2/24/15 3:38 PM

Chapter 2

Customer conversations: looking from the ‘outside-in’ How to reduce complexity and associated costs

W

e have long pursued the Holy Grail of superior supply chain performance through the time-honoured art of customer ­segmentation. Over the years a myriad of customer segmentation regimes have been designed, deployed and cemented into place. Some frameworks have been successful, and a few remain useful, but as the often lacklustre performance has demonstrated, these regimes are no longer producing the results we need. The central message in this chapter is that segmentation must occur by analyzing customers along behavioural lines if we’re to achieve superior performance. It’s time for you to make customers, and customers alone, the ultimate frameof-reference for supply chain design. Once we understand the external marketplace via customer behaviour, we can track that behavioural thread back inside the organization and establish supply chain configurations accordingly. The great news is that we only need sufficient supply chain configurations to match the major, and not all, customer segments to reach up to 80 per cent of the market. This multiplealignment, multi-dimensional format may on the surface seem complicated, but in fact, it’s quite the opposite: it represents a significant reduction in operating complexity and, correspondingly, lower costs. The relatively few global companies that have adopted these customercentric principles are already reaping the rewards of their first-mover advantage.1 Dynamic alignment is our new Holy Grail!

· 41 ·

M02_GATT6818_03_SE_C02.indd 41

2/24/15 3:39 PM

Dynamic Supply Chains

What better way to start this pivotal chapter than a quote from Sir Terry Leahy, the former CEO of global retailer Tesco. When addressing the Supply Chain 50 Spring Summit in New York in April 2012, he said: ‘The best place to find the truth is to listen to your customer. They’ll tell you what’s good about your business and what’s wrong. And if you keep listening, they’ll give you a strategy.’2 Indeed. Sir Terry has given us the secret to designing superior supply chains – listen to customers, and re-segment them along behavioural lines. I define this behavioural-based customer segmentation as simply enabling ­customers to buy the way they prefer to buy. From there it’s a matter of reverse e­ ngineering back into the enterprise. The key is shaping specific value propositions for each major segment and underpinning these with s­ upportive organization structures, processes, technology and other building blocks. I discuss the different combinations in more detail elsewhere (in Chapters 7 to 11).3 Indeed, something that we have known for some time – but have mostly been in denial about – is that customers are the ultimate frame-ofreference. I’ve come to this conclusion, and developed my thinking around dynamic alignment, as a result of four decades of research and consulting practice.4 In that time we’ve come some distance in placing the customer at the heart of what we do. Supply chain academics Professors Matthias ­Holweg and Frits Pil were adamant about the central role of customers when they promoted the use of make-to-order (MTO) strategies in 2001.5 Dell was the first leading corporate to reference the customer, and did so as long ago as 2006, followed by Unilever in 2011, energy management innovator Schneider Electric in 2012, Australian grain marketer CBH Group in 2013, and DKSH, a market expansion agency in 2014 in Thailand. Why not other companies in other sectors? Service industries, for instance, seem missing in action. I believe that introducing this type of genuine customer focus is critical to a breakthrough in supply chain design. Things are beginning to happen, and even in the service industries there are signs of progress, albeit limited. McKinsey & Co report that ‘the application of behavioural science to service operations [is starting to happen]’; however, ‘[it] seems spotty at best’.6 This is small beginnings, and still a long way from influencing ­supply chain design. We shouldn’t blame senior managers for failing to emphasize customers in their thinking because outdated organizational designs have been a major

· 42 ·

M02_GATT6818_03_SE_C02.indd 42

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

hindrance to progress. Rigid, hierarchical structures have often fragmented knowledge and responsibility into silos, leading to little information on customers ever filtering through to people in the back-office. What’s more, many organizations have adopted erroneous and often irrelevant customer segmentation regimes. Many regimes use the United States Government’s Standard Industrial Classification (SIC) as a basis to categorize different types of industry sectors;7 others are based variously on geography, size, revenue, profitability, price points, product characteristics and an assortment of institutional parameters around which sales forces and logistics operations have been mobilized. US academic Thomas Davenport and his colleagues were right when they observed that ‘. . . a Firm needs more than transactional data to gain [customer] insight’.8 Successful companies agree that the person behind the transaction must also be considered. We can better understand and predict customer behaviour by examining behavioural data along with the ­corresponding transactional data.9 Indeed, this is where knowledge ­management intersects with our interest in customer buying behaviours. Unfortunately, companies are relying too much on technology-driven ­transactional data alone, which leaves big gaps in their knowledge about actual customer behaviour. Something else is needed to fill this gap.

Confusion around segmentation Customer segmentation, together with the concept of product differentiation, are perhaps the two most fundamental concepts in marketing. No doubt you’ve encountered them in many different guises. Product differentiation is reasonably straightforward, but confusion is rife when it comes to segmentation and how it is best operationalized. The idea is simple: we need to group customers with common expectations, so that we can match service strategies to their unique (shared) needs. Each segment must be distinct, accessible and economically viable in size. Based on these guidelines your ability to dissect a market is only limited by the breadth of your imagination. But therein lies the problem. One of the earliest raw forms of segmentation used by enterprises was the classic one-size-fits-all approach; but this is the antithesis of segmentation. The attempt to standardize products and service offerings was born out of

· 43 ·

M02_GATT6818_03_SE_C02.indd 43

2/24/15 3:39 PM

Dynamic Supply Chains

a misguided desire to simplify internal processes for the sake of managerial convenience. A pity about the customers; they had no choice but to accept the limited products on offer – alignment was not even on the radar. The drive to ‘one-size-fits-all’ even has overtones of Procrustes, or ‘the stretcher’, who in Greek mythology ‘was a rogue and bandit from Attica who physically attacked people, stretching them, or cutting off their legs so as to make them all fit the same size iron bed’.10 Let’s hope your managers aren’t that committed! Far from a Procrustes-led revolution, however, we’ve seen increasingly sophisticated customers pressure companies to find solutions that fit their preferences, not the other way around. Consequently, some suppliers went to the other extreme and fell into the over-customization trap, where every customer was treated as unique.11 This type of segmentation led to further complexity and an even higher cost-to-serve. In reality, the compromise ‘80/20’ or ‘80 per cent solution’, where you will reach 80 per cent of your customers from 20 per cent of potential supply chain configurations, lies somewhere in the middle of these two extremes. You can create up to five possible but substantive behavioural segments, rather than one or many, to produce superior results. How do your sales and marketing teams target your customers? ­Generally, sales and marketing managers have developed a myriad of ways to divide their markets and allocate resources, and in particular, to organize their sales forces and supporting logistics functions. But they have paid scant attention to the mostly negative impact on back-office operations. Indeed, a real ‘disconnect’ continues to exist between the way market-­ facing personnel view customers and the information they communicate back to non-­market-facing personnel deep in the organization. Yet it’s fundamental that everyone inside the enterprise, who contributes to serving customers, directly or indirectly, should be on the same page. Despite advances in technology, we do not seem to have achieved this most basic level of common understanding. And while the search goes on at the frontend of organizations to find ever more subtle ways of understanding customers’ preferences,12 little or no work appears to be taking place to link this evolving understanding to back-office fulfilment operations. Sound familiar? I have actually achieved this connection with one of my clients using the P-A-D-I coding regime (explained in Chapter 1), plus a little internal training, to great effect.

· 44 ·

M02_GATT6818_03_SE_C02.indd 44

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

Recently, information technology researcher Gartner has been s­ pouting about ‘supply-chain’ segmentation,13 but starting from the seller rather than the buyer end, and focusing on which customers to target with what ­products. For example, at the 2012 Gartner Supply Chain Executive ­Conference, Chris Gordon talked about the ‘benefits [of] drilling down, with an eye toward understanding how products attract costs and which customers are the most valuable to the seller’.14 His idea is to ‘focus [your] resources on where you can get the best return’.15 This is surely putting the cart before the horse. And in any event we have long since given away the idea of ­dissecting segmentation into what is best for the supply chain, and separately, what is best for other parts of the business. The fact is there can only be a single holistic assessment of the customer: one that seeks to understand what their buying preferences are along all dimensions. The answer to this question will have implications for every function inside the supplier, individually and jointly. What appears to be confusing the issue even more are industry commentators calling for ‘supply chain segmentation’ when really it’s more a matter of segmenting customers first, from which you can then derive your segmented supply chains. The reverse approach does not hold true. Most enterprises will ultimately adopt a segmentation method of sorts to guide the design and operation of their supply chains. Unfortunately, in many cases, you pay your money and get what you deserve! We have compelling evidence from many research and consultancy projects during the past two decades that there is really only one ‘right’ way to group customers: behavioural segmentation. Perhaps one of the best early attempts at arguing the case for behavioural segmentation comes from strategic change researchers Phil Nunes and Frank Cespedes.16 They argued that customers have ‘escaped’ from conventional channels, and this is certainly true. But then again, we need to find faster and better ways of keeping abreast of the evolving, continuously learning customer. They identified four kinds of buyers, not unlike the ‘straw man’ I will present later in this chapter. However, in some respects they go too far too early in attempting to describe how the buying behaviours of the four kinds of buyers they identified vary across the five stages of a typical purchasing life cycle. Of course, this can (and does) occur in practice, but their approach introduces an unnecessary layer of complexity, which makes it more difficult to use in practice. Indeed, any new method of segmentation should be user-friendly, and this one is not. I agree with the notion that ‘unfettered customer behaviour is

· 45 ·

M02_GATT6818_03_SE_C02.indd 45

2/24/15 3:39 PM

Dynamic Supply Chains

inevitable’,17 but this is not necessarily bad, or something we should openly resist. Quite the contrary. The solution is to accept that knowledge-rich customers will inevitably find ways to access products and services by selecting from the increasing number of pathways or channels on offer. We can achieve true alignment if the customers are satisfied with this process. However, to get to this point, we must first develop a much deeper understanding of the internal cultural implications for all of the parties involved along these channels and corresponding supply chains. One company that has been very innovative in its segmentation is ­Diageo, the global producer of wines and spirits. Diageo introduced an extreme segment, serviced by its ‘super deluxe supply chain’, where a single bottle of whiskey can sell for $200,000, through their Johnnie Walker Houses in Shanghai and Beijing. According to Paul Gallagher, Diageo’s Asia-Pacific Supply Chain Director, ‘The Houses serve as an “embassy” for Johnnie Walker in Asia and bring us closer to our customers to provide unique and exclusive choices of our products, including bespoke customized blends of Johnnie Walker whiskey and packaging.’18 In our coding we would assess this segment as a very rare ‘DI’, a combination of extreme innovation and maximum brand loyalty. This particular customer segment is one of the 16 we originally identified to describe the full spectrum of buying behaviours observed in humans and is depicted in Figure 2.1 (see overleaf  ).

Moving away from one- and two-dimensional solutions Consider the supply chains that exist in your industry. How difficult would it be to shift towards using multiple supply chains to serve your different customer segments? And how effective? Where would you start? Let’s look at several approaches investigated by academics and commentators since the mid-1990s. Marshall L. Fisher was one of the first to define and explore the idea of multiple supply chains.19 He proposed classifying products based on their demand patterns and devised two main product categories – functional and innovative – each requiring distinctly different supply chains.20 He concluded that ‘. . . the root cause of the problems plaguing many supply chains is a mismatch between the type of product and the type of supply chain’. He

· 46 ·

M02_GATT6818_03_SE_C02.indd 46

2/24/15 3:39 PM

Customer Conversations: looking from the ‘outside-in’

‘Transactional’

‘Commercial’

‘Fair deal’

‘Relationship at a price’

‘Visionaries’

‘Innovation with a human face’

‘Innovative solutions’

‘Innovation at speed’

‘Partners’

‘Collaborative’

‘Demanding’

‘Dynamic’

figure 2.1 ◆

’Trying new things, together’ ‘Sharing innovation’

‘Solutions at speed’

‘Pragmatic/ project accumulation’

the 16 possible dominant behavioural segments: demand-side

Source: Gattorna Alignment research

suggested a matrix where functional products, such as everyday staples like bread, milk and petrol with mostly predictable demand, should be handled via an ‘efficient’ supply chain; and more innovative products, such as fashion apparel and electronic high-technology goods, would require what he termed a ‘responsive’ supply chain. In his estimation, problems arose when innovative

· 47 ·

M02_GATT6818_03_SE_C02.indd 47

2/24/15 3:39 PM

Dynamic Supply Chains

products were processed via an ‘efficient’ supply chain c­ onfiguration.21 Does this thinking ring true for your organization? I believe there are some flaws in Fisher’s framework. He assumes the demand patterns for so-called staple products will stay constant under all market conditions. But demand for any product or service can be unstable at times, so it is incorrect to imply that supply chains can be designed around a broad product classification, a type of ‘set-and-forget’ approach. Changing market conditions can and do influence demand patterns and effectively change staple products into different types of ‘products’ that are bought in very different ways. For example, under normal circumstances, Fisher might classify petrol as a staple product, exhibiting relatively predictable demand patterns among consumers. However, if there is even the sniff of a refinery strike, or an accident interrupts supply, consumers are likely to rush to petrol stations and pay whatever price is being asked at the pump to fill their tanks. In such a situation, the supplying oil company has to manage the unpredicted spike in demand differently from everyday demand for petrol. One example of this is Hurricane Sandy. When it hit the east coast of the USA in October 2012, ‘millions of people were without power for several days, and lines formed outside gas stations to purchase fuel for emergency generators and vehicles’.22 The Coca-Cola company provides another example. Coca-Cola exhibits different demand patterns when sold in volume through a supermarket outlet c­ ompared to when sold in smaller quantities via the local convenience store or a vending machine; and the corresponding supply chains for each channel are configured differently too. So focusing solely on the product and its ‘typical demand and supply characteristics’ is not the answer. You have to consider the combination of product category and the situation in the market at a particular time. Hau Lee, a Stanford University professor, developed a second approach when he sought to extend Marshall Fisher’s work in his paper, ‘Aligning Supply Chain Strategies with Product Uncertainties’.23 He proposed four types of supply chain strategies, which look very much like my own taxonomy of four supply chain types, namely efficient supply chains (equivalent to my lean), risk-hedging supply chains (equivalent to my fully flexible), responsive supply chains and agile supply chains (which taken together appear to be equivalent to my agile). He does not suggest anything equivalent to either my collaborative or campaign supply chain types.

· 48 ·

M02_GATT6818_03_SE_C02.indd 48

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

The framework he uses to develop his categorization of four supply chains involves matching supply uncertainty and demand uncertainty. This is the weakness in the framework because we have already concluded that the same products and services can be subject to different customer buying behaviours, which in turn will change their demand and supply patterns. David Simchi-Levi and his colleagues24 followed a similar operational logic when they endeavoured to assist Dell to determine the number of supply chain configurations it needed to meet fluctuating demand. They advised Dell to create multiple pathways to its various customers-markets where demand certainty varied, so that customer relationships could be classified along the continuum, from tight to loose. The solution appeared customer-centric; however, it was not rooted in fundamental customer buying behaviours. However, Dell was one company that had a lot of customer data it could use, mostly collected from customers who ordered online. Most of the business was configure-to-order (CTO), and customers were categorized as ‘Self Service Techie’, or ‘Micro Business Entrepreneur’, which in effect are buying behaviour labels. But further refinements were still required. For example: where are the collaborative customers in this regime, requiring and deserving of special attention? Where are those customers who want more innovation, and are prepared to pay for it? Where are the project customers who want delivery in full on time, every time? In reality they are not catered for. But an increasing degree of customization was being used by Dell at the time, perhaps too much, which also has its own downside. The truth lies somewhere in the middle, by defining a small number of behavioural segments. Real synergies come from achieving genuine alignment with each customer behavioural segment, which in turn will reduce complexity and increase synergies, naturally. So work remains to be done to convince corporates that they have to return to primary research, supported by secondary data. Lee’s model of four types of supply chains also lacks the all-important dynamic capability that we will discuss in more detail later in the chapter. His is more of a static representation at a point in time, which although a reasonable approximation of reality, is not close enough when product-market situations are changing rapidly. As an example, a small washer on a piece of capital equipment may be categorized as a staple by Lee, but it could become critical if it fails, thereby causing the machine to fail, malfunction or become unserviceable. In that circumstance, a customer’s buying behaviour

· 49 ·

M02_GATT6818_03_SE_C02.indd 49

2/24/15 3:39 PM

Dynamic Supply Chains

for the humble washer would surely move (albeit temporarily) from staple product (involving a lean supply chain configuration) to an emergency requirement (involving a fully flexible supply chain configuration) – extreme opposites. Lee seems to acknowledge the need for a more dynamic approach when he says that ‘. . . because of shorter and shorter product life cycles, the pressure for dynamically adjusting and adapting a company’s supply chain is mounting’.25 Perhaps this will be achieved, but in a somewhat different way to that which he originally envisaged. IBM also has a view on this vexed topic of multiple supply chains. Bill ­Gilmour, IBM’s global consumer products industry leader, argues that fast-moving consumer goods (FMCG) manufacturers need two ­supply chains to service their retail customers,26 i.e., mass production push (­equivalent to my lean) and something at the other end of the spectrum to handle unpredictable (pull) demand (equivalent to my agile). But he does not suggest how this might work. So there is no shortage of viewpoints on the topic. Consultancy Booz & Co. (now rebranded Strategy& under the PwC corporate umbrella) proposes what it describes as ‘tailored business streams’ for its contribution to the debate on multiple supply chains.27 Its view that ‘. . . the challenge for companies is not achieving a single point of focus, but rather about harmonizing multiple points of focus’,28 is well made. Booz’s research found that ‘Smart Customizers’, companies that aligned their market facing and fulfilment operations with customers, exhibited a 2:1 performance gap over those that did not. This is a significant finding and should accelerate the movement towards the multiple supply chain alignment that I am proposing in this book. A fourth academic to offer insights on this topic is Jonathan Byrnes of MIT; he acknowledges that three or more supply chains may co-exist in and between enterprises.29 Companies such as Walmart, P&G and Target are typical of those taking advantage of new supply chain information technologies, which are ‘becoming more capable of dynamic management, assigning the right product to the right supply chain at the right time’.30 His insights appear to be similar to those expressed by Fisher. But here too we should scrutinize where he places the most focus, and in this case Byrnes ­emphasizes what he calls ‘. . . an intelligent, precise supply chain IT system’.31 In recent blogs, Byrnes seems to be focused on what he calls ‘profit-based’ segmentation32 as a way of differentiating service, but here again this is looking at the effect rather than the cause of particular customer behaviours.

· 50 ·

M02_GATT6818_03_SE_C02.indd 50

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

Like other commentators before him, Byrnes is close, but not quite there! He too is skirting around the more fundamental issue of who is actually pulling and pushing products through supply chains in the first place. If we factor this additional (human) dimension into the equation we will have the ability to explain a lot more about how modern supply chains really work and how they should be designed for peak performance. Byrnes is right about one thing though, that ‘sooner or later, competitive pressures will force companies to employ dynamic, differentiated supply chains, because they will be accompanied by compelling first-mover advantages. The supply chain managers who start to create these systems now will lead their industries for a generation to come’.33 That said, we are still left wondering about the underlying mechanisms that will bring about this most desirable outcome! Another framework is offered by consulting house A.T. Kearney, which outlines a ‘. . . how-to approach for developing strategies that a­ ppropriately align with each supply chain’.34 Its 2004 paper, ‘How many supply chains do you need?’, uses a combination of customer-related and product-related variables to segment supply chains. Unfortunately, any early promise is unfulfilled as they follow a similar path to that taken by Fisher, again categorizing the type of supply chain by product category. As discussed, this works some but not all of the time, because buying situations inevitably change. The secret is to segment customers by their dominant buying behaviour and then consider what this means for the design and operation of the corresponding supply chains (‘outside-in’), rather than think in terms of segmenting supply chains from the ‘inside-out’. A subtle but important distinction. Another subtlety lost on most is that we are not setting out to segment supply chains per se. Rather, we are segmenting the overall market, and then using this information to design matching supply chain configurations. There is a world of difference. Janet Godsell, a researcher at Cranfield, provides yet another perspective.35 Godsell introduces the notion of ‘demand chain strategy’ that links demand fulfilment (otherwise known as the supply chain) with demand definition and creation (otherwise known as marketing). She sees demand chain management as ‘the crucial missing link between business unit, market, and supply chain strategy – that creates alignment around a common set of demand chain objectives to ensure that the demand chain meets the needs of customers and shareholders alike in the most efficient and effective way.’36

· 51 ·

M02_GATT6818_03_SE_C02.indd 51

2/24/15 3:39 PM

Dynamic Supply Chains

I am not too keen on the new terminology, but that aside, Godsell proposes a useful four-step process for developing demand chain strategy, as follows: 1 Set demand chain objectives. 2 This will drive market strategy, comprising a) relevant segmentation and b) customer value segmentation. 3 This sets up the supply chain process strategy, comprising a) supply chain drivers and b) differentiated supply chain process strategy. 4 It also sets up process enablers, such as organization design, performance management, and systems. This then feeds back into the demand chain objectives as an on-going interactive process. Her model is a useful introduction to alignment, with a few caveats; Godsell is primarily linking the market with supply chain processes. But I am proposing that there’s more involved here – internal capabilities such as culture and leadership must be addressed simultaneously if we are to align with our customers. More grist for the supply chain alignment mill. A more recent attempt at categorizing supply chains comes from Melnyk et al.37 But here again, there is only a very indirect reference to customers; their framework is still very much ‘inside-out’ in orientation. They talk about a blend of six properties, rather than a combination of unique supply chain configurations or hybrids. It’s just another dead-end in the search for enlightened design thinking which truly reflects customer expectations. Finally, Hernan David Perez identifies six generic types of supply chain types in the spirit of my own multiple alignment concept.38 And while they all look plausible, they have been derived via an ‘inside-out’ thought process, which is not rooted in the fundamental buying behaviours of customers in the marketplace. So the question remains: in what situation do we engage each type? And therefore how can we be sure we are indeed engaging the right strategies? Disappointingly, none of the above described perspectives seem to even hint at, let alone address, the underlying influence and power of organizational culture in either supporting or resisting ‘best laid plans’. In my view culture is the critical ‘missing link’ in our understanding of how supply chains really work in practice, and it is exactly this gap in current knowledge that we are addressing in this book.

· 52 ·

M02_GATT6818_03_SE_C02.indd 52

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

Fittingly, Dave Anderson, a former colleague and partner at Accenture, has the last word on the subject in his paper, ‘Quick-change Supply Chains’.39 He acknowledges that ‘most of today’s supply chains . . . are hard wired,’ which means ‘they accommodate only standard service offerings and have no ability to meet fast-changing availability or delivery requirements. Yet business success in the twenty-first century will increasingly demand quick-change supply chains.’40 His ‘quick-change’ supply chains are equivalent to my multiple (aligned) supply chains. The only thing left to do now is agree how this new philosophy can be implemented on the ground. We are not too far from success, and increasingly harsh trading conditions brought on by the 2008 global financial recession will provide the added incentive for many enterprises to find a way to jump any final hurdles. In my experience (in both advisory and research capacities), those parties in supply chains under the most pressure are the first to innovate, simply to survive. If successful, these ‘first movers’ receive most of the benefits from leading change, but very often the consequent costs of their innovations flow to the opposite end of the chain, depending of course on the balance of power at the time. This is akin to Darwinian ‘survival of the fittest’ in the business world.

The missing behavioural dimension At this stage we should remind ourselves of an important point made earlier (in Chapter 1): supply chains are not inanimate mechanical machines. Products and services only move from raw materials sources and production points and on to consuming markets because of human intervention. This can come from either outside the enterprise (customers, suppliers and third parties), or inside (company personnel and Boards). If it is true as we assert that a one-size-fits-all approach is no longer viable in a fast-changing world, we should be considering how many possible behavioural segments we need to organize our business around. The fieldwork I’ve conducted with my colleagues over the years has led us to identify up to 16 possible behavioural segments, as depicted in Figure 2.1. Incidentally, Joseph Cavinato41 also identified 16 different albeit discrete types of supply chains, mainly based on empirical observation. He mapped complexity (high-low) versus business impact (traditional-competitive

· 53 ·

M02_GATT6818_03_SE_C02.indd 53

2/24/15 3:39 PM

Dynamic Supply Chains

advantage) to derive his taxonomy, but this approach lacks conceptual depth and predictive capability, and does not cater for the required dynamism in the marketplace. While we identified as many as 16 behavioural variants, we do not have to allow for all these segments operating at the same time. In fact, we gathered empirical evidence that not only confirms the importance of human intervention in supply chains, but also brings to light some entirely new perspectives on customer buying behaviour. We gained four major insights, which are quite pivotal to the way we do business: 1 Customers always exhibit a small but finite number of dominant buying behaviours for any given product or service category, usually no more than five (to give an 80 per cent fit to the market). 2 The preferred dominant buying behaviours exhibited by customers can change temporarily under the pressure of external operating conditions, such as lifestyle circumstances, government regulation, or the product life cycle itself.42 But behaviours usually return to the preferred position when conditions return to ‘normal’. 3 When a permanent change is observed, it is usually the result of a change in the customer’s own internal decision-making unit (DMU). 4 Finally, it is not unusual to observe more than one buying behaviour inside a large corporate customer, where different groups are involved in buying different product or service categories at different times. The changeability of dominant buying behaviours is probably the ­phenomenon that Nunes and Cespedes were attempting to explain when they described how buying behaviours vary during different stages of the purchase life cycle.43 But changing behaviours during a purchase is not equivalent to the observed phenomenon of changing buyer behaviours under severe market pressures. Significantly, they appear to agree with my position when they comment that ‘buying behaviour also depends on the shopper’s particular circumstances (and) a buyer wears different hats at different times’.44 Coupled with these insights, we can now make two further observations: 1 People often exhibit a mix of preferred dominant buying behaviours depending on the product or service category they have in mind at the time. This means that an individual may display different buying behaviours for different product and service categories – a fact that

· 54 ·

M02_GATT6818_03_SE_C02.indd 54

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

has perplexed and confused market researchers and marketers for decades. 2 Customers do not distinguish between the outputs of different internal departments (or functions) inside a supplier organization; they don’t say, ‘the sales force is good but logistics fulfilment is poor’. Customers are very binary in their outlook and see service as simply good or bad – with little in between. Can you now see why aligning with customers as they continuously learn and evolve their hierarchy of values is so difficult? Clearly, segmenting supply chains according to customer buying behaviours is a dynamic phenomenon. It is like trying to hit a moving target rather than seeking an all-embracing descriptor of a stagnant customer type, which is where previous efforts at ­aligning with customers have erred. From this point it is only a small step in logic to move from the broad concept of dynamic alignment, as depicted in Figure 2.2, to the practicalities of multiple supply chain alignment shown in Figure 2.3.

Dynamic alignment business model

Business processes

Leadership style

Culture

Strategy

Customers and Marketplace

Technology + Infrastructure

Business Enterprise

Figure 2.2 ◆

Strategy = The ‘bridge’ between the market and the enterprise

Market

Dynamic alignment business model – from a supply chain perspective

Source: Adapted from Figure I.2 in Gattorna (2003), p. xiii; see also Gattorna (1998), p.5; and Gattorna (2006), p.16

· 55 ·

M02_GATT6818_03_SE_C02.indd 55

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 56 Strategy

Service proposition

Service proposition

Service proposition

Service proposition

Service proposition

multiple supply chain alignment: customer-side

Cultural capability

Leadership styles

Collaborative SC

Lean SC

Agile SC

Campaign SC

Fully flexible SC

Source: Adapted from Figure 4.3.2 in Gattorna (2003), p. 459; and Gattorna (2006) Figure 2.1, p. 40

fi gu re 2 .3 ◆

Subculture

Leadership

Subculture

Leadership

Subculture

Subculture

Leadership

Leadership

Subculture

Leadership

Finding the linkages is key to supply chain design

Buying behaviours

dYnamiC supplY Chains

· 56 ·

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

Leading enterprises are already using the idea of multiple supply chains in different formats. For example, Inditex has a multiple supply chain strategy based on its various store brands. Zara is the best known brand in its portfolio, but other companies in the Inditex portfolio that are aiming at specific customer layers in the market are becoming more familiar, e.g., Massimo Dutti, Pull&Bear, and Bershka. Dell too, one of the most wellknown supply chain innovators, is also developing a menu of supply chains to service each of its institutional markets, i.e., small to medium businesses, the public, and large enterprises like government and education, and the consumer. Even health authorities are getting the message. In Australia, hospitals in Melbourne and Sydney have started to separate ‘emergency’ surgery cases from the more predictable ‘elective’ surgery. Patients are no longer competing for beds, operating theatres and staff.45 Unilever North America has completely embraced the idea that multiple supply chains are essential for future success. In its Supply Chain 2010 project, Unilever ‘. . . recognized that one size does not fit all, and that the ‘right’ supply chain model would require the integration of many supply networks linked through organizational structure, a common back-office infrastructure, and common ways of working’.46 Our work with Unilever in Indonesia, where the company is heavily involved in servicing the Modern Trade,47 has led to a significant improvement in their supply chain alignment, and has resulted in a corresponding improvement in their margins in key categories. (More about the specifics of this proof-of-concept project in Chapter 9.) Based on the success of this work, similar initiatives are being rolled out globally. Interestingly, Unilever has also adopted the multi-functional customer-facing teams that I will be proposing later (in Chapter 6), where supply chains with different configurations start to emerge around the most commonly observed behavioural segments (see Figure 2.4). Even though there are many combinations and permutations of ­possible behavioural segments, in my experience the five-segment supply chain portfolio depicted in Figure 2.4 is evident in markets as diverse as petrol, legal services, travel, dairy products, third-party logistics services and financial planning; note the equal emphasis on services as well as products. The ‘project accumulation’ segment is a new addition to my earlier identification of four main buyer behaviours.

· 57 ·

M02_GATT6818_03_SE_C02.indd 57

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 58 ◆

◆

◆

◆

◆

◆

◆

◆

◆

demand Commodity relationship Time priority/urgency Opportunity focus Ad hoc source of supply Low loyalty, impersonal Fewer processes Outcome oriented Commercial deals based on pragmatism Price aware

◆ Unpredictable

the five most commonly observed dominant buying behaviours

◆

◆

◆

◆

◆

◆

◆

◆

◆

within contract Regular delivery Efficiency, low-cost focus Multiple sources of supply Little sharing of information More adversarial Standard processes Power imposed Transactional Very price sensitive

Dynamic Rapid response to unpredictable supply and demand conditions

Source: Adapted from Table 1.3.1 in Gattorna (2003), p. 32; see also Gattorna (2006), p. 41

fi gu re 2.4 ◆

◆

◆

◆

◆

◆

◆

supply Trusting relationship Teamwork/partnership Information sharing Joint development Forgiving Price not an issue

◆ Primary source of

products

◆ Mature or augmented

◆ Regular delivery

◆ Predictable demand

Consistent low-cost response to largely predictable demands

Close working relationships for mutual gain

◆ Mostly predictable

Transactional

Collaborative

◆

◆

◆

◆

◆

◆ ◆

◆

◆ ◆

◆

deliveries Stock reservation system Completed deliveries Expedite if necessary Accumulation off-site Standard processes Special packaging Special transport if necessary Fixed price Delay avoidance Risk migration (liquidated damages) Systematic and detailed supervision

◆ Time-specific

Delivery to project site on time and complete

Project accumulation

demand

◆ No price sensitivity

◆ Incentives/ego

◆ Management of IP

◆ Solutions oriented

making

◆ Individual decision-

◆ Rapid change

◆ Innovation focus

response

◆ Flexible delivery

◆ Higher risk

◆ Very unpredictable

Supplier-led development and delivery of new ideas

Innovative solutions

dYnamiC supplY Chains

· 58 ·

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

It is worth repeating that there are particular types of behavioural groupings where customers naturally reside, but customers can and do switch between buying behaviours according to situational pressures. Also, it is not uncommon in large complex organizations to find evidence of more than one buying behaviour present, although mostly in different timeframes or situations, e.g., the different ways Nestlé buys a range of dairy ingredients from its New Zealand supplier, Fonterra. For some products, Nestlé prefers to push on price; for others there is a preference for a particular product specification, at a premium. At this stage we are in a position to make two further observations: 1 In segmenting customers, geography has little impact on the range of dominant buying behaviours present; the only thing that changes is the proportional mix of these same buying behaviours. 2 Similarly, the only change from country to country is the proportional mix of the same segments.48 When you think about this it makes sense, unless of course we are dealing with extra-terrestrials! Often, too much is read into the potential impact of different national cultures, when really we should be emphasizing the similarities. Of course, there are many nuances that can be read into the segments in different county markets, so we will look more closely at this issue now.

Nuances, and more nuances in customer segmentation Nuances are a bit like great artworks – you know them when you see them, but they’re so difficult to describe! Nuances are difficult to encapsulate because they’re about people, and about people in different cultures. As we move across country borders and encounter different country cultures, you begin to realize just how vexed this topic of customer segmentation is for global organizations. As indicated earlier, in our work for Schneider Electric in the Pacific and China, the array of behavioural segments identified were very similar, but the proportional mix was quite different, and so were the nuances. For example, in the Pacific, what we thought initially was largely a transactional customer base in terms of demand pattern, turned out to be more likely that encountered in the dynamic behavioural segment; this conflict between stability and agility led to conflict in the operation itself. However,

· 59 ·

M02_GATT6818_03_SE_C02.indd 59

2/24/15 3:39 PM

Dynamic Supply Chains

once we undertook the primary research in the marketplace for electromechanical products and equipment, things became a lot clearer. It led us to conclude that both lean and agile supply chains were needed, and in some special cases of important relationships with distributors, we could see the need for a collaborative configuration. In addition, given the way the market in the Pacific was shifting towards more project work, we identified the need for a ‘dedicated projects’ or campaign supply chain, and a dedicated service supply chain as well. In the case of China, our initial expectation was that the core buying ­behaviour was transactional, serviced by a predominantly lean supply chain, supplemented by a service supply chain which was responsive to ­customers’ needs. However, following our fieldwork we identified a predominantly ­‘projects’ buying behaviour across the board, that has to be satisfied with a c­ ampaign-style supply chain configuration. On top of that we found evidence of dynamic (agile supply chain), transactional (lean supply chain), and some collaborative ­relationships among large distributors (collaborative supply chain). Based on this more granular view of the customer segments in both geographies, we were able to design a more finely tuned mix of supply chain configurations to achieve the desired alignment with the respective customer bases. Understanding the nuances was key to this, but it did not drive our approach in the sense it was not primary in our thinking. Our belief in ­customer behaviour remained unchanged.

From spaghetti bowls to conveyor belts – a dynamic perspective Our conclusion from all of this research and field experience is that five discrete supply chains (or conveyor belts) run through enterprises, just like the central nervous system in humans. Each has different configurations and operating characteristics, achieved by combining largely standard processes and activities in unique ways. The supply chains (front and back) may themselves combine in different ways, e.g., agile with lean, collaborative with agile; but more about these hybrid combinations in Chapter 13. The combination of up to five coexistent supply chains is depicted in Figure 2.5. Obviously, variations around these five ‘generic’ types can and do exist, but in my experience these are the ones most commonly present and therefore deserving of our further attention.

· 60 ·

M02_GATT6818_03_SE_C02.indd 60

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 61

Campaign Has elements of lean and agile supply chains in particular, plus expediting capability via fully flexible supply chain. Focus on delivery of products and equipment to site in full and on time.

Fully Flexible Respond opportunistically and manage yield. Focus on providing creative solutions for premium price.

Agile Unplanned or unforeseen demand, and a sometimes loose relationship with customers – almost always demands an agile response at higher cost-to-serve. Focus on the service–cost equation.

Low

Fully Flexible

The five generic supply chain types: demand-side (supplier perspective)

Source: Originally adapted from Figure 2.3 in Gattorna (2006), p. 43

F igur e 2.5 ◆

Agile

Predictability of demand

Campaign

Collaborative

Lean Lean Demand predictable (e.g., from historic off-take), but the loose relationship does not necessitate an extremee Loose service level. Focus on High efficiency.

Relationship with customer

Collaborative Predictable demand, easily managed through tight collaboration with customers. Tight Focus on retention of customer relationships.

Customer conversations: looking from the ‘outside-in’

· 61 ·

2/24/15 3:39 PM

Dynamic Supply Chains

A note before we go on. As much as possible, I’ve chosen to label the five generic supply chain types with existing names, e.g., in particular, lean and agile. Why? The literature already has too much different terminology without my adding further to the confusion. However, having said that, I need to briefly explain where my definitions of these terms vary from existing interpretations: ◆

Collaborative supply chain: this one is quite straightforward. To work properly, it requires genuine collaboration with customers, and suppliers, as simple as that.

◆

Lean supply chain: my definition of lean varies from existing usage in that I do not think lean necessarily involves collaboration with customers; that’s why we have collaborative. However, it may involve some pull ­component via collaboration on the supply-side. But my definition of lean and the traditional definition both involve push into the marketplace, and a focus on efficiency by removing waste wherever possible. But lean still requires some external view in order to develop and align the ­appropriate value propositions with customers. However, we should not be trying to convert all customers to a collaborative buying behaviour mind-set – that is plain wasteful, and simply does not work. So the subtlety here is that lean is not completely internal in its orientation. Marks and Spencer ­misguidedly tried to go lean in the late 1990s, but this approach did not align with its customers’ value set – so they got it wrong and failed. In fact, adapting to the customer’s value set is a key consideration at all times. Lean works well when it fits the value proposition of customers with low cost, price sensitivity and efficiency at their front of mind.

◆

Agile supply chain: this means responsiveness to customers in ­unpredictable demand situations; it is all about pull. Customer pull. And it can be achieved in various ways. However, the appropriate agile response almost always involves building in redundant capacity (or ­buffers) along the supply chain – in the form of inventory, labour, ­procurement, production capacity and transport assets.

◆

Campaign supply chain: this configuration is designed to fulfil the ­demanding service conditions that surround projects, big and small. ­Suppliers of products, assemblies and engineered-to-order (ETO) ­equipment must manage the staging and timely delivery to project sites in a completely different way to the usual way discrete products are ­delivered. Campaign s­ upply chains also have to manage what is by ­definition a very lumpy business.

· 62 ·

M02_GATT6818_03_SE_C02.indd 62

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

◆

Fully flexible supply chain: this is an extreme example of an agile ­supply chain. Indeed, some would argue that this is not a freestanding ­supply chain type in itself, but rather a ‘must have’ competence that can be engaged as and when customers require extreme solutions. Whatever your point of view on this, it is important to possess this competence for business ­continuity in crisis situations – and they do arise from time to time! As such, it might involve a small group of highly skilled and ­entrepreneurial people being available on a stand-by or emergency basis. General ­Electric has its product incubator, which probably doubles, in part at least, as its fully flexible capability. The thing to remember about this type of ­supply chain is that the supplier always leads the market in search of ­break-through i­nnovative solutions; customers count on them for this. In every other situation, c­ ustomers lead the way and have their say. In this respect, GE doesn’t disappoint. As part of a $3.5 billion investment in its aerospace supply chain, ‘GE says it will spend tens of millions of dollars to invest in new technology and, over the next five years, triple the size of its 70-­person 3-D-printing staff and expand its ­factory floor four-fold. (The 85,000 ­nozzles are for engine orders that will enter full production in late 2015.)’49

Can you see the internal capabilities that your Firm needs to configure all these supply chains? The abiding challenge facing enterprises of all types is flex, i.e., the ability to have each supply chain capability compartmentalized inside the business, and have enough flexibility to switch between parallel ­supply chains to keep abreast of the shifting marketplace. Thankfully, in ­reality this shift is never very fast – it just seems that way when you are caught by surprise. In fact, it is a bit like watching grass grow if you are alert to what is happening out there! So facilitating easy switches between the four mainstream supply chains, with the fifth on standby, is the type of dynamic we are suggesting. It’s this more dynamic view of how supply chains serve the marketplace that differentiates the ideas in this book from other current literature on the subject. Each of the five types of supply chain depicted in Figure 2.4 may be characterized as ‘laminar’ flows in a pipeline, essentially a streamlined flow of different layers. The laminar-like stream, illustrated schematically in Figure 2.6,50 is shaped by a combination of customer buying behaviours and internal culturedriven behaviour. The management of complexity will reduce significantly if the behavioural segment-driven regime suggested here is adopted. This is

· 63 ·

M02_GATT6818_03_SE_C02.indd 63

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 64

‘Collaborative’ Very predictable demand from known customers; easily managed through tight collaboration with these collaborative customers.

‘Lean’ Regular pattern of demand, quite predictable and forecastable; although may be seasonal. Tend to be mature low-risk products/services.

‘Agile’ Usually unplanned, at least until the last possible moment. May result from promotions; new product launches; fashion marketing; unplanned stock-outs; or unforeseen opportunities.

‘Campaign’ Irregular, but planned, sometimes months ahead. The task is to ensure all components are accumulated and delivered together to site at a predetermined date/time.

‘Fully flexible’ Unplanned and unplannable demand due to unknown customers with exceptional, sometimes emergency, requests.

Types of supply chains

flow types and matching supply chain types

◆

◆

◆

◆

◆

Source: Adapted from Figure 2.4 in Gattorna (2006), p. 46

f ig ure 2 .6 ◆

Base

Semi-wave

Surge

Project

Cavitation

Flow types

Customer segments

dYnamiC supplY Chains

· 64 ·

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

quite the opposite effect to that experienced where so-called standard processes (and standard technology) are implemented across the entire enterprise. This leads paradoxically to increased complexity and higher cost-to-serve, because of all the exceptions created along the way. If organizations are predominantly designed to deliver one type of value proposition, and the marketplace contains, say, five dominant types of customer buying behaviour, then the degree of alignment will be very limited, and the organization will find itself continually making costly exceptions. The conclusion: complexity is significantly reduced through deployment of dynamic alignment principles. Flexibility is increased when alignment conditions are fulfilled. There is a lot said about flexibility and the need for organizations to be more agile and adaptive in the fast-moving world of the third millennium. However, flexibility is not about having one offer, and then creating a myriad of exceptions to achieve ‘fit’ with customers; that’s far too expensive and does not deliver the required service levels on a sustainable basis. Genuine flexibility can only be achieved through multiple alignment. The organization must be ‘hard-wired’ to a limited number of customer segments via a ‘hybrid’ organizational structure and a unique combination of processes and corresponding technology applications. Then, if customers change their buying behaviours under the pressure of new operating conditions in their respective markets, it simply means they move to another of the previously identified dominant buying behaviours for that particular product or service category. They are thereafter serviced in the pre-defined way for that segment. This is flexibility without the corresponding cost penalty. In business-to-business (B2B) situations, it is possible that a given customer organization will exhibit all five of the identified buying behaviours at different times; this is quite normal and relatively easily managed once understood. Figure 2.7 shows the details of each combination of supply chain–value proposition–customer buying behaviour. Alignment of the appropriate value propositions with customers’ true needs and expectations significantly improves operating and financial ­performance for several reasons: ◆

It is easier to focus on consistently fulfilling customer requirements ­(better service).

◆

It is easier to put an appropriate price on ‘value added’ supply chain services (improved margins).

· 65 ·

M02_GATT6818_03_SE_C02.indd 65

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 66 ◆ ◆ ◆ ◆

‘Collaborative’ Close working relationships Mostly predictable demand Relationship focus Loyal

◆ Efficiency focus ◆ Price sensitive

largely predictable demands

‘Transactional’

‘Dynamic’ Rapid response to uneven demand Urgent delivery focus Lower loyalty Price aware

‘Project accumulation’ Delivery in full to site Stage if necessary Delivery in specified time window Expedite if necessary

◆ Consistent responses required to

◆ ◆ ◆ ◆

◆ ◆ ◆ ◆

◆ Low sensitivity to price

products and services

‘Innovative solutions’

Customer segments

◆ Unplanned and unplannable demand ◆ Require innovative solutions in

aligned supply chain ‘value propositions’

Focus on developing loyal customer relationships with trusty and reliable service

‘Collaboration zone’

Focus on economies of scale, synergies and lowcost production and delivery

Focus on responding rapidly and commercially to unpredictable supply/demand conditions

Focus on delivery in full of all products and equipment, to site at a specific date/time

Hedging and deployment strategies used to improve responsiveness on a selective basis

Aligned value propositions

Source: Adapted from Figure 7 in Christopher and Gattorna (2004), p. 120; see also Figure 2.5 in Gattorna (2006), p. 48

fi gu re 2 .7 ◆

Collaborative

Lean

Agile

Campaign

Fully flexible

Supply chain types

dYnamiC supplY Chains

· 66 ·

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

◆

It allows advanced functional excellence to be brought to bear in high value segments, e.g., collaborative planning within the collaborative behavioural segment.

◆

It facilitates functional excellence in lower value segments, e.g., reduced cost-to-serve.

◆

It allows better management of opportunistic business in the ‘Dynamic’ and ‘Innovative solutions’ segments, leading to increased revenue and margins.

◆

It allows the development of new service offerings resulting from c­ ontinuous innovation across all supply chain types, e.g., increased revenue.

Zara – genuine dynamic alignment in practice It is rare to find a company that demonstrates the benefits of alignment as well as Zara, the Spanish fashion retailer and manufacturer.51 Zara is a superb example because its business brings almost every facet of alignment and supply chain principles into play. It is a powerful reminder that good performance flows from a combination of many factors. Of course, Zara mainly sells womens, mens and childrens fashion apparel, a ­segment that will always be demanding because demanding consumers are involved. Zaras decision to focus mostly on a segment with a single type of dominant buying behaviour [Pa] means it has a relatively easier task in designing the appropriate supply chain configuration. And it has done just that with distinction. Zaras amazing agility could even encourage it to move into adjacent, less fashion-oriented markets for apparel, competing with the likes of British retailer Marks and Spencer. Zara would have an immediate advantage if it did so, as it could easily work inside the current Marks and Spencer decision cycle-time (from design to store shelf), in the process winning more customers for lower-priced, less fashionable apparel. The success of Zaras agility is demonstrated in its ability to move quickly from ‘sketch to store’ in 15 working days, resulting in the customers perception of their stores as always having fresh product. In contrast, Marks and Spencer has a more traditional supply chain for textiles and apparel, with cycle times of up to a year. Marks and Spencer release only two major clothing collections each year: Spring/Summer and Autumn/Winter, and consumers lie in wait for the inevitable markdowns and clearance sales.

· 67 ·

M02_GATT6818_03_SE_C02.indd 67

2/24/15 3:39 PM

Dynamic Supply Chains

‘Triple-A’ supply chains are not here yet The good news is that the idea of aligning your supply chains with customers, suppliers and third-party logistics providers (3PLs) is intuitively attractive and catching on fast.52 In fact, we seem to be hearing all the right rhetoric lately. But few if any enterprises have joined all the dots and fully understood what is involved in engineering an aligned supply chain. We are at best still in a world of experience and observation, and still some way from a comprehensive theory to guide us into the future. Hau Lee comments that ‘most firms already have the infrastructure in place to create Triple-A supply chains. What they need is a fresh attitude and a new culture to get their supply chains to deliver Triple-A performance’.53 By ‘Triple-A’ he is referring to the three properties – adaptiveness, agility and alignment – that enterprises need to exhibit in their supply chains. I will put a different spin on this proposition, because you can’t have all three of these characteristics present in a single supply chain configuration. Achieving superior performance is easy to say but difficult to achieve when most organizations still have such a poor understanding of how cultural capability underpins all action on the ground in some way or other. We must work to design and embed the appropriate subcultures in the organization to reflect the customer segments (otherwise called external subcultures) that are present in a particular market. It simply will not happen by chance. The ideal mix is the 45/20/35 proportions (described in Chapter 1) – ­commit 45 per cent of your effort to human behaviour, 20 per cent to systems technology and the remaining 35 per cent to asset infrastructure. Unfortunately, we still seem to be stuck in the ‘old’ 0/60/40 groove, with zero emphasis on human behaviour and 60/40 on technology and infrastructure. Other researchers have taken different routes towards alignment,54 and some have even tried to use the alignment concept to help anticipate market trends.55

Beyond institutional segmentation in real life One of the most common ways that enterprises segment their markets is along ‘institutional’ lines, because it is easy and convenient. Data is easily collected on recognizable institutions. Sometimes whole channels are built around specific institutions. For example, a reorganization at the Australian

· 68 ·

M02_GATT6818_03_SE_C02.indd 68

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

brewing company, Foster’s Australia, resulted in the introduction of a new service model.56 The sales force was split into dedicated teams servicing 14 different channels, made up of customers grouped by institutions such as hotels, nightclubs, five-star hotels and resorts, restaurants, national retailers and independent liquor stores. This institutional channel model was expected to take three to four years to implement, involve an overall increase in the number of staff serving customers, and reduce supply chain costs.57 Almost a decade has passed since then, so it’s useful to return and look at the result: did the lower costs flow as expected and more importantly, did revenue climb faster than incremental costs? Not long after its initial announcement, Foster’s divulged more about its plans,58 and signalled to the market that it would pursue a ‘Blue Ocean strategy’,59 which involved making multi-beverage offerings to the 14 institutional segments identified in the Australian market. The better news was that Foster’s had gone further and reorganized the 14 institutional segments into four behavioural segments – integrated, destination, local and connect. On the basis of available public information and previous work in the beverage industry, I’ve interpreted what each of these four new segments might look like. See Figure 2.8 for a summary of their characteristics. The Foster’s strategy is truly breakthrough thinking, with dedicated customer-facing teams focusing on each of the four segments, and those in logistics fulfilment roles delivering differentiated service to match. Some method of coding customer behaviour will be required to help people working in these back-of-shop operations to stay in synch with the responses required by customers. Fortunately, this level of management sophistication is well within reach with current technology. However, this is where the innovation has hit a speed bump. The success of the Foster’s transformation has since been significantly constrained by the company’s well-publicized difficulties in integrating its global wine b ­ usiness into its overall beverage business, particularly in the USA. This ambitious strategy to integrate the two businesses, and do it globally, weakened the company and ultimately led to a takeover by SABMiller in December 2011. Since then the company has been more focused on reviving some of its iconic brands rather than implementing a new supply chain design;60 we shall have to wait and see the result of Foster’s supply chain vision under the new ownership. Ultimately it’s all a question of ‘packaging’. Customers in the different segments are all buying beer, but they are buying it in different ways and

· 69 ·

M02_GATT6818_03_SE_C02.indd 69

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 70 ◆

e.g., small and remote customers; not buying direct

◆ Some

e.g., fine dining restaurants; casinos; resorts; theme parks; 5-star hotels

Connect*

Clubs, restaurants, cafés, bistros

Small volumes Special solutions ◆ Specific delivery arrangements ◆ Creative sales and logistics arrangements ◆ Small volumes ◆ Value-for-money ◆

Night clubs, casinos

volumes unpredictable in demand ◆ Regular orders ◆ Difficult delivery locations ◆ Pack presentation important ◆ Premium/value-adds ◆ Price aware ◆ Variety important

◆ Small

Destination*

National retailers

behavioural-based segmentation in the australian alcoholic beverage industry

Source: Adapted from Figure 2.6 in Gattorna (2006), p. 51

figure 2.8 ◆ foster’s

* Segment names selected by Foster’s.

◆ Standing

e.g., major retailers; Coles; Woolworths

◆ Difficult

e.g., suburban hotels and bottle shops

◆ Large

Integrated*

Typical institutional segmentation

volumes orders ◆ Straight forward regular deliveries ◆ Relatively high stock levels ◆ Price sensitive ◆ Appropriate promotions

5-star hotels

volumes delivery locations ◆ Merchandising support ◆ Limited space ◆ Tight finance ◆ Stable demand ◆ Certainty of supply ◆ Regular orders ◆ Price sensitive ◆ Relationship important

◆ Small

Local*

Suburban hotels and bottle shops

ILLUSTRATIVE

dYnamiC supplY Chains

· 70 ·

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

different product mixes, pricing, response times, quantities and relationship requirements. What Foster’s must do is find correspondingly appropriate ways to align internal resources with these multiple customer requirements via a limited number of cost-effective supply chain configurations. Other examples of this phenomenon are provided in Figures  2.9 and 2.10. In Figure 2.9 we see the Coca-Cola company selling and delivering to three types of customer (institutional) segments, all with differing service requirements. In terms of the fulfilment part of the operation, the logistics or supply chain infrastructure has to be capable of delivering three discretely different responses. Figure 2.10 shows the customer segments used by Scholastic, a publisher of children’s books. Here again, each of the three behavioural segments has distinctive service priorities, requiring correspondingly appropriate supply chain responses. Management must overcome conventional mind-sets in order to deliver this multidisciplinary capability. Two other examples of multiple supply chain alignment in different industries are provided below in Figures 2.11 and 2.12. In the healthcare industry, four types of supply chains are necessary to carry all the supplies consumed in public hospitals. And, as already intimated in Chapter 1, major processed food manufacturer Goodman Fielder Ltd also needed a similar number of supply chains for its FMCG business in the Asia-Pacific region. Unfortunately, this design was never fully implemented because of a combination of internal resistance from business unit executives and subsequent changes in leadership at the top of the organization. However, for those who prefer institutional segmentation, all is not lost; there is of course a connection to behavioural segmentation as depicted in the example below in Figure 2.13. This example draws on our fieldwork at Schneider Electric in China, and shows how the two segmentation regimes are compatible. Down the left-hand axis of Figure 2.13, we have classic institutional segments such as End Users, Systems Integrators (SI), Original Equipment Manufacturers (OEMs), Panel Builders (PB), and different levels of Distributors. These are some of the ‘institutions’ that Schneider sells to in China and elsewhere in the world. Each institutional segment is then divided into the proportions of the different behavioural segments present in each, e.g., Cooperative [IA], Commercial [Ap], Pragmatic/Projects [PA], and Dynamic [Pa]. This research confirms that within each institutional segment

· 71 ·

M02_GATT6818_03_SE_C02.indd 71

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 72

the three different supply chains at Coca-Cola, Japan

Source: Dynamic Supply Chains (2010), p. 60

fi gur e 2. 9 ◆

– Coordination – Warehousing – Inventory management

◆ Distribution:

Regular representation Automatic order receipt Time definite deliveries Cost efficiency

Multi-level relationships Proactive order collection with assistance Driver stows stock and merchandises

‘Lean’

‘Supermarket’

Consistency Highly reliable Regular deliveries Predictable

‘Collaborative’

‘Mom & pop stores’

Stable, long-term relationship High levels of support Merchandising Help with billing

Shared logistics infrastructure (capable of multiple responses)

Segmentfocused activities

Service priorities

Customer segments

and administration

◆ Marketing

◆ Finance

◆ Manufacturing

On-call representation Low-stock alert system Full-stock vehicles with on-road flexibility Quick response

Short lead-time Flexibility Responsive service Telemetry

‘Agile’

‘Vendor refill machines’

ILLUSTRATIVE

dYnamiC supplY Chains

· 72 ·

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 73

Single point of contact Multi-skilled After sales service In-depth customer knowledge

Uncomplicated order procedure Assistance with order process

Uncomplicated order procedure Assistance with order process Packaging by class/type

Customer interface

Order processing

Physical fulfilment

Planned in regular intervals Order status availability Incentives for economic ordering quantity (EOQ)

High delivery accuracy Price availability Ease of order processing

Call centre Telemarketing eCommerce CRM capability

Performance excellence 100% satisfaction Quality

‘Campaign’

Next day delivery Quick response Highly streamlined returns process

Internet Quick response medium Order confirmation Real time availability

eCommerce Multiple outlets eCRM skills

Experience High expectations High service standards

‘Innovation at speed’

Source: Dynamic Supply Chains (2010), p. 62

the three main supply chains at scholastic, a children’s book publisher

Partnership and collaboration High moral and ethical standards

Service priorities

fi gur e 2. 10 ◆

‘Relationship at a price’

Customer segments

ILLUSTRATIVE

Customer Conversations: looking from the ‘outside-in’

· 73 ·

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 74

Food

multiple supply chains in the healthcare industry

Medical supplies

Agile supply chain

Lean supply chain

Wholesaler cross-docking

Flexible deliveries (mixed)

Radiology

Stores

Direct large volumes

Theatres

Labs

Source: Adapted from Appendix 2B.1 in Dynamic Supply Chains (2010), p. 418

fi gu re 2 .11 ◆

Pharmaceuticals

Supplier warehouses

Wards

Maintenance

Capital equipment

Fair deal supply chain

Collaborative supply chain

Domestic supplies

Scheduled deliveries major items

Engineering

Kitchen

Direct deliveries small and frequent

Pathology

Office

ILLUSTRATIVE

dYnamiC supplY Chains

· 74 ·

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 75

MeadowLea

Fresh/Fully Flexible

Milling & Baking Business units’ factories

Flexibility/Dynamic

Fresh daily (supermarkets, small retail and McDonald’s)

.....................

Bulk/Fair Deal

Bulk industrial

multiple supply chains in processed food manufacturer goodman fielder limited

Flow/Lean

Fast food chains Food service distributors Food processors Small industrial

Source: Adapted from Appendix 2B.2 in Dynamic Supply Chains (2010), p. 419

f ig ure 2.1 2 ◆

Uncle Tobys

Supermarket DCs

ILLUSTRATIVE

Customer Conversations: looking from the ‘outside-in’

· 75 ·

2/24/15 3:39 PM

Dynamic Supply Chains

ILLUSTRATIVE

End user Systems integrator OEM Panel builder Distributor type 1 Distributor type 2 0

10

20

30

40

50

60

70

80

90

100

Percentage of customer type in institutional segment IA

Figure 2.13 ◆

Ap

PA

Pa

Key: IA Ap PA Pa

Cooperative Commercial Project Accumulation Dynamic

Mix of behavioural segments in each institutional segment

Source: Gattorna Alignment research

there may be several behavioural segments, and for that reason must be serviced by a combination of the available supply chain types. Built into each supply chain type is the appropriate array of capabilities.

Researching and identifying behavioural segments There are five possible research methodologies that can be used to identify behavioural segments: 1 Top-down. This is where your organization taps into its accumulated ­internal knowledge of customers to develop a detailed map of ­customer segments. You would start by conducting an internal workshop and quickly developing a first approximation. This is consistent with the view of Chris Sanderson, co-founder of The Future Laboratory, that ­‘companies should leverage the knowledge of their staff, who have direct contact with customers, rather than contracting market researchers.’61 You can then refine the model progressively with other internal audiences,

· 76 ·

M02_GATT6818_03_SE_C02.indd 76

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

and finally validate the findings via primary research in the marketplace. When everyone involved is satisfied with the segment descriptors, another project team can allocate each customer to one of the pre-defined behavioural segments. After that it’s a simple matter to calculate the size of each segment in terms of numbers, volume and revenue. 2 Bottom-up. This involves your enterprise individually assessing each ­individual customer, bottom up. Staff would assess and code ­customers in P-A-D-I terms and aggregate them into segments based on the ­similarities of their respective codes. While this method can be ­somewhat time-consuming, the advantage is it provides an in-depth basis for ­segmentation from the start. 3 Direct interview. The other way of achieving the same result is to use a specially designed interview guide, starting with a few short telephone or face-to-face interviews to prove its integrity. We used this method in our research into the way Taiwanese companies preferred to buy ‘express’ services from transport providers such as DHL.62 The interview file should be updated each time there is an interaction with a customer and made widely available to personnel on the company’s intranet, which ensures customer tracking is ongoing. 4 Conjoint analysis. This fourth method involves undertaking sophisticated market research using conjoint analysis. In-depth investigation of the ­customer will deliver sound, timely and market-based information. However, except in special situations,63 the additional time and expense is not warranted for the extra degree of accuracy achieved. The first two methods will provide sufficient accuracy for the initial segmentation, and the third method in particular is useful for tracking customers on a continuing basis. This ‘continuous improvement’ approach will ultimately lead to an accurate picture of your customer base. 5 Data mining. The fifth and final method being used by some r­etailers and their suppliers is to seek ‘customer insight’ through the use of ­sophisticated data-mining techniques that involve analyzing point-of-sale (POS) data. Tesco in the United Kingdom and its suppliers are using this technique, combined with their loyalty card (Tesco Clubcard).64 We have used data analytics techniques in conjunction with one or more of the above four primary research methods. Figure 2.14 shows the entire research and design process used to date.

· 77 ·

M02_GATT6818_03_SE_C02.indd 77

2/24/15 3:39 PM

dYnamiC supplY Chains

Predictive

Customer interviews

Internal and data review

CUSTOMER PADI LOGICS

IDENTIFY KEY SEGMENTS

Buying behaviour

Includes: Business growth strategy

Customer expectations Service sensitivities Demand drivers

Cost and risk imperatives

DEMAND PATTERNS

Customer sales patterns

Status quo

Customer briefings Customer operational drivers Includes: Lead time drivers Availability sensitivity Stockholding drivers Value-added sensitivity Planning horizon

Design service offers and supply chains • xxxxxxxxx • xxxxxxxxx • xxxxxxxxx

• xxxxxxxxx • xxxxxxxxx • xxxxxxxxx

Tailored Common

figure 2.14 ◆

• xxxxxxxxx • xxxxxxxxx • xxxxxxxxx

• xxxxxxxxx • xxxxxxxxx • xxxxxxxxx

• xxxxxxxxx • xxxxxxxxx • xxxxxxxxx

Service offers Network

Network

research inputs to dynamic alignment supply chain design

Source: Gattorna Alignment research

Apart from the conventional research methodologies outlined above, we have started a research and development programme at Gattorna Alignment to develop the next generation of ‘market sensing’ tools that will form part of an integrated suite of tools designed to assess the degree of alignment/ misalignment between an enterprise and its customers and suppliers. This toolset will also have the capability to monitor customer satisfaction on a routine basis in between being used to assess shifts in the customer segments in particular target markets. This toolset will be tested on a number of ‘beta’ sites around the world in 2014–15, and should be ready to license by late 2015. Once you finalize a comprehensive re-segmentation of your customer base, it is important to take the opportunity to compare the ‘ value propositions’ and operational strategies currently in play with the ‘ideal’ strategies indicated by the new segmentation regime. More about this point in Chapter 3. One final word on this topic of customer segmentation, channels and supply chains. Very often suppliers, such as FMCG and pharmaceutical companies, have more than one customer or intermediary between them

· 78 ·

M02_GATT6818_03_SE_C02.indd 78

2/24/15 3:39 PM

Customer Conversations: looking from the ‘outside-in’

and their final consumer base. And it is more than likely that these will have different – even opposing – dominant buying behaviours at each level. Schering-Plough, the pharmaceutical company (since acquired by Merck Sharpe & Dohme in 2010), faced such a problem in the mid-1990s when it launched Drixine, an innovative topical nasal product for the decongestant market. Consumers were attracted to the product through Schering-Plough’s aggressive advertising, and sought-after the promised ‘quick fix’, e.g., quick relief; unblocked nose; convenient form; long-acting [DP logic]. However, many retail pharmacists were not prepared to stock the new product as they made a lower margin than on other competitive products [AI logic]. This misalignment is depicted in Figure  2.15. The task facing Schering-Plough was to overcome the inherent misalignment, and it did this through a series of initiatives involving promotions aimed directly at consumers via TV commercials, and promotional support for the pharmacists. These succeeded, because the weight of consumer demand soon forced the pharmacists to stock the Drixine product. Area health authorities have a similar problem when building and operating hospital facilities. Patients (end-users), nursing staff, administrators,

Standard products offering

Users/consumers Quick relief Unblocks nose Convenient form Longer acting/sustained Premium price

Standard relief Unblocks nose Standard utensil Shorter life Cheaper

Intermediary (e.g., retail pharmacy)

Profit/price/ margins Something that works Deals JIT supply Promo support

Misalignment

Suppliers of conventional treatments

Schering-Plough’s Drixine innovative new treatment

Suppliers

figure 2.15 ◆

misalignment in the topical nasal decongestant market

Source: Gattorna Alignment research

· 79 ·

M02_GATT6818_03_SE_C02.indd 79

2/24/15 3:39 PM

Dynamic Supply Chains

doctors, boards and government all have different ‘buying behaviours’. So the task of reconciling all the different mind-sets and expectations is a ­difficult one, even before operational fulfilment comes into play. We should not lose sight of this other dimension of the alignment problem.

Monitoring on-going alignment Once initial alignment is achieved, we need an easy, cost-effective method to monitor and maintain this highly desirable alignment condition. One very efficient way is to utilize outputs from the regular/annual customer satisfaction index (CSI) survey in order to detect any discernible shifts in buyer behaviours between segments over time. The CSI methodology measures customer expectations/values, and compares these to perceptions/opinions in order to measure the gap between the two. We are more interested in any shifts in buying expectations/values, as this would have an impact on buying preferences. The attributes that appear in each CSI analysis are ­subjected to a factor analysis, and grouped under a limited number of ­factors as ­indicated in Figure 2.16. These factors are in effect the logics as defined by our coding system described earlier. This example is taken from fieldwork conducted among DHL Express customers in the Nordic countries. In addition, once the attributes are identified and used in the survey of customers, performance gaps can be plotted on an Urgency versus Impact matrix to help prioritize ongoing action to improve the service satisfaction profile with customers. The CSI is therefore a much more useful tool than the net promoter score (NPS) that many companies seem to be wedded to, for inexplicable reasons. The main issue I have with the NPS is that it seeks to answer one question only, and can’t be used to directly inform the design and ­management of enterprise supply chains. Nor does the NPS adequately break down the level of satisfaction into individual attributes and groups of attributes (factors). All it measures is propensity for customers to stay loyal in the foreseeable future, based on their current opinions. The net satisfaction score (NSS) used by some companies is an e­ xtension of the NPS, and asks more questions, but mostly of a general nature, and all based on perception rather than expectations. Given that we are using ­customer insights to design and build long-term infrastructure, we can hardly do so based on opinion, opinion which could easily change next week!

· 80 ·

M02_GATT6818_03_SE_C02.indd 80

2/24/15 3:39 PM

M02_GATT6818_03_SE_C02.indd 81

Offer late-day pick-up

Have the ability to cluster work for more than one country

6

7

Price to fit value of the goods

Be cost efficient

Provide low-cost service

Reduce inventory holding costs

9

10

11

12

Be responsible for break bulk

Be reliable

15

16

Source: Gattorna Alignment research

Example of CSI survey outputs

Handle all transportation

14

Fi gure 2.1 6 ◆

Ensure shipment is correct every time

13

Factor: Responsiveness (25%)

Provide a flat rate

8

A/P

Advise immediately of any problems with the delivery

5

A

Be able to re-route deliveries if necessary

4

Factor: Value for money (35%)

91.0 80.0

Have the capability to handle a wide range of shipment sizes

3

90.2 89.1

88.3

91.3

93.5

91.0

89.5

91.7

87.0

90.1

93.7

90.4

91.5

91.8

92.2

92.8

93.9

91.0

94.2

92.5

91.0

90.4

92.5

Expectations total 91.5

87.2

78.0

94.0

86.9

76.5

80.4

80.2

82.5

80.1

79.9

89.0

71.0

78.2

85.0

Easy to contact in emergencies

2

80.5

Offer flexible pick-up arrangements

1

82.1

86.9

Factor: Responsiveness (25%)

Factor: Flexibility/responsive (40%)

79.9

Factor: Value for money (35%)

Perceptions total 82.5 82.1

D/p

Behavioural segment

Factor: Flexibility/responsive (40%)

Total Weighted Index

Customer Satisfaction Indices

–1.9

–1.9

–13.3

0.5

–4.1

–13.0

–11.3

–6.8

–7.6

–13.6

–10.5

–2.5

–20.8

–12.2

–1.8

–15.6

–6.0

–13.7

–10.4

–4.1

–10.5

–10.4

8.8

Gap total

INDICATIVE

Customer conversations: looking from the ‘outside-in’

· 81 ·

2/24/15 3:39 PM

Dynamic Supply Chains

The alternative method requires a lot of extra discipline across the Firm. You could install CRM software internally, linked to the company’s intranet, and use this to record every contact with customers, on each ­occasion ­checking if the original behavioural code is still valid, using a few ­carefully selected ­questions. If something is perceived to have changed since last ­contact, an attempt should be made to explain what has happened to change the ­customer’s segment position in the interim. In practice, this latter method is probably best confined to testing the existing list of relationship ­customers (Ia; IA) only, because they deserve the closer attention and is therefore time-consuming.

Optimal pathways to customers So what is your ultimate goal? You need to configure your total l­ogistics ­network and wider supply chain relationships so that you have the ­capacity to deliver an array of supply chain responses that align with the ­dominant ­buying behaviours of your customers. And you must do this in an ­increasingly competitive operating environment. This objective was amply demonstrated by Fletcher Challenge Paper, the major New ­Zealand based newsprint m ­ anufacturer, subsequently acquired by Norwegianbased ­Norske Skog. FCP was one of the first companies to link behavioural ­segmentation of its customers to its physical network, and subsequently test various ­service-cost scenarios using a network optimization model. The modelling prompted a range of possible responses. FCP could choose to do nothing; use price as a deterrent; or choose to amend contracts or change capacity. It gained ­significant new insights into the differences between each major customer/market, which were subtle but important. The ­company was able to ­customize its product and service offerings for individual ­customers. Based on a deeper understanding of the cost of serving different customers/markets, each ­segment was served more cost-effectively. ­Over- and u ­ nder-servicing was eliminated. FCP achieved cost savings of around NZ$10 million a year and, just as importantly, improved its margins while enhancing its relationship with customers. Through all the changes, ­customers felt they were being better served. It was win–win all round. Network optimization models of the type used by Fletcher C ­ hallenge Paper are very powerful, especially when linked to buying behaviour segments in the target market. Every enterprise should build one of these models

· 82 ·

M02_GATT6818_03_SE_C02.indd 82

2/24/15 3:39 PM

Customer conversations: looking from the ‘outside-in’

to enhance decision-making quality. Unfortunately, my ­experience is that ­relatively few companies understand the value of this type of ­decision-support tool, and fewer still know how to build one. More detailed information on these network modelling tools can be found in John G ­ attorna (ed.) H ­ andbook of Supply Chain Management (2003) and John Gattorna (ed.) Strategic ­Supply Chain Alignment (1998).65 A more recent example is that of Schneider ­Electric in the Pacific and China, which used this unique c­ ombination of ­behavioural segmentation and network optimization m ­ odelling to c­ ompletely re-design its supply chain footprint, leading to a significant reduction in o ­ verall ­cost-to-serve, while improving its lead-times customers.66 We also completed a similar model for the Western ­Australian grain handler/­marketing company, CBH Group, in mid-2014, this time using behavioural segmentation at both the supply end (5,000 farmers/growers, on 10,000 farms) and the demand/ customer end (100+ global customers). Results have been above expectations, with a more optimal network of assets identified at different harvest volumes; quantum improvements in the cost of operating the network under these different crop-size scenarios, end-to-end, from grower to port; and enhanced satisfaction profiles among farmers and customers alike.

Now the picture is almost complete By now you’ll understand why dynamic alignment of extended supply chains isn’t easy to achieve. Clearly, a lot of pieces must be engineered into position if alignment of the various internal and external stakeholders is to occur, leading to the desired boost in performance. However, the good news is that we now know much more about what pieces are necessary for alignment, even if we haven’t quite discovered how to orchestrate them to perfection. Later (in Chapter 4) we will address this knowledge gap and move ahead to the implementation of alignment principles on the ground. Significantly, this is the area where most other commentators have not dared to go, but it’s essential that we tackle implementation and understand more fully the cultural forces at work inside the enterprise. Success will raise our level of understanding several notches, from a descriptive albeit superficial level, to a more satisfying explanatory level. Taking that learning journey will give us far more predictive capability and get us closer than ever before to the Holy Grail – dynamic alignment of our supply chains.

· 83 ·

M02_GATT6818_03_SE_C02.indd 83

2/24/15 3:39 PM

Dynamic Supply Chains

Key ideas 1 There is only one ‘right’ way to segment customers: according to their dominant buying preferences and behaviours. 2 Supply chain configurations that lack a dynamic capability to ‘flex’ between different service delivery propositions will inevitably lead to service failures and reduced operational and financial performance. 3 For the best outcome, link behavioural segments at the customer end, and suppliers at the source end, with a network optimization model that allows a clear line of sight on the best cost-to-serve pathways through the network to customers. 4 Institute some sort of on-going measurement mechanism in order to detect early any significant shifts in the buyer behaviour patterns of your customers. This can be achieved in a number of cost-effective ways, and specifically by utilizing outputs of CSI-style surveys.

Your challenge What methods of customer segmentation are you using? If not the ­behavioural method suggested here, how effective is your adopted method in influencing the design and management of your enterprise supply chains?

· 84 ·

M02_GATT6818_03_SE_C02.indd 84

2/24/15 3:39 PM

Chapter 3

Designing supply chain strategies How to formulate strategies that reduce cost and improve service

O

nce we have identified the range of behavioural segments present in any product-market combination, it’s a relatively simple task to develop the equivalent value propositions and corresponding operational strategies.The value propositions express in words what we are prepared to commit to, and offer, each customer segment. They provide a mini-vision for capturing our specific customer groups. Our challenge in this chapter is how to turn that vision into a reality! We outline 16 strategy dimensions for you to consider in your supply chain design. These are drawn from across all disciplines of the enterprise, and we propose combining them to produce unique strategy packages or recipes that are targeted at delivering your value promise to targeted customers. We recommend using the OODA loop – observe, orient, decide and act – to put the strategies into action. OODA is a military manifesto for getting a tough job done, and one I’ve found more than fitting for beating our competitors! A key question for supply chain design is what strategies we should use to get our products and services to the various customer segments we have opted to serve. And, most importantly, what method do we use to devise those s­ trategies. In today’s rapidly changing market conditions, our choice of ­supply chain strategy is critical to being able to serve customers faster than our ­competitors. Academic Martin Christopher and his colleagues, who ­conducted supply chain case studies in the clothing manufacturing industry, found ­evidence that ‘. . . the choice of supply chain strategy should be based upon a careful analysis of the demand/supply characteristics of the various · 85 ·

M03_GATT6818_03_SE_C03.indd 85

2/24/15 3:39 PM

Dynamic Supply Chains

1. 2. 3. 4. 5. 6. 7. 8.

Product mix Innovation emphasis Marketing emphasis Channels of distribution Pricing regime Promotional activity Service emphasis Procurement/sourcing approach

Figure 3.1 ◆

9. 10. 11. 12. 13. 14. 15. 16.

Production Capacity considerations Fulfilment emphasis Relationship intensity Systems/IT support Resource allocation priorities Strategic risk profile Financial considerations

Strategic dimensions for formulating supply chain strategies

product/markets served by the company’.1 Their analysis is correct. What’s more, it’s about as close as anyone has come to date to finding the correct fit between customers and ­supply chains! However, when they speak of characteristics they mean the degree of predictability on the demand-side of the supply chain (predictable versus the unpredictable), and the length of the lead-time on the supply-side (long lead-times versus short). I believe this approach is too limiting. It excludes the most important dimension of all – human behaviour which, as we have seen, influences both demand and supply-sides. Ultimately, there is only one valid basis for strategy formulation and that is a deep understanding of the range of customer buying behaviours that are present in any product/market situation. There are up to five main types of supply chains (as we saw in Chapter 2). Once we are clear about the precise configurations needed for a particular operating environment, we can prepare the corresponding value propositions to match the corresponding customer buying behaviours. In this chapter we will look at the next step which is to translate this understanding into action by developing strategy packages, or strategy recipes, for each customer segment. In Figure 3.1 is a list of the 16 strategic dimensions that we’ve selected to develop strategy packages for the five generic supply chains.

Matching value propositions to customers For the purpose of this analysis, we will confine our attention to the five main supply chain types identified: collaborative, lean, agile, campaign, and the two variants of the fully flexible supply chain, ‘business event’ and

· 86 ·

M03_GATT6818_03_SE_C03.indd 86

2/24/15 3:39 PM

Designing supply chain strategies

‘humanitarian’. Let’s examine each value proposition and the corresponding buying behaviour for the customers that reside in each segment. The customers in the ‘Collaborative’ segment (Ia) value reliability and trustworthiness and are typically served by the collaborative supply chain. They prefer mature, quality products and are not overly price sensitive. They’re the types of customers we want to attract and retain over the long term. But in exhibiting their loyalty, these customers also expect to see their loyalty rewarded. That’s where our value proposition comes in: We will provide you with consistent quality product, delivered on time, at a stable price. We will use our capacity, and your information, to provide you with assured supply. We aim to be an integral part of your business and engage with you in joint developments, for mutual benefit. This value proposition cuts across all functions in the business, and requires all functions to make their respective contributions to its fulfilment. The customers in the ‘Transactional’ (A) segment, in contrast, are very price sensitive and will quickly look to your competitors to find the best price on offer. They are looking for efficiency and reliability rather than excessive service or innovation. They are the customers of our lean supply chain. The value proposition we offer is: We will provide you with consistent quality product, delivered reliably on time, at lowest price, surprise free. In the ‘Demand/Quick response’ or ‘Dynamic’ (aP) segment, the customers are – as their name suggests – demanding, unpredictable and expect speed in every encounter. We serve these customers through our agile supply chain, where we are equipped to expect the unexpected. Our value proposition is: We will build sufficient capacity into our supply chains to be in a position to respond to your unique albeit unpredictable ­requirements as they arise, at speed. For customers in the ‘Project Accumulation’ (AP) segment, we must be very time sensitive and provide our products on schedule. These customers are served through the campaign supply chain, which is populated by big

· 87 ·

M03_GATT6818_03_SE_C03.indd 87

2/24/15 3:39 PM

Dynamic Supply Chains

projects, big budgets and long timeframes. The AP customers are insistent on precision in every encounter. The value proposition is: We will deliver to site exactly to your specifications, on time and in full, every time. Finally, the ‘Innovative Solutions’ customers in the two fully flexible ­supply chain variants – ‘business event’ and ‘emergency response/­humanitarian’ – are working in crisis environments, where innovation and speed are at a premium. Their behaviour is highly individualized but also team-oriented. Their expectation is you must deliver as there is so much at stake. The value propositions for the crisis sub-types are: ‘Business Event’ (Dp): Our skilled resources, supported by specialist expertise as required will develop innovative solutions to unplanned disruptions in your supply chains, extremely fast. ‘Humanitarian’ (iD): We will work in partnership with you to identify and implement innovative solutions to your unique, albeit unpredictable problems, bearing in mind that our resources are finite.

From soft buyer behaviours to hard strategies As implied by the title of this chapter, strategies – or how we go about delivering our value propositions to customers – should never be classified as either right or wrong. Why? Because a strategy that is working well today may become obsolete in some future operating environment. And the corollary is also true: a strategy that has been tried and failed under one set of conditions at a particular point in time, may well be the best strategy under changed conditions in the future. So let’s hear none of the old argument ‘but we tried this strategy before and it failed’ as an excuse for not trying it again. The trick is to avoid becoming too ideological and prescriptive about strategy formulation, and instead use the marketplace and customers as the compass to guide us in developing the most appropriate package for the specific conditions being addressed at the time. With this in mind, let’s review the possible combinations of strategy dimensions for each of the five generic supply chains addressing the corresponding

· 88 ·

M03_GATT6818_03_SE_C03.indd 88

2/24/15 3:39 PM

Designing supply chain strategies

five types of behavioural segments. We are calling these ‘ideal’ strategies because they are imputed directly from an understanding of each behavioural segment. Put simply, they are the theoretical best – what we all aim to achieve! You will note that the 16 strategy dimensions listed in Figure 3.1 are not confined to physical logistics considerations alone, but rather, are a combination of all the variables that a business might want to bring to bear to deliver on the promise embedded in a particular value proposition. This approach is consistent with my view that supply chains, taken in aggregate, are in effect the business. In addition, it is fair to say that customers don’t look at a supplier’s strategy and split hairs either, e.g., ‘I like their product but not their service or fulfilment methods.’ No, customers are binary in this regard. Either a supplier satisfies them completely or not at all: there’s not much in between. This point will be further reinforced in Chapter 6 when we push for developing a new type of organization design that is multidisciplinary in the way it is constructed. Each of the strategic dimensions is detailed below. We will outline how the dimensions might be combined in strategy packages, or ‘recipes’, for each supply chain type in the following chapters. As you read through the dimensions, consider how they are currently deployed – or not deployed – in your organization. Could they be combined and applied in a way that will better serve the buyer behaviours of your customers?   1 Product mix. The product or service is what a customer buys and has in mind at the point of purchase. It contains certain benefits that the customer is seeking. But there are products and there are products! Some are branded and carry with them a type of guarantee of performance and trust. Others don’t carry any of these attributes and are bought on a ­different basis, perhaps price, or performance, or even c­ onvenience. A  customer’s particular mind-set will determine what combination of attributes is being sought on any particular occasion. And this can change with the situation.   2 Innovation emphasis. Innovation means different things to different people in different mind-sets and situations, and we have to choose the right interpretation.2 For some customers who are loyal to their brands, they would only see innovation as useful if it led to product quality or delivery that is even more reliable. They buy safe, mature products and are not interested in taking any risks by switching to another, newer product while the one they are using is meeting their needs.

· 89 ·

M03_GATT6818_03_SE_C03.indd 89

2/24/15 3:39 PM

Dynamic Supply Chains

  3 Marketing emphasis. Marketing is the sum of all the things you do with, and for, the customer in order to pre-condition him or her for a sale. But you have to know what your target market likes in this regard, otherwise you can waste a lot of money on things that cost you dearly but make little or no impression on the customer. So we have to consider what will help us better align with the target customers, and this means knowing their mind-sets.   4 Channels of distribution. Channels are the pathways through which customers gain access to your products and services. These channels are in effect the commercial arrangements we make with other parties to carry out some of the functions required to present our products/services to the target market. The physical pathways that products travel along as they make their way towards customers may not necessarily coincide with these commercial channels, and indeed, mostly don’t. However, one observation we can make from experience is that it is rare that one channel is enough to cover our target market. In most cases we will need a combination of different channels, and the selection of these channels can mean the difference between success and failure.   5 Pricing regime. Pricing is perhaps the most underestimated strategy dimension of all. Yet it can impact heavily on the operational performance of enterprise supply chains, in both positive and negative ways. Pricing also drives the revenue line, so it’s the other factor we must concern ourselves with when seeking to improve margins, apart from cost-to-serve. DHL did this in Taiwan when the incoming country manager realized that the company was trying to force all customers to buy their premium express service, but in so doing was driving away customers who were looking for a slightly slower, albeit reliable, delivery service at a lower price. By radically improving the alignment with the total customer base, DHL increased its revenue faster than its corresponding cost-to-serve, and so enhanced its margin.3 Remember, not all customers want the lowest price; nor are they all prepared to pay a premium. We must work out which is which and include the right price emphasis in the strategy package.   6 Promotional activity. Promotional activity is expensive and needs to be carefully targeted. For instance, it is unlikely any such activity is required or even wanted by customers who are already brand loyal; for them it becomes a distraction and an annoyance. However, for customers in the ‘demanding/dynamic’ segment, it is essential to attract their attention.

· 90 ·

M03_GATT6818_03_SE_C03.indd 90

2/24/15 3:39 PM

Designing supply chain strategies

  7 Service emphasis. As in the case of the innovation dimension above, service is something that takes on a different hue depending on the type of customer you are targeting and their particular situation. For customers looking for a quick, creative solution to a major problem (Dp), customer service means ‘just fix it, fast’. For a customer who is price sensitive and looking for consistency, service means we have to deliver just that, no more, no less. So it is a clear case of ‘horses for courses’.   8 Procurement/sourcing approach. Selecting the best array of suppliers to source from and indeed to outsource to, is a vital consideration, and one that may well determine if we can honour our portfolio of value propositions to customers.   9 Production. For manufacturing that is kept in-house, we need to ensure it is configured to deliver the required range of value propositions. This may mean using straight production lines for products that are being produced in volume in order to drive down unit costs; or using postponement techniques and utilizing slack capacity in times of off-peak demand; or it may simply mean using methods such as group technology, where small specialized batches are produced for either brand-loyal customers or customers that exhibit sudden and urgent demand for a product, for which they are prepared to pay. In any event, the production side of the business must be in complete synch with the demand and supply elements of the enterprise, upstream and downstream. 10 Capacity considerations. Capacity can come in many forms such as machine capacity, labour availability, inventories (all types), storage locations and transportation options. To counter any fluctuations in demand and potential problems on the supply-side, both of which can cause disruptions, buffers can be designed into the overall supply chain as and where appropriate, as long as these are designed according to policies on stock-out tolerance levels. 11 Fulfilment emphasis. The physical delivery of products and services is what fulfilment is about. It can be designed on an agreed basis with the customer so as to drive shared costs down, or it may be more ad hoc to meet unpredictable situations. In any event, the type of customer and their expectations will largely drive the design and operation of fulfilment practices.

· 91 ·

M03_GATT6818_03_SE_C03.indd 91

2/24/15 3:39 PM

Dynamic Supply Chains

12 Relationship intensity. Some customers need to be recognized and provided with personalized service attention, and others want quite the opposite. Since providing close personal attention is costly, we must ensure it’s only given to those loyal customers who genuinely deserve and appreciate such treatment. 13 Systems/IT support. While most contemporary enterprises will have modern enterprise resource planning (ERP) systems installed, the exact combination of software applications that sits on top of this transactional system is largely determined by the type of customer being served, and their corresponding needs. The trick is to mix the right strategy package for each of the main customer types, rather than throw all available technology at every customer indiscriminately. 14 Resource allocation priorities. These are the three most important words in the vernacular for companies battling to survive in difficult trading conditions. Using shared forecasts will help when we are dealing with customers willing to share and collaborate; using sophisticated network optimization models may be necessary where this collaboration does not exist and we are trying to decide between different courses of action. In the latter case we must decide whether to serve or not serve particular customers, with the aim being to maximize customer account profitability. It’s interesting that some third-party logistics providers, or 3PLs, are culling their client base rather than taking on new clients, so that they can focus on long-term, mutually profitable relationships.4 15 Strategic risk profile. All strategies carry some element of risk (of failing), and we must manage these risks as much as we can. In a stable market in combination with a loyal docile customer who buys the same products and services all the time, the risks may be low. For a new customer coming on to the books and demanding new combinations of products and ways of being serviced, the risks are correspondingly higher. We have to assess these risks and where possible, make an early decision. 16 Financial considerations. Each strategy dimension has financial (cost and revenue) implications, so these have to be taken into account. Whether it be the changing cost of running an entire supply chain network, or the incremental revenue achieved through faster lead-times, finance counts because that is how the enterprise is evaluated by analysts and shareholders alike.

· 92 ·

M03_GATT6818_03_SE_C03.indd 92

2/24/15 3:39 PM

Designing supply chain strategies

We will work through the list of 16 strategy dimensions for each of the five generic supply chains (in Chapters 7 to 11), and offer advice on the best packaging of these dimensions to achieve optimal alignment with the corresponding customer segments. The difference between the ‘ideal’ and the ‘actual’ is of course a measure of the misalignment ­currently occurring between your business and its customers. Often it’s not a pretty picture!

Turning strategies into operational reality Converting ‘words on paper’ into ‘actions on the ground’ is an age-old problem. We know from experience that 40 to 60 per cent of intended strategies are never fully realized and we know why – the people inside the business passively resist the required changes. It is not the competitors we have to fear, but our own people. We consider strategy implementation later (in Chapter 4); however, for now it’s appropriate to mention the operational arrangements necessary to bring the strategies to life. A useful checklist is provided in Figure 3.2. This diagram shows a four-tier approach to operational strategy development, starting with the strategic level where the primary focus is on getting alignment with customers, and this of course means multiple alignment, then working down through the other three layers of structural, operational and support mechanisms. At each level pointed questions are raised, to which satisfactory answers must be found. This process is likely to involve a significant amount of further analysis, but at least we now know the boundaries of the conditions we are working with. For the top two levels, development of a network optimization model would be very helpful as various cost-service scenarios can be posed and tested, without making any actual changes on the ground. I fail to see how any organization with more than $1billion in turnover can operate effectively without this type of decision support system (DSS) in place, interfaced of course with a standard ERP transactional system. Such a model would also provide useful pointers to the action that should be taken at the operational level. The fourth level is all about implementation, and again, this is more fully investigated in Chapter 4.

· 93 ·

M03_GATT6818_03_SE_C03.indd 93

2/24/15 3:39 PM

M03_GATT6818_03_SE_C03.indd 94

The supply chain design pyramid

Processes

Sourcing, production and inventory management

Organization design

Support

Performance management

Operational

Facilities and transport operations

Structural

Network optimization

Strategic

Customer value alignment

Channel design

Integrated planning

Information systems

Source: Adapted from Appendix 2D in Gattorna (2006), p 283

F ig ure 3 .2 ◆

What infrastructure, measures and incentives need to be in place to ensure ongoing peak performance?

What information systems are required to maximize efficiency and visibility?

What distribution and transport operation arrangement will optimize service, investment and cost?

What is the best way to plan end-to-end operations in collaboration with partners?

How can operational integration be achieved among the various channel members?

How do we integrate the supply chain to create value for our customers, trading partners and ourselves?

What structures and capabilities are in place to service customer segments?

What processes and procedures need to be in place for flexible, effective operation?

How do we source inputs, manufacture products and deploy inventory to match supply and demand at the right cost?

What is the best supply chain network configuration to meet channel and customer service requirements?

What supply chain capabilities are required to meet customer service needs at optimum costs?

Dynamic Supply Chains

· 94 ·

2/24/15 3:39 PM

Designing supply chain strategies

The ‘ideal’ versus the ‘actual’

• Each initiative is mapped on to the matrix according to the relative business benefit and the relative ease of implementation

Immediate priority

Plan delivery

Exploit in time

Review at later date

Low

• This process is in itself an extremely effective way of promoting valuable, interactive and focused discussion among the top management team

Relative business benefit

High

Each of the behavioural segments we have identified requires us to develop a unique strategy package in response. We have proposed (in Chapters 7 to 11) what these various packages might look like if they were to exactly align with customers’ expectations: the ‘ideal’ strategy. By comparing your ‘ideal’ strategy to the actual strategy you have on the ground, you will discover valuable new information (and possibly give yourself a shock in the process). The comparison will put a spotlight on just where the misalignments in your strategies are occurring, allowing you to make changes in a very ­conscious and consistent way. First, you should conduct a detailed analysis of the customer segments and buyer behaviours, and second, use the analysis to prepare a plan for how to implement the necessary changes. To guide this process, the supply chain design pyramid depicted in Figure 3.2 will prove useful. It shows the types of questions that need to be asked at each of the strategic, structural, operational and support levels. It should be used in conjunction with the prioritization matrix shown in Figure 3.3; the purpose of this is to help set priorities based on the benefits that are likely to accrue from each of the initiatives, as compared with their ease of implementation.

Easy

Difficult Relative ease of implementation

Figure 3.3 ◆ Prioritization matrix – business benefits versus ease of implementation Source: Adapted from Appendix 2D in Gattorna (2006), p. 284

· 95 ·

M03_GATT6818_03_SE_C03.indd 95

2/24/15 3:39 PM

Dynamic Supply Chains

Value propositions? Get them right It is all very well to laud the importance of value propositions but once we start developing strategies – or defining our intentions – we have to hone in on how we will deliver them. A value proposition is essentially a promise, and delivering on that promise has two dimensions. First, we have to review the operational issues and identify any gaps in how we will meet the needs of our customer buyer behaviours. Second, we have to get the right organizational structure in place, with the right people and the right abilities so that the organization is equipped with the necessary capabilities to deliver on the promise represented by your value proposition. An example of how a strategy analysis might occur in the collaborative segment is depicted in Figure 3.4, highlighting the operational and capabilitybuilding issues involved in delivering the value proposition. In this case the organization, a Greek FMCG distributor,5 is representing various branded goods manufacturers or principals, and selling to intermediaries downstream such as wholesalers, retailers, and food service companies, who in turn service end-users/consumers. The value proposition shows that the distributor is just as committed to the end-consumer; as it is to the other intermediaries in between: ‘We will stay close to your (manufacturers’) consumers and share information with you about both customer and consumer markets.’ The value proposition ensures that everyone ultimately works together to serve the endconsumer;. The management teams of both Firms work together on the value proposition issues such as sharing information, setting agreed priorities, joint planning and executing the agreed plans according to a shared timetable.

Beating your competitors’ decision cycles Increasingly in today’s operating environment, enterprises have to find ways of getting their products and services to market faster than ­competitors, or adapting to changing market conditions faster than competitors. We now live in a world where customers will go with the supplier that is first to ­market or responds to their needs within hours or days rather than weeks and months. For this reason companies have been adopting the OODA loop, a ­process originally developed by the military as a way to penetrate the e­ nemy’s ­decision-making cycle and strike first.6 OODA stands for observe, orient,

· 96 ·

M03_GATT6818_03_SE_C03.indd 96

2/24/15 3:39 PM

M03_GATT6818_03_SE_C03.indd 97

F ig ure 3.4 ◆

3 mths

6 mths

12 mths 2, 3

Low

D

1

Significant

A 5, 6 B E

C4

High

Strategy issues associated with the collaborative segment (‘la’ logic)

A. Role modelling B. People positioning C. Internal communications D. Training and development E. KPIs

Capability issues

Impact

As your long-term (AI) trusted (I) representative, we will offer you a reliable (A), cost-effective (A) portfolio of services. We will stay close to your customers (I) and share information (I) with you about both customer and consumer markets. We will encourage joint developments (I) between us, and carry out our fulfilment role (A) in a consistent (A) and timely (AP) manner.

1. 2. 3. 4. 5.

Deadlines set by principals/suppliers Information sharing Setting agreed priorities in plans Not enough joint development Principals/suppliers need help to understand the commercial arrangements 6. Execute agreed task/plans to the agreed timetable

Value proposition

Urgency

Value proposition issues

ILLUSTRATIVE

Designing supply chain strategies

· 97 ·

2/24/15 3:39 PM

Dynamic Supply Chains

decide and act. The desire, if not the necessity, to get inside your competitors’ ­decision cycles and act first is something that applies equally as well to the commercial world. As one executive observed, ‘If I can make decisions faster than my competitor, if I can get inside his decision cycle, then I’ve got him.’7 Clearly, formulating good strategy, fast, is important. But even more vital is having the capability to execute fast, and for this purpose you need the appropriate array of internal subcultures, a topic we will explore in depth in Chapter 4. Later, in Chapter 9, we will give examples of companies that have mastered the OODA loop as a competitive weapon.

Key ideas 1 Be very clear about which customer buying behaviours are present in any given product-market combination. Only then can you formulate the value propositions appropriate for those customers. 2 Value propositions can be delivered by constituent strategies, and these strategies involve synthesizing up to 16 strategic dimensions. These strategy packages will tailor your strategic response based on your customer buying behaviours. 3 If you compare the ‘ideal’ strategies that should be targeting behavioural segments in a given market, and the ‘actual’ strategies a company is pursuing, the mismatches will become visible, as will the misallocation of precious resources. 4 The key to achieving the ‘ideal’ is clear: 1) identify customer buying behaviour, 2) develop the value proposition for each customer segment, and 3) design the strategy packages that will deliver your promise to your customer groups. 5 You have to execute strategy fast if you are to beat your competitors and make first contact with customers. Let the OODA loop become your strategy mantra: observe, orient, decide and act.

Your challenge Are you designing your enterprise supply chains based on your customer segments and the value propositions that you’ve defined for each? If so, are they truly multi-disciplinary strategies?

· 98 ·

M03_GATT6818_03_SE_C03.indd 98

2/24/15 3:39 PM

Chapter 4

Internal cultural capability How to align internal capabilities to propel multiple supply chains

Y

ou have to build internal capabilities to execute supply chain strategies that will transform your business. It’s mandatory. But to do so, you must first embrace the invisible world of the ­subconscious and seek to understand the culture and associated subcultures that exist within your organization. We all know, however, that the ­characteristics of ‘culture’ and how they affect an organization can be difficult to grasp; many prefer to focus on the more tangible aspects of strategy, ignoring culture altogether.This chapter puts an end to that.We outline how to map the subcultures in your enterprise and to identify the specific s­ ubcultures that are necessary to implement your supply chain ­strategies. And we introduce the concept of capability areas that can be tailored to different supply chain types; they provide us with the practical levers to achieve the changes we so desire. Few executives seem to understand that ­successful change programmes can only occur if you have a clear picture of the ­starting point (‘as is’ culture), and where you want to take the o ­ rganization in the future (‘to be’ culture). If you know both end-points, you have a clear choice: either accept that certain strategies will never be delivered by the incumbent subculture(s); or make the necessary changes to ensure 100 per cent of your operational strategies are in play. Transformation is at your fingertips! ‘Who needs competitors when we have colleagues like this to work with?’ I will always remember this telling observation in 1972 by my boss at the time, Don Johnson, a Vice-President in FMC Corporation’s Petroleum · 99 ·

M04_GATT6818_03_SE_C04.indd 99

2/24/15 3:42 PM

Dynamic Supply Chains

Equipment Group. Don was setting up divisional operations in A ­ ustralia, based in Melbourne. The parent company, FMC Corp., was and still is a major US-based conglomerate; it has interests in many ­industries, from food machinery to defence. We had just come out of another ­interminable meeting, where very little had been achieved if you take out the politicking. Years later I came to understand what he meant, and unfortunately the same disease has continued to spread at a geometric rate in many businesses. Nothing changes. Witness what happened to Carly Fiorina in her early days as CEO at Hewlett-Packard when she was trying to win over a sceptical workforce: Mid-level managers and rank-and-file employees didn’t openly attack her new ideas. They just meandered around them. In public forums, Fiorina appeared to win support. Then managers huddled privately to decide whether they liked what they heard. They softened goals, adjusted timetables, made some exceptions. By the time they had finished, they had gutted whatever it was that Fiorina was trying to achieve. Resistance was so subtle and pervasive that she couldn’t accomplish anything by getting angry. There was no obvious opponent. It was just the system.1 Sound familiar? Louis Coutts, international management consultant and founder of the Hawthorne Academy in the United Kingdom, expresses much the same sentiments: Whenever I hear the war cry, ‘we need to change the culture of this ­organization’, I cringe. Culture cannot be imposed; it must be discovered. What is frequently overlooked is the fact that the culture of an organization is contained in the hearts and minds of the people it employs. It’s already there, waiting to be expressed. To the extent that we allow that culture to be expressed, a range of benefits will emerge. If we don’t allow that culture to be expressed, an organization will always fall far short of its potential.2 No doubt you are familiar with this cultural war cry. From what I have seen over the past two decades, it seems that most, if not all, enterprises have problems converting stated intentions (otherwise called strategies or business plans) into actions on the ground. Indeed, it’s not unusual for 40 to 60 per cent of stated intentions and best-laid plans to go unrealized, for any number of reasons. Certainly, the changing operating environment comes into play here and can force a change in plans. But resistance from people

· 100 ·

M04_GATT6818_03_SE_C04.indd 100

2/24/15 3:42 PM

Internal cultural capability

within the enterprise is usually the biggest factor causing slippage of intended strategies. Enterprises can inflict much more damage on themselves than any external competitor will ever do (as observed in Chapter 1). In discussing her transformation at Kraft, which has since been renamed Mondelez, CEO Irene Rosenfeld asked some of the people who p ­ articipated to comment. Karen May’s comment was particularly relevant to the ­discussion above: When I came to Kraft in 2005, it was a company with iconic brands. Kraft had scale like nobody else. On an individual basis, the talent was amazing. Yet somehow, we were getting in our own way. We had functionalized to the extreme, and had lost focus on business results.3 Despite evidence to the contrary, management literature has largely ignored the potential for self-wrought destruction if culture is ignored; research ­normally focuses on competitors as the main source of danger. Most likely, this has been because the role culture plays in driving action inside ­enterprises is not fully understood. Ironically, if the culture is functional, it may be the organization’s only real competitive strength because it is the only factor competitors cannot easily replicate in the short term. We have all heard the same old albeit naïve mantra: just formulate smart strategies (on paper), and the rump of the organization will automatically implement, unquestioned and unmodified. Experience tells us something different. What we now know is that while the downward force of strategy on the organization to deliver plans is considerable, an even stronger force exists – the upward force exerted by the organization’s culture. Quite ­simply, the resident culture selects those parts of the strategy it is prepared to s­ upport and put into action, and those parts which it chooses to resist – as Carly Fiorina discovered. Indeed, culture becomes evident when there is change of any sort. ­Otherwise it bubbles along in the background, unnoticed until a change occurs when it then becomes visible. At the extreme, it can rear its ugly head when change is managed badly. The strategy formulators develop strategy in a vacuum without any focus on culture. They only notice culture when they get resistance, and then blame employees. Instead, they need to be developing strategies with the view of how to implement them, upfront, rather than just focus on formulation per se. Latest literature on this subject believes resistance could be a mask for change exhaustion. So resistance

· 101 ·

M04_GATT6818_03_SE_C04.indd 101

2/24/15 3:42 PM

Dynamic Supply Chains

could be operating at two levels – an exercise of power by employees, or a physical wellbeing protection from too much change. So what may appear to be employee resistance to change may in fact be change exhaustion. Employees have ‘switched off’ as a self-protection mechanism. Continuous change causes feelings of exhaustion because employees are unable to predict what will come next and are unprepared to deal with the unknown. This overload in change leads to fatigue, exhaustion, employee disengagement, and ultimately high turnover.4 As the final word on the critical importance of culture we need go no further than the article by Jaruzelski et al. in which they comment that ‘studies have shown again and again that there may be no more critical source of business success or failure than a company’s culture – it trumps strategy and leadership’.5 This is particularly true in the context of innovation, and I daresay in the underpinning of the five generic supply chain types we have already identified and described in earlier ­chapters. According to Schein, ‘the bottom line for leaders is that if they do not become conscious of the cultures in which they are embedded, those cultures will manage them’.6

Getting the capabilities right Is it possible to shape something as invisible as culture and use it to transform our enterprise? It all comes down to putting the right capabilities in place to shape and drive the intended operational strategies that link the enterprise to its customers. Unlike the intangible nature of culture, if we drill down into what will deliver our desired state of dynamic alignment, then it is capabilities that will act as our levers to achieve change and maintain high levels of performance. It is these capabilities that form a core part of my latest work on supply chains found in this book. According to Mark McDonald at Gartner, ‘a capability is the resource(s) an enterprise uses to create outcomes’.7 Leonard Greski, Director of ­eCommerce Architecture at W.W. Grainger, Inc., expands this definition slightly when he says that ‘business capability is a set of related business ­processes, people, and physical assets that deliver value directly to ­customers, or are needed to run the business’.8 Finally, Divakaran et al. define ­capabilities as ‘. . . cross-functional combinations of technology, process, skills, and mind-sets that work together synergistically’.9 In their view, capabilities will

· 102 ·

M04_GATT6818_03_SE_C04.indd 102

2/24/15 3:42 PM

Internal cultural capability

‘enable a company to stand out from competitors and consistently provide value for its chosen customers that no one else can match’.10 I agree, wholeheartedly. During our fieldwork and research over the last decade, we have analyzed many of the possible capabilities that Firms can enlist in their quest for alignment. We have come to the conclusion that there are eight capability areas that are the most critical to achieving ­alignment in supply chains, which are listed below. In Chapters 7 to 11, we outline how these capability areas should be customized to meet the needs of c­ ustomer segments and the requirements of individual supply chain types. These capability areas act as the DNA building blocks for our ­supply chains; they embed the right culture into the heart and soul of your ­organization. This is what achieving dynamic alignment is about. Each of the capability areas are ‘cultural’ by nature, in that they directly influence the behaviours and values that make up organizational culture, or they underpin particular operational strategies because of their impact on performance. The first capability area of customer interaction, for instance, on first analysis looks to be external to the enterprise because it’s related to customers, but aligning the customers with your supply chains is clearly internal. Organizational design also has a cultural dimension; no new structure will work if the culture is not right. Our eighth cultural capability area is culture itself; it looks at culture at the most granular level, giving us the tools to shape and embed the most appropriate subculture. Our approach in these capability areas is that while distinct, they are cross-functional, working in synergy across the supply chains running through our enterprises. The eight capability areas are: 1 Customer interaction: the ability to read the market and understand customers’ expectations. 2 Transformation: the ability to convert analyses at the aggregate level into flows at the individual SKU level. 3 Organization: building the appropriate organization structure from which to launch operational strategies. 4 Processes: designing the standard processes to underpin day-to-day operations. 5 Planning: applying different planning regimes to different supply chain configurations.

· 103 ·

M04_GATT6818_03_SE_C04.indd 103

2/24/15 3:42 PM

Dynamic Supply Chains

6 Systems/IT: combining systems applications in various ways to ­underpin and institutionalize the above-mentioned processes. 7 Operations: having in-house capabilities in DC, transport, and ­inventory operations. 8 Culture: shaping the appropriate subcultures needed to drive each type of supply chain configuration. For the rest of this chapter we focus on culture in its broadest sense, as it infuses performance across the organization (and hence goes further than number 8 on our list). The subcultures present in an enterprise are major determinants of what plans get acted upon, and what do not. The net effect of these subcultures acting in concert is what we call cultural capability. In this book I will refer to the various ‘cultures’ that I identify as subcultures, because they are elements of the broader organizational culture, sometimes referred to as corporate culture. These constituent subcultures have the ability to drive different supply chains. The refusal of managers and staff to deliver ‘intended strategies’ ­creates a hole that is mostly filled with a disparate array of other non-critical a­ ctivities; this often takes the organization off the critical path to high performance. This, in turn, leads to frustration among senior executives, who have ­primary responsibility to shape the appropriate subcultures to get the job done in the first place. In this sense, the leadership group has failed the o ­ rganization, often because they are out of touch with the marketplace and their own people. Or rather than ‘refusal’, perhaps it’s a case of misunderstanding how to engage employees in change management. If employees are properly engaged they are less likely to resist the implementation of their own ideas! So it is important for leaders to warm up managers and the overall ­organization and socialize intended strategies. Unfortunately, because they often have a rational mind-set, they think of employees as objects rather than people with feelings and ideas of their own. Hence, the ‘I say’ and ‘you do’ mentality that pervades many organizations. This ­paradigm affects their communications and engagement strategies. Their own ­frustration could be with not knowing how to work with people and ­communicate effectively with them. Unfortunately, they don’t teach this in business schools.

· 104 ·

M04_GATT6818_03_SE_C04.indd 104

2/24/15 3:42 PM

Internal cultural capability

But what is culture? What is this mysterious phenomenon that has such an impact on the way enterprises perform? Culture, as depicted schematically in Figure 4.1, is the intangible human force that sits below the surface of the ‘performance iceberg’. It represents an organization’s values, beliefs and deeply held underlying assumptions that people import into the enterprise over time. Culture represents the ‘unwritten’ rules about what is expected and valued in the organization. Edgar Schein defines culture as: a pattern of shared basic assumptions learned by a group as it solved its problems of external and internal integration, which has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems.11 We commonly express this concept of organizational culture more informally as the ‘way of life’ within the enterprise, or ‘the way we do things around here’. In much the same way as Schein states, culture at the organizational level involves a shared understanding of how an enterprise perceives and responds to its operating environment. This explains how a company responds to market conditions and different customer demands. Enterprises express this as wanting to achieve a customer-focused culture. Culture also acts as the ‘glue’ holding the internal mechanisms together, making it capable of accomplishing what an individual alone cannot. Conversely, when culture is dysfunctional, it eventually leads to the demise of the enterprise. There are plenty of ‘corporate shipwrecks’ to support this latter point.

Caterpillar

1 Assumptions: unwritten rules that are accepted as fact; 2 N  orms, customs, and routines: how people behave, interact, and work at all levels of the organization;

▼

The global equipment manufacturer Caterpillar set out to create a functional, high-performing culture after its performance went into serious decline following decades of expansion. It’s a good example of how corporate thinking about culture can have a lasting impact. Key to Caterpillar’s approach was to start with an analysis of 10 cultural dimensions, which it identified as:12

· 105 ·

M04_GATT6818_03_SE_C04.indd 105

2/24/15 3:42 PM

Dynamic Supply Chains

3 P  ower: not the result of position or a title, power – which can be positive, negative, or mixed – determines who influences opinion; 4 R  ites and rituals: ceremonies and events that highlight what is important and not important; 5 R  oles and responsibilities: determine expectations and provide insight into performance measures; 6 Stories and myths: help describe the company’s history; 7 S  tructure: the invisible organization chart that identifies relationships, communications and power; 8 S  ymbols: nonverbal communications that help explain values and beliefs; 9 S  ystems and rules: methods to control, measure and reward desired behaviour; and 10 Values: what the organization cares about most. Caterpillar used the cultural analysis to develop the now famous ‘One Voice’ corporate culture programme in 2004. According to Micah Kee, this culture programme had a direct ‘fiscal benefit’ for Caterpillar.

Given that significant change can’t happen simply by decree, recent insights from neuroscience have begun to explain why. According to Schwartz et al., ‘new behaviours can be put in place, but only by reframing attitudes that are so entrenched that they are almost literally embedded in the physical ­pathways of employees’ neurons’.13 So if we want to change the ­previously mentioned maxim of ‘that’s the way we do things around here’ to ‘that’s the way we [used to] do things around here’, belief systems honed by years of routine and hundreds of workplace conversations and habits will have to ­ ompanies change.14 This will require re-wiring people’s neural pathways. C such as Cargill and financial planning firm Ameriprise have already ­pioneered this approach inside their respective enterprises.

Cultural misalignment hinders performance We need to go back to our model of dynamic alignment to guide our search for potential misalignment in culture, strategy and customers. The alignment framework (introduced in Chapter 1) enables us to delve into the mysteries of organizational culture. It has four levels: marketplace, strategy,

· 106 ·

M04_GATT6818_03_SE_C04.indd 106

2/24/15 3:42 PM

M04_GATT6818_03_SE_C04.indd 107

The ‘performance iceberg’

Source: Adapted from Figure 4.3.3 in Gattorna (2003), p. 460

F i g ure 4. 1 ◆

UNDERLYING ASSUMPTIONS ◆ Taken for granted assumptions about the organizational reality

VALUES AND BELIEFS ◆ Goals of the enterprise ◆ Means used to accomplish these goals

VISIBLE PATTERNS OF BEHAVIOUR Structure Strategy ◆ Systems

◆ ◆

INVISIBLE UNCONSCIOUS

VISIBLE CONSCIOUS

Internal cultural capability

· 107 ·

2/24/15 3:42 PM

Dynamic Supply Chains

culture and leadership. The key to cultural alignment lies in u ­ nderstanding what is happening at the interface between each level, and particularly the interface between strategic response and cultural capability. Crucially, the model brings together the two dimensions of internal and external ­environments, and culture has an impact on both. How many times have you seen internal culture derail the successful implementation of plans to reach customers? In short, the potentially damaging impact of misaligned or dysfunctional culture is a reality that has long been overlooked. And it’s now time to address this oversight. Beer and Eisenstat sum things up well when they comment that ‘between the ideal of strategic (dynamic) alignment and the reality of implementation lie many difficulties’.15 Their six ‘silent killers’ are all connected to an organization’s culture and could be addressed by looking at them through the lens of cultural alignment as well as dynamic alignment. The six ‘killers’ are:16 ◆

top-down or laissez-faire senior management style;

◆

unclear strategy and conflicting priorities;

◆

an ineffective senior management team;

◆

poor vertical communication;

◆

poor coordination across functions, businesses or borders; and

◆

inadequate down-the-line leadership skills and development.

Beer and Eisenstat say that: ‘Individually, the six barriers are troubling. Taken together they create a vicious circle from which it is difficult to escape.’17 Actually I think there are more than six killers, more like 12! Of course, the invisibility of culture is in stark contrast to the ­tangible world of hard assets, infrastructure, systems, technology and observed behaviour that fills the conscious world. Most people tend to manage what they can see in front of them, while either ignoring or remaining oblivious to what they can’t see, touch or feel. This is the problem that has plagued not only the design and operation of supply chains, but all forms of human organizational endeavour over the centuries. It is not generally recognized that inefficiencies in culture are created through the pressure on companies to deliver shareholder value, which most often means cutting costs. For example, procedures are not documented or kept up to date because there are not enough people to do it, or people have left the organization and have not been replaced, taking their knowledge

· 108 ·

M04_GATT6818_03_SE_C04.indd 108

2/24/15 3:42 PM

Internal cultural capability

with them. Systems are not upgraded or are in a constant state of change. Employees avoid communicating with their manager as it usually means more work, adding to an already heavy workload. Customer service eventually suffers. While there are common corporate values that apply across the entire enterprise, often referred to as corporate culture, other values, artefacts, symbols and underlying assumptions can exist, forming subordinate cultures we prefer to call subcultures. These are essential to ensure different response capabilities are in place to meet different customer demands in the marketplace. The dominant logics that shape these subcultures are the same logics that shape and drive the dominant buying behaviours of customers because, in both cases, humans and human behaviour are the common denominator. It is important at this point to clearly distinguish climate from culture, as they can be easily confused, and result in cultural initiatives being based on false assumptions and misguided goals. Confusion can all too easily reign. Climate is how the enterprise feels about itself, its mood, morale and the level of employee satisfaction at a given point in time. This is the internal equivalent to external customer perceptions of the organization, which are expressed as opinions about the relative performance of suppliers. Both the internal climate and external customer perceptions are subject to rapid change, whereas culture and the dominant buying behaviours of ­customers are permanent features and cannot be easily changed. These fine distinctions are depicted in Figure 4.2. The customer satisfaction index (CSI) methodology is used to measure customer expectations and p ­ erceptions (opinions) in the external operating environment, and e­ quivalent mapping methodologies are used to measure culture and climate on the inside of the enterprise. For best results, the external and internal results should align or ‘mirror’ each other. I call this the ‘mirroring’ effect. Can you see then, the pivotal role culture plays in implementing ­strategy, achieving superior performance in single enterprises and d ­ elivering ­performance along supply chains and networks of linked enterprises? We need to achieve dynamic alignment between the internal culture and the expectations of external customers. Not an easy feat! There are various combinations of the four primary subculture forces present in all enterprises: group, entrepreneurial, hierarchical and rational (see Chapter  1); these are summarized in Figure  4.3 and detailed in

· 109 ·

M04_GATT6818_03_SE_C04.indd 109

2/24/15 3:42 PM

Dynamic Supply Chains

Customer perceptions = Opinions

Staff perceptions = Organization climate (mood)

CSI* = Values/ expectations

Culture map = Internal capabilities

Internal organization

External marketplace * Customer Satisfaction Index.

Fi g u r e 4 . 2 ◆ The two sides of values: behaviours and perceptions – inside and outside the enterprise

Figure 4.4. The opposing cultural forces are P versus I, and A versus D. The overall culture of an enterprise is the net outcome of the tension created by these four primary forces in dynamic equilibrium, and is ultimately represented as the dominant force, with possibly an adjacent secondary force. Each of these four subcultures (and their various combinations) has particular strengths and limitations. These have to be factored into any change programme that seeks to improve alignment between an enterprise, its strategies and the marketplace, since the four subcultures require very specific actions to shape and mould them. However, there is also a dark or ‘shadow side’ to culture, which is ­opposite to the ideal characteristics described in Figure 4.4. The dark side occurs when an organizational culture becomes dysfunctional due to long periods of organizational stress or exaggerated, unchecked or u ­ ndisciplined behaviours. For instance, the features of openness, vision and ­inspirational leadership that characterize the entrepreneurial subculture turn into exhaustion, failure and ‘brain freeze’ when they enter the dark side. In the group culture, the positive features of shared values, recognition and teamwork become ‘cliquey-ness’, decision avoidance, and a poor focus on the market. The dark side detailed in Figure 4.518 is a place we do not wish to enter!

· 110 ·

M04_GATT6818_03_SE_C04.indd 110

2/24/15 3:42 PM

M04_GATT6818_03_SE_C04.indd 111

Cohesion

Ends:

Order

Ends:

Direct control

Indirect control

Results

Ends:

Rational

Action, objectives, energy

Growth

Innovation, flexibility, readiness

Entrepreneurial

Means:

Ends:

Means:

The four generic enterprise subcultures

Source: Adapted from Figure 4.3.5 in Gattorna (2003), p. 461

Fi gur e 4. 3 ◆

Hierarchical

Systems, measurements, controls

Means:

Internal focus

Synergy, teamwork, cooperation

Group

Means:

A

I

External focus

P

D

Internal cultural capability

· 111 ·

2/24/15 3:42 PM

M04_GATT6818_03_SE_C04.indd 112

A

Source: Adapted from Figure 3.3 in Gattorna (2006), p. 74

Details of each generic subculture

Hierarchical subculture

◆

◆

◆

◆

◆

Rational subculture

P

Emphasis on results, urgency and high levels of activity Open, formal communication by way of concise, timely updates using the most appropriate media for speed Control achieved by focus on results Management support emphasizes planning Individuals are given structural authority to perform their roles Rewards are based on formal standards and relevant results – analysis and action No deviation from plans or performance standards

Emphasis on stability, order, systems and control

Closed, formal communication which is shared only on a ‘need to know’ basis Control achieved by focus on processes Management support emphasizes procedures Individuals’ tasks are established by precedence Rewards are based on formal standards and the ability to maintain internal control – good administration No deviation from approved processes ◆

◆

◆

◆

◆

◆

Emphasis on creativity, innovation and flexibility

D

Open informal communication which is shared with whoever happens to be around at the time Control achieved by commitment to a common vision Management support emphasizes leading, inspiring, flexible and initiating behaviours Individuals are empowered to perform their roles Rewards are based on creativity and entrepreneurial behaviour Deviant behaviour is tolerated – provided it is goal directed

◆

Entrepreneurial subculture

Emphasis on cohesion, teamwork, synergy and consensus

Group subculture

Closed informal communication shared through groups and teams Control achieved by commitment to common values Management support emphasizes the internal climate, particularly cooperation, personal development and recognition Individuals’ tasks are negotiated by consensus Rewards are based on informal standards and the ability to maintain internal cohesion – good team players Deviant behaviour is tolerated – provided it adheres to consensus values

F i g ure 4 .4 ◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

I

Dynamic Supply Chains

· 112 ·

2/24/15 3:42 PM

D

M04_GATT6818_03_SE_C04.indd 113

The ‘dark side’ of each generic subculture

Hierarchical subculture

Source: Prepared for John Gattorna by The Ryder Self Group, Sydney, 2004.

F i g ure 4 .5 ◆

A

Emphasis on stability, order, systems and control Dark side … ◆ Bureaucracy runs rife, dogmatic about going ‘by the book’ ◆ Systems and procedures become cumbersome and slow ◆ Information is withheld to maintain power ◆ High blame element and people are not trusted ◆ People are treated as a number or unit of production ◆ People get ahead by not ‘rocking the boat’ or giving bad news ◆ Highly resistant to change, pessimism and inability to plan ◆ High focus on cost cutting leads to ‘corporate anorexia’ ◆ Managers are highly autocratic

Rational subculture

P

Emphasis on results, urgency and high levels of activity Dark side … ◆ Burnout from a demanding environment and difficulty with work-life balance ◆ High competitive behaviour among individuals ◆ Poor performance is not tolerated ◆ Analysis paralysis ◆ Rigid and arrogant, decisions made too quickly to get the job done ◆ Emotionally charged environment and impatience with drawn out solutions or involving people ◆ Managers are highly aggressive and prone to ‘head kicking’

Entrepreneurial subculture Emphasis on creativity innovation and flexibility Dark side … ◆ Initiative fatigue or exhaustion from too many projects and change ◆ High level of failure with going down blind alleys, starting and not finishing activities ◆ Brain freeze and spin out of control from too many ideas, options ◆ Can be too ahead in timing for developing products or services ◆ Enthusiasm lacking for strategy implementation ◆ Micro-managing and obsession with details ◆ Managers are defocused and disconnected from staff leading to employees avoiding their boss

Group subculture

Emphasis on cohesion, teamwork, synergy and consensus Dark side … ◆ Favouritism and very cliquey environment (e.g., ‘the boys’ club’) ◆ Information is shared with those in the ‘inner circle’ ◆ ‘Corrupt’ practices are tolerated – things are kept hidden in the ‘family’ ◆ Loyalty is rewarded rather than competence or talent ◆ Indecisive without consensus leading to a ‘meetings culture’ ◆ Difficult decisions regarding people and disagreements are avoided ◆ Internally focused, losing market focus and direction ◆ Focus on solving own problems without seeking external help ◆ Managers are highly political

I

Internal cultural capability

· 113 ·

2/24/15 3:42 PM

Dynamic Supply Chains

Mapping internal values and cultures If organizational culture is indeed the ‘psychological life of an o ­ rganization’, then mapping its inherent ‘shared meaning’ – the unwritten values and assumptions that most people understand and work within – offers a ­considerable challenge. Culture mapping provides a way of profiling an enterprise in quantitative terms; it makes visible what is invisible. Some of the earliest work in developing mapping techniques was undertaken by Cameron and Quinn.19 We drew on their work and adapted it to the P ­ -A-D-I coding system we introduced as the common metric in our f­ our-level dynamic alignment model. A culture mapping questionnaire is distributed to all staff. The responses – which are usually a high proportion of the original number sent out – are sorted and mapped in any number of ways, e.g., by level, department, business unit, division, overall organization, etc. The culture mapping methodology is described in more detail below. Culture mapping is a method of understanding and depicting organizational culture. There are various approaches to mapping culture, but what is ultimately important is the usefulness of the results. There is little value in mapping culture where there is no context for what it reveals. The context in the business setting is the strategy that the business wishes to pursue, which in turn is driven by the market or markets in which it operates. The culture mapping approach used to support the dynamic alignment model produces results which can be easily considered in relation to the other three levels of the alignment framework, i.e., the market, strategy and ­leadership. In fact, the method of depicting culture uses the same metric system (PADI logics) that is used throughout the alignment model. The organization’s culture (and the culture of subgroups) is assessed along nine dimensions, which include autonomy, communication and change tolerance. The nine dimensions measured have been identified in many research studies as key elements of culture, although due to the subjective and perceptual nature of culture there could be an almost infinite number of other dimensions present. For example, the culture work by Caterpillar referred to earlier uses some different dimensions to those we have selected. There is no right or wrong here. Culture mapping for alignment involves a survey of employees that explores their beliefs, values, behaviours and assumptions about their workplace. Questions relate to both the current situation and the preferred

· 114 ·

M04_GATT6818_03_SE_C04.indd 114

2/24/15 3:42 PM

Internal cultural capability

situation. The distance between ‘current’ and ‘preferred’ is of interest because it can indicate the level of cultural tension within the group examined, but preferred is not considered to be the same as ideal culture. The ‘ideal’ culture can only be determined by understanding the marketplace or stakeholders to which the organization must ultimately deliver value. For this reason culture mapping is usually conducted in parallel with some form of market or stakeholder segmentation. A typical array of output maps are shown in Figure 4.6. The current culture is represented by the black dot or the ‘centre of ­gravity’. It provides a consolidated picture of employee views on current values, beliefs, behaviours, and assumptions. The preferred culture, indicated by the shaded square, is where people would naturally like to be if there were no constraints on them or the business. Finally, to complete the picture, the ideal culture is superimposed over the two previous plots and represents the ­predominant behavioural segments present in the target m ­ arketplace. By comparing all three plots we are able to identify any significant ‘­misalignments’ and decide what specific initiatives to take to improve alignment between the enterprise, its marketplace and current strategies. The comparative analysis gives us the ability to precisely identify misalignments. The subcultures present in an enterprise are the collective set of values and beliefs held by staff and management; they influence the thinking and action of the organization. The techniques as described above have been developed to map multiple cultural dimensions by measuring the values present in relation to people’s beliefs, behaviours, and assumptions about the enterprise where they work. Below is a list of nine cultural dimensions typically used in culture mapping. Experience suggests that a minimum of five dimensions is required to produce usable results. Autonomy/decision-making: Indicates the extent to which individuals feel they are able to take the initiative and make decisions. Change tolerance: Measures employee assumptions about the enterprise’s capability and willingness to change. Communication: Measures the nature and degree of information sharing going on inside the enterprise.

· 115 ·

M04_GATT6818_03_SE_C04.indd 115

2/24/15 3:42 PM

M04_GATT6818_03_SE_C04.indd 116

Current

Preferred

Management

P

D

Current

Preferred

Employees

P

D

Example of a culture map

Preferred

Total culture test

Current

Total culture

P

D

Preferred: Culture is DP The preferred culture is one where the main focus is on the future direction, opportunities for growth, performance and results.

Current: Culture is Ai Overall focus is on following rules and procedures, making decisions by consensus, with information being privy to those who belong to cliques or groups.

A

I

A Current

Preferred

Communication

Culture dimensions

P

D

Current

Preferred

Change

P

D

Current

Preferred

Decision-making

P

D

Preferred: Decision-making PA – Employees would like sufficient authority to make decisions to allow them to achieve their objectives and targets.

Current: Decision-making Ai – Individuals need to seek management approval for decisions, provided there is consensus.

A

I

Preferred: Change PA – Although employees are willing to accept change when the reasons are well understood, they prefer change to be implemented with new systems and procedures.

Current: Change Pd – Change is accepted when people understand the reasons for doing things differently and it becomes the way of life in the organization.

A

I

Preferred: Communication P – Employees prefer open communication where information is widely shared and easily accessible to all.

Current: Communication Ia – Closed communication with information available to cliques or members of particular groups and on a ‘need to know’ basis.

Source: Prepared for John Gattorna by The Ryder Self Group in 2006, and amended by Deborah Ellis, Carpenter Ellis, 2009.

Fi gu re 4 .6 ◆

Note: There are nine culture dimensions considered in the culture survey.

Preferred: Employees Ai – Employees prefer to work according to rules and procedures where everyone’s contribution to the team is valued.

Current: Employees Pa – Employees are given specific goals and objectives to meet and are expected to work efficiently by following established rules and procedures.

A

I

Preferred: Management Di – Prefer managers to focus on the future, opportunities for growth, building teams and supporting them.

Current: Management PD – Managers focus on performance, results and the organization’s future direction and opportunities for growth.

A

I

Employee data cuts

Total culture

I

ILLUSTRATIVE

Dynamic Supply Chains

· 116 ·

2/24/15 3:42 PM

Internal cultural capability

Conflict: Assesses how and why conflict arises in the enterprise, and how it is resolved. Control: Measures the way in which organizational effort is monitored and coordinated. External coping: Assesses the values which influence the ­enterprise’s ability to cope with external operating environment conditions. Identity: Employee assumptions about the enterprise’s effectiveness in the marketplace, and the extent to which they identify with this. Internal organizing: Assesses the values which affect the way in which work is allocated, integrated and organized. Measures employee assumptions about Performance-reward:  what constitutes ‘good’ performance. These nine cultural dimensions represent the way an enterprise’s ­culture can be dissected and analyzed to better understand what is h ­ appening within the organization. Ultimately they help us to determine which ­dimensions we need to focus on to improve alignment between strategy and the ­primary customer segments. It is much more precise than the ­seemingly ad hoc approaches used in the past, and that alone makes it infinitely more effective. How does this help us? Through culture mapping, we can identify more accurately the most appropriate levers to use in the subsequent change ­process, thereby eliminating much of the guesswork that has previously plagued change management initiatives. Of course, the results from pulling any of these levers never occurs as fast as expected, but managers can now at least persevere with selected actions in the knowledge that they are on the right track, and therefore the action being taken should have the desired effect when the wheels stop spinning – and real traction is achieved. In this process, the culture’s appropriateness or inappropriateness, strengths and dysfunctional aspects are highlighted vis-à-vis the ‘ideal’ ­subcultures identified in the array of customer behavioural segments. ­Managers are therefore in a much better position to understand how to communicate to staff, and predict how staff members are likely to handle and resolve conflict, change and cope with external pressures.

· 117 ·

M04_GATT6818_03_SE_C04.indd 117

2/24/15 3:42 PM

Dynamic Supply Chains

The most appropriate performance and reward system can then be more readily identified, and the recruitment process can be fine-tuned to attract people who not only have the necessary technical qualifications, but also bring with them into the enterprise a mind-set that reinforces the desired subculture(s) and corresponding strategies. Culture mapping helps managers to improve individual and team performance.

Why climate and culture go hand in hand The influence of the more transient climate factors at work in an organization should not be under-rated, because they provide a measure of the level of engagement and stress in the organization. This is depicted by the gap between the current and preferred cultures as defined earlier. The bigger the gap, the more the stress and greater the challenge in changing culture. So, in conjunction with undertaking a culture map, it is also important to gain some insight into the issues concerning employees about their work environment. The seven factors considered in assessing the climate or the mood of the organization are: Physical environment: Employee perceptions about the physical and ­aesthetic aspects of their workplace. Job stressors: Those factors which have a negative effect on employee performance. Job motivators:  Those factors which stimulate individual performance. Job rewards: Employee perceptions about tangible and intangible aspects of reward and performance. Corporate self-esteem: The extent to which employees believe the organization is successful. Communication: Employee perceptions about the style of d ­ elivery and the content and process of information sharing in the organization. Employee engagement: Measures the level of commitment, their passion, loyalty and willingness to go the extra mile. For the best results, climate and culture information should be analyzed together. Climate will signal the problem, and the clue to the root of this problem will be found in the culture data. For example, people may ­complain · 118 ·

M04_GATT6818_03_SE_C04.indd 118

2/24/15 3:42 PM

Internal cultural capability

about poor communications inside the company. The ­corresponding ­culture map may reveal a predominantly ‘A’ type communication style, which means that information is only shared on a ‘need-to-know’ basis. In effect, this means that information is being withheld from people, leaving them with the feeling that communication is poor. In summary, culture is the internal reality of the organization, while ­climate is the mood. Culture drives strategic capability, while climate reveals whether or not employees are engaged or not. Culture is a long-term capability ­embedded in the enterprise and difficult to change rapidly. Climate is a short-term issue because it involves perception and as such can be changed relatively easily. Ultimately, culture is the key to internal capability, and it informs climate.

Let’s get cross-cultural We can’t talk about organizational culture and alignment with our customers without looking at the country cultures in which businesses operate. More and more businesses are operating globally, and multiple cultures are a common feature of enterprises in their domestic operating environment. The seminal work of Geert Hofstede20 on cross-cultural management has helped immeasurably in understanding more about the differences in country cultures, and how these can modify the way individuals and organizations behave in certain situations. As depicted in Figures 4.7, 4.8 and 4.9, Hofstede’s original work identified four major dimensions on which country cultures differ. He labelled these power distance, uncertainty avoidance, individualism and masculinity. Based on later research he added the short- versus long-term orientation dimension. Brief descriptions of Hofstede’s five dimensions are described by Nadeem Firoz et al.:21 Power distance: The extent to which less powerful members of society accept that power can be distributed unequally. Uncertainty avoidance: The extent to which people try to avoid situations where expectations and outcomes are unclear. Individualism: The relationship between an individual and the group to which that person belongs. · 119 ·

M04_GATT6818_03_SE_C04.indd 119

2/24/15 3:42 PM

Dynamic Supply Chains

Low power distance

D

9 14

Collective

11

29

6 32

18 19 3

30 4 5 24 26 28 23 31 7

13 2

21

33 1

17

16 15

22

20 25

10

34

8

Individual

I

12

27

A

High power distance

Legend United States Canada Brazil Chile Colombia Argentina Mexico Sweden Denmark Fi g u r e 4 . 7 ◆

1 2 3 4 5 6 7 8 9

Norway Finland Russia United Kingdom Ireland France Spain Italy Greece

10 11 12 13 14 15 16 17 18

Turkey Arab World South Africa India Singapore Thailand Philippines Vietnam Malaysia

P 19 20 21 22 23 24 25 26 27

Hong Kong Taiwan South Korea China Japan Australia New Zealand

28 29 30 31 32 33 34

National/country cultures (1)

Source: Based on Geert Hofstede™ Cultural Dimensions (1980), prepared for John Gattorna by The Ryder Self Group, 2009.

Masculinity/femininity: The ‘masculinity’ dimension describes societies where there is a polarization of the traits displayed by males and females. In a masculine society, traits such as assertiveness, strength and focus on material success are primarily considered male, while women are supposed to exhibit tenderness and a concern for quality of life. A ‘feminine’ society is one where both men and women exhibit traits of tenderness, modesty, etc., and there is less of a polarization between the sexes.22 Long-term orientation: The extent to which people within a culture have a long- versus short-term outlook on life.

· 120 ·

M04_GATT6818_03_SE_C04.indd 120

2/24/15 3:42 PM

Internal cultural capability

I

Feminine values

D 8

10

9

Uncertainty avoiding

4 12

16 15

24

30 19

3

6

18

7

5

29 20

26 27

2 22 34 28 1 33 13 25 31 21 14

17

Uncertainty accepting

11

23

32

A

Masculine values

Legend United States Canada Brazil Chile Colombia Argentina Mexico Sweden Denmark Figure 4.8 ◆

1 2 3 4 5 6 7 8 9

Norway Finland Russia United Kingdom Ireland France Spain Italy Greece

10 11 12 13 14 15 16 17 18

Turkey Arab World South Africa India Singapore Thailand Philippines Vietnam Malaysia

P 19 20 21 22 23 24 25 26 27

Hong Kong Taiwan South Korea China Japan Australia New Zealand

28 29 30 31 32 33 34

National/country cultures (2)

Source: Based on Geert Hofstede™ Cultural Dimensions (1980), prepared for John Gattorna by The Ryder Self Group, 2009.

So, the country cultures exhibiting different combinations of the above dimensions will have a pervasive influence on the way business is done in general, and on how supply chains operate in particular, across all source and consumption markets. Given that many of the world’s major companies are now global in reach, this is a factor that requires more understanding and sensitivity as the search for ever higher performance continues. Based on our own empirical work and the work of Hofstede, we can say that country cultures do not throw up previously unknown dominant buying behaviours in similar product and service categories around the world; nor do they reveal unknown subcultures and patterns of behaviour inside organizations across the global terrain. The key insight here is that the prevailing values (or subcultures) in a given country appear to only have a modifying

· 121 ·

M04_GATT6818_03_SE_C04.indd 121

2/24/15 3:42 PM

Dynamic Supply Chains

Long-term orientation

10

D

25 34 1

Uncertainty avoiding

2 33

13

Uncertainty accepting

I

8 23

24

22

3 32

30

26

29

28

31

A

Short-term orientation

Legend United States Canada Brazil Chile* Colombia* Argentina* Mexico* Sweden Denmark* Figure 4.9 ◆

1 2 3 4 5 6 7 8 9

Norway Finland* Russia* United Kingdom Ireland* France* Spain* Italy* Greece*

10 11 12 13 14 15 16 17 18

Turkey* Arab World* South Africa* India Singapore Thailand Philippines Vietnam Malaysia*

P 19 20 21 22 23 24 25 26 27

Hong Kong Taiwan South Korea China Japan Australia New Zealand

28 29 30 31 32 33 34

* Not included

National/country cultures (3)

Source: Based on Geert Hofstede™ Cultural Dimensions (1980), prepared for John Gattorna by The Ryder Self Group, 2009.

influence on the ‘mix’ of previously identified dominant buying behaviours for a particular product or service. We were able to confirm this observation while undertaking a behavioural segmentation across global markets for the dairy ingredients division of New Zealand manufacturer Fonterra, involving 3,300 international B2B c­ ustomers spread across more than 100 countries.23 This is an important observation because it means that multiple supply chain alignment is a phenomenon which is valid in all countries or markets, and all the supplying enterprise has to recognize is the varying mix of previously identified dominant buying behaviours from country to country. We again reached a similar conclusion in our work for Schneider Electric in Australia and China r­ espectively – the main behavioural segments were much the same in each country, but heavily nuanced by local conditions and respective country cultures.

· 122 ·

M04_GATT6818_03_SE_C04.indd 122

2/24/15 3:42 PM

Internal cultural capability

Dominant subcultures in the five generic supply chains We identified (in Chapter 2) the five most common types of supply chains that have been observed during the course of many projects in the past two decades; their corresponding P-A-D-I codes are shown in brackets: Collaborative supply chains (Ia); Lean supply chains (A); Agile supply chains (Pa); Campaign supply chains (PA); Fully flexible supply chains (Dp and Di variants). Other configurations do exist and have been observed – for example, the fair deal supply chain (Ai), which is a close variant of the collaborative supply chain type, and the commercial supply chain type (Ap) – but the five types listed above are clearly the most common. For the designer/operator of an array of supply chains, the important thing to know is the particular mix of the five most dominant types of buyer behaviour evident in the marketplace, what customer segments are being served, and the current prevailing culture inside the enterprise which is powering management’s strategies into these behavioural segments. These are the two ‘end conditions’ that must be known at the start of any transformation programme. Perhaps this gives a clue why so many transformation programmes have failed so dismally in the past. It is very clear that executive leadership has not understood that both of these end conditions must be known, and acted upon, to successfully implement a major change initiative.

Changing the enterprise to improve alignment To achieve alignment, Figure  4.10 provides a quick insight into where the emphasis must be placed among the four generic types of subcultures (P, A, D, I). Particular combinations of these subcultures must be present to underpin the five main types of supply chains identified via our extensive fieldwork, i.e., Ia, A, Pa, PA, and Dp/Di (there are actually two variants of the fully flexible supply chain).

· 123 ·

M04_GATT6818_03_SE_C04.indd 123

2/24/15 3:42 PM

M04_GATT6818_03_SE_C04.indd 124

◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆

Define ‘what we are fighting for’ statement Decentralize decision-making; encourage staff to solve problems Specify clear guidelines, not rules Job design based on results, outputs Formalize position descriptions; individual performance objectives Measure performance against objectives Provide regular feedback on performance Reward achievement of objectives; speed of response Provide incentives/merit-pay, based on results for individuals Establish a timely and speedy communication process Training programmes which emphasize optimum use of time and resources Monitor competitor information and market conditions P Recruit ‘P’ people

Emphasis on results, urgency and high levels of activity

The embedded emphasis of the four generic subcultures

Source: Adapted from Figure 3.9 in Gattorna (2006), p. 87

F i g ure 4 .10 ◆

◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆

Define ‘how we do things’ statement Centralize decision-making, especially for cost control measures Change guidelines to rules Define jobs by method Formulate policy and procedure manuals Set efficiency/productivity objectives Measure and reward conformance to systems and procedures Provide cash rewards based on productivity, ‘sticking to the rules’ Establish a formal, regular, structured, systematic communication process on ‘need to know only’ basis ◆ Training programmes which emphasize planning, measuring, controlling and ‘use of systems’ ◆ Recruit ‘A’ people

Emphasis on stability, order, systems and control

◆ ◆ ◆ ◆ ◆

Define ‘our future potential statement’ Allow people to work on their own to fulfil their potential Make individuals accountable for their decisions Formulate vision Job design to increase autonomy Informal standards of performance assessment for individuals based on creativity, flexibility Reward creativity of solutions, ideas, experimentation, lateral thinking Incentives for individuals, e.g., learning experience Open, informal communication for whoever is around at the time Training in creative thinking; creative problem-solving Recruit ‘D’ people

◆ ◆ ◆ ◆ ◆ ◆

Define ‘what we stand for’ statement Emphasize teamwork Consensus decision-making Define common values Joint-peer job design Informal standards for performance assessment of teams based on cohesion Reward team effort, loyalty and commitment Cash-based rewards for team (gain-sharing) Training emphasizes personal interaction and team building Recruit ‘I’ people

A

◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆ ◆

D

Emphasis on creativity, innovation and flexibility

Emphasis on cohesion, teamwork, synergy and consensus

I

Dynamic Supply Chains

· 124 ·

2/24/15 3:42 PM

Internal cultural capability

Change programmes in the past have failed because of the lack of understanding about enterprise cultures, and the implications this has for the strategies being pursued at the time. This in turn has led to agitated staff and frustrated management, all for very little benefit. This phenomenon has been aptly named the Canary Syndrome.24 In this scenario, executives bang the cage every few years and keep the canaries (staff) highly agitated, without really achieving anything. The good news is that we no longer have to put up with this roughcut treatment. We understand what levers are available to create successful change, and more importantly, we know the right combinations to use at any given time. It is very similar to using X-rays to identify problems inside the human body. As long as the person conducting the analysis has an appropriate conceptual frame-of-reference, be it medical knowledge or as in this case an understanding of the mix of behavioural segments in the marketplace, it is possible to plot a systematic course of action to close any identified gaps. Behavioural segmentation techniques have emerged to provide this essential frame-of-reference for the external market. And new techniques to map the internal subcultures inside enterprises have coincidentally been developed over the past decades. It is now just a matter of comparing the two to gauge the degree of misalignment. Change programmes are either ‘evolutionary’ or ‘revolutionary’. Evolutionary change occurs when change to the culture is incremental, and as such does not require an immediate alteration to the enterprise’s ‘subconscious’. Such change may be planned, but often occurs ‘naturally’, as the organization adapts to its changing marketplace. There are distinct modifications possible to strategies, organizational structures and management processes, such as expanding sales territories, changing product portfolios and entering new channels of distribution. Some logistics examples would include the move from hard-wired Electronic Data Interchange (EDI) systems to web-based and cloud communications, the use of network optimization models to rationalize supply chain assets, and strategic sourcing through the prioritization of suppliers. Revolutionary change occurs when there are fundamental changes to underlying assumptions, values and beliefs, causing a significant change to manifested strategic behaviour. It is usually planned, and often occurs when the enterprise is a ‘victim’ of rapid changes occurring in its own operating environment. Revolutionary change is almost always enterprise-wide, with

· 125 ·

M04_GATT6818_03_SE_C04.indd 125

2/24/15 3:42 PM

Dynamic Supply Chains

1. Evolutionary

Figure 4.11a

Figure 4.11b

2. Revolutionary

2

2

1

1 Figure 4.11d

Figure 4.11c 1

1 2

Figure 4.11 ◆

2

Change pathways

Source: Adapted from Figure 4.3.6 in Gattorna (2003), p. 463

radical shifts in strategy that may impact on the vision, organization structures, decision-making protocols, power distribution and status among the executive leadership. It is almost always accompanied by the import of new executives from outside the enterprise. The suite of diagrams in Figure 4.11 defines the eight main change pathways that have been identified, four evolutionary and four revolutionary. In each case the so-called ‘ideal’ subculture has to align with the target market segment. Given that we have previously identified at least five types of predominant behavioural segments in most product/service markets, what are

· 126 ·

M04_GATT6818_03_SE_C04.indd 126

2/24/15 3:42 PM

Internal cultural capability

the implications? Well, it means that the executive leadership has to retain some parts of the current culture, while splitting off other parts and taking finely tuned initiatives to align with three or four other buyer behaviour segments to achieve the desired multiple alignment. As the marketplace fragments, we have to reflect an equivalent fragmentation in the internal culture of the enterprise, albeit in ways that still make the enterprise manageable. Leaders should identify the cultural strengths of their organization in order to engage employees. However, the opposite often occurs – CEOs disengage staff and employees by not harnessing and articulating these cultural strengths. By their lack of consciousness of these strengths they effectively destroy them and the company in the process as change programme after change programme fails. In general terms, there are a limited number of change levers or ­capabilities – the DNA building blocks for our supply chains – that can be used. The following list is a subset of the eight capability areas already discussed earlier in the chapter. ◆

organization structure, reporting relationships and decision rights;

◆

positioning people in the organization according to their natural strengths;

◆

processes;

◆

IT systems;

◆

methods of internal communication;

◆

job design;

◆

training and development initiatives;

◆

key performance indicators (KPIs)/performance metrics;

◆

corresponding incentive schemes or motivators;

◆

planning systems;

◆

recruitment from external sources with both the required technical skills and appropriate mind-set to support planned initiatives;

◆

role modelling and mentoring; and

◆

leadership style of the top management team.

Neilson and Fernandes of Booz & Co (now part of PwC) came up with a shorter list than the above. They identified ‘four fundamental tools that

· 127 ·

M04_GATT6818_03_SE_C04.indd 127

2/24/15 3:42 PM

Dynamic Supply Chains

organizations can wield to achieve alignment: decision rights, information, motivators, and [organization] structure’.25 They found in their research that structure was less important than decision rights and information flows in providing leverage to drive execution; they called these two ‘dominant genes’.26 Manage these critical building blocks with precision and you inevitably move towards dynamic alignment, bringing sustained high-performance across the business and throughout the supply chains in which your enterprise participates. While the moves to achieve evolutionary change are either horizontal or vertical (i.e., A to P, P to D, D to I, I to A, and vice versa), revolutionary change is diagonal, but must go through both vertical and horizontal moves along the way; you can’t simply move diagonally! In other words, while the strategic thrust and ideal culture definition may shift from, say, A to D, P to I, and vice versa, actual implementation must follow a two-stage pathway, as shown by the dotted lines in Figure 4.11. Clearly, revolutionary change will take longer to bed down than evolutionary change, particularly if thousands of staff members are involved. For example, an enterprise with 10,000 staff can easily take three to four years to fully re-align with its marketplace, unless of course an accelerated approach is adopted as described in Chapter 14.

Culture as a powerful influencer of performance If I were pressed to choose the two most powerful building blocks for change in the various lists detailed above I would not hesitate to go for leadership followed by organization structure. Structure is particularly important in ‘A’ and ‘P’ cultures. Information is probably more important in ‘D’ cultures. And in some companies such as Google, structure is unlikely to be important! So, if in doubt, start with combinations of these. If you think about it, all the recorded cases of successful change have started with the CEO [leader] as the prime mover and shaker. Jack Welch at GE comes to mind. As does Edward Zander at Motorola. He joined Motorola early in 2004 determined to bridge the gap with his main competitor, Nokia. His vision was to ‘reinvent Motorola as a nimble, unified technology company’, and his primary focus was on dismantling ‘Motorola’s debilitating bureaucracy and a culture of internecine rivalries [that were] so intense that Motorola’s

· 128 ·

M04_GATT6818_03_SE_C04.indd 128

2/24/15 3:42 PM

Internal cultural capability

own employees refer to its business units as warring tribes’.27 Have you heard that all before? Well, you will hear the same story and the same pattern repeated many times over in the years to come, unless of course senior managers in corporations adopt similar measures to Welch and Zander. But things change over time, and many of Jack Welch’s initiatives have been abandoned by his successor, Jeff Immelt. For example, where Welch focused on cost-cutting (including R&D), Immelt has invested in R&D. Where Welch was very results oriented in the short term, Jeff has embraced long-term results and a renewed focus on customer satisfaction, value added products, and performance with integrity. Likewise, with Edward Zander at Motorola. He stepped down in 2008 and was succeeded by Greg Brown. During his time as CEO, Zander struggled to update and modernize the company’s culture, and it was this factor that led to a largely unsuccessful merger with Google. The cultural divide between the two companies was just too wide. Nokia is not standing still either. Having been caught out by Apple’s launch of the iPhone and the many associated services that it brings to the customer, Nokia has been working hard under a new CEO appointed in 2010 to transform its business model from a mass ‘device manufacturer’ to a provider of unique ‘consumer communications solutions’. By moving away from their previous one-size-fits-all mentality, Nokia’s challenge now is to shape new subcultures so that they can successfully execute their new business model. A challenge indeed. Given Nokia’s record on transformation, they of all enterprises will understand the culture changes required. However, Stephen Elop was not able to effect the necessary change, financial performance deteriorated significantly, and he was succeeded in 2013 by Risto Siilasmaa. Microsoft acquired Nokia’s troubled mobile phone and devices business. The company now focuses on maps, networks and advanced technology. MillerCoors, the giant US brewer, formed through a joint venture between SABMiller and Molson Coors in 2008, is aggressively transforming its business into a more powerful and competitive brewer. The new company is working to create America’s best beer company by building a winning culture shaped by its greatest asset – people. MillerCoors acknowledged that creating one cohesive culture out of the two former companies would be a challenge in its early days, but the company understands that to win in the beer business it cannot afford two separate and

· 129 ·

M04_GATT6818_03_SE_C04.indd 129

2/24/15 3:42 PM

Dynamic Supply Chains

competing cultures. SABMiller has more of a Rational (Pa) culture, while Molson Coors has traditionally had the opposite, a Group (Ia) culture. In reality both cultures must learn to co-exist because that is what the market wants. Easier said than done. The work on a ‘unified’ or shared culture’ is still a work-in-progress, but the company continues to do well despite the internal changes underway. The leading global PC and laptop supplier, Dell, is another giant enterprise on the move. They are currently transforming their hitherto successful ‘direct’ business model and developing a menu of supply chains for the market while at the same time undergoing ownership changes. This is requiring a corresponding re-vamp of their underlying subcultures, no small challenge in an enterprise of their size and reach. Peter Widdows was appointed Managing Director of Heinz Australia in 2003 and given just 12 months to turn around the ailing company. He succeeded by recognizing that culture was the root cause of the company’s problems, then changing it.28 In 2008 when it acquired Golden Circle, Heinz initiated an innovative productivity scheme which lifted performance in what was a more open culture where factory workers felt comfortable to challenge management where they thought improvements could be made. As already mentioned, Caterpillar is another organization whose organizational DNA became increasingly misaligned over its first 50 years of history, from the 1930s until its very existence was threatened in the early 1980s. Disaster was only averted by strong leadership on the part of CEO George Schaefer who took over in 1985 and instituted a radical transformation programme to turn Caterpillar into a more resilient enterprise. Caterpillar went from a major loss in 1992 to sustained profits during the next decade.29 The biggest factor in the transformation was the new organization structure, a decentralized and accountable business unit model introduced overnight on 29 January 1990. This changed everything once and for all, and put Caterpillar back in touch with its dealers and loyal users. The rest is history. So the combination of inspired leadership, knowing where to start and what to do is invaluable in today’s corporations. We need more of this special ingredient, especially in those enterprises where the business is synonymous with the supply chain itself. To combat a decline in demand in the mining industry, Caterpillar is now more focused on cost reduction by shifting production between facilities and

· 130 ·

M04_GATT6818_03_SE_C04.indd 130

2/24/15 3:42 PM

Internal cultural capability

rationalizing its manufacturing network. It’s One Voice programme, referred to earlier, has provided the right cultural mind-set to achieve this type of change and maintain its improved performance. A prime example of a company currently suffering severe internal cultural problems is France Télécom. There were 24 staff suicides reported in 2008–09 – an extremely disturbing number and evidence that something was badly wrong in the company. More suicides occurred in 2014 in the company, now called Orange, and these deaths have been attributed to ‘management harassment’, dare I say bullying. It seems like nothing has changed in the intervening five years. Another company that has distinguished itself in very negative terms is BP following the blast at its Texas refinery in March 2005. An investigation led by former US Secretary of State James Baker concluded that ‘. . . weak leadership at BP and a lack of attention to effective safety, helped create a dangerous setting that led to 15 deaths at the Texas refinery’.30 BP is now in even deeper trouble in the Gulf of Mexico. It seems that BP’s culture of cost-cutting over safety caused the Deepwater Horizon oil spill in 2010, and the new CEO, Bob Dudley, has vowed to change the culture following this disaster. Previous CEOs have clearly put the company at risk.

Crucial influence of organization design and process Among the levers that shape the culture, leadership style of the top management team has the most impact, and organization design is not far behind. The performance management system, which measures and rewards the new behaviours, is the next most powerful lever for change. Organization design refers to the way resources are configured or structured inside an organization. It focuses the efforts of the organization and plays a major role in shaping its cultural capability. The functional capability of each major type of organizational design will be further examined later (in Chapter 6), but it is important to flag the importance of this key factor in organization performance when discussing culture and implementation. In the scheme of things, organization design is so powerful because it is the springboard for strategies formulated by the business and deals directly with resource allocation and configuration issues. On the other hand, the process

· 131 ·

M04_GATT6818_03_SE_C04.indd 131

2/24/15 3:42 PM

Dynamic Supply Chains

Figure 4.12 ◆

Dilbert on organization design

Source: DILBERT © 2014 Scott Adams. Used By permission of UNIVERSAL UCLICK. All rights reserved.

capabilities that underpin each type of supply chain are more focused on ways of doing things. Ultimately, although both these powerful levers play pivotal roles in shaping cultural capability, organization design is a more powerful influence than process. Organization design must always follow an understanding of both the marketplace and corresponding strategy formulation (in that order), not the other way around. This point was made long ago by the Roman Centurion Petronius when he said: We trained hard, but it seemed that every time we were beginning to form up into teams, we would be reorganized. Later in life I was to learn that we tend to meet any new situation by reorganizing, and a wonderful method it can be for creating the illusion of progress while producing confusion, ­inefficiency, and demoralization.31 This point is further reinforced by the Dilbert cartoon in Figure 4.12. For those readers who are keen golfers, you may recall how Paul Azinger, Captain of the US Ryder Cup team in 2008, engineered the defeat of the European team, by an overwhelming margin. He did it with clever organization design. Azinger introduced a code (there’s that word again) of principles that he drew from practices in the US Army Special Forces, breaking his team of 12 into ‘pods’ of four, based on personality types rather than strengths of their respective golf games.32 So my idea of building designer clusters seems to work in all walks of life!

· 132 ·

M04_GATT6818_03_SE_C04.indd 132

2/24/15 3:42 PM

Internal cultural capability

Changing the culture – now faster than ever In 1991, in the early development days of the dynamic alignment model, we worked with then CEO Bob Scott at General Accident (UK) (now named CGU) in Perth, Scotland.33 This 10,000-strong company had just suffered an appalling financial loss, and Scott, a New Zealander, was appointed to turn things around. Over the subsequent three years we systematically worked our way through all four levels of the dynamic alignment model: reviewing the competitive environment for GA’s General and Life Insurance businesses in Britain; introducing a direct channel to consumers and rationalizing the domestic branch network; mapping and working on ways to change the legacy culture; and bringing new blood into the leadership team at all levels. It was a hard grind, but by the third year the results were beginning to show a substantial improvement in profit. As it became clear that his strategy was working I remember asking Bob Scott what he would do differently if he were to undertake it all over again, and his answer: ‘I would go much faster.’ Changing the culture of a company the size of General Accident (UK) in three years seemed a fair result, but we now know a decade later that it is both possible and preferable to move faster when transforming an enterprise. Kurt Swogger, Research Director of the Polyolefins & Elastomers business at Dow Chemical Company, did it simply by choosing the right people and putting them in the right roles to find and launch innovative products at speed.34 He grew a ‘starter’ culture that had key personnel working on concepts that potentially added value for customers, and he put ‘finishers’ in ‘finisher’ roles to ensure these were executed as promised. In the process, Swogger improved the degree of fit between a member of staff ’s personality and their roles from 29 per cent in 1991 to 79 per cent in 1995.35 In addition, he worked on the ‘recruitment’ lever and consciously hired the most appropriate people for the job. In so doing, he increased the Myers-Briggs Type Indicator (MBTI®) based Creativity Index in his research and development (R&D) group – made up of both scientists and managers – from around 200 in 1991 to 260 by 1995, well above the national average of 235. His work showed that it is indeed possible to change the dominant culture in large organizations in a relatively short time through a deep understanding of the ‘genetic nature of individual personalities and group subcultures’.36

· 133 ·

M04_GATT6818_03_SE_C04.indd 133

2/24/15 3:42 PM

Dynamic Supply Chains

In September 2012, Dow Chemical announced a change to a new business structure, eliminating its Business Divisions in favour of a Global Business Unit model. The aim was to have less structure at the top of the company, and more deployment in-market.37 The same could be said of the more operational subcultures commonly found in many corporate logistics and supply chain functions these days. It has always bothered me why a company like Philips with such an impeccable pedigree for innovation and creativity in consumer and electronics products in particular, cannot seem to lift itself to the same creative levels when designing and operating its vital logistics networks and global supply chains. Why? Maybe its high time Philips switched some of its product R&D people on to the task of thinking about new supply chain business models! The results are likely to be impressive if not unexpected. As if on cue, incoming CEO Frans van Houten, appointed in 2011, embraced a new programme called Accelerate, aiming to create an agile, more entrepreneurial Philips.38 The programme, which is set to run through to 2017, has five streams as follows: 1) make us more customer focused; 2) resource our business/market combinations to win; 3) create lean end-to-end customer value chains; 4) implement a simpler, standardized ­operating model; and 5) drive a growth performance culture. There is certainly one chief executive intent on re-shaping the culture. Ken MacKenzie, the incoming CEO of the ailing Australian packaging group Amcor, was determined to tear down what he calls ‘a silo mentality that is festering throughout the company and is hampering returns’.39 So the message of the power of culture, for good or evil, is getting through to the highest levels at last. Let’s hope that top management teams everywhere embrace the power of this hidden force and take advice on how it can be turned to the benefit of all stakeholders of the enterprise. In 2009, Amcor developed ‘The Amcor Way’, and has followed this operating model ever since, with significant success.

Helping culture formation with the built environment One recent development has been the new focus on the built environment to influence the formation of the required array of internal subcultures. One of the leaders of this movement is Blackmores, an Australian company · 134 ·

M04_GATT6818_03_SE_C04.indd 134

2/24/15 3:42 PM

Internal cultural capability

specializing in natural health products. They have created the Blackmores Campus in Sydney, Australia. It is a world-class facility ‘that includes innovative features to minimize environmental impact, drive operational efficiencies, and importantly, provide resources and amenities to create a motivating, healthy happy place in which to work – so (employees) can do their best’.40 Indeed this emerging field has been called ‘environmental psychology,’ and it focuses on aligning company brand (values) throughout the organization, from customers to back-of-house operations. Blackmores seeks to engineer the built environment to have an impact on behaviour in line with the company’s brand position as a leader in natural health products and services. In this way the built environment is often used to accelerate revolutionary change. It helps considerably with change initiatives, is pertinent in a time of increasing mergers, delivering tangible messages about company strategy and forcing a break with previous work habits. The workplace environment influences staff energy levels and subsequent response or output times. The ‘look and feel’ of the workplace are also strong motivators for attracting or maintaining certain staff cultures that are desirable or productive for the company. Design of the workplace delivers much more than the reward of a smart place to work. It provides an opportunity to manifest new corporate strategies, especially when instigated by company leaders who themselves embrace the change in culture. Climate factors also come into play. For example, corporate esteem, which is the extent to which employees believe the organization is successful. There exists in top-tier professional services firms (especially accounting, finance, and law firms) something of a competition to provide desirable work environments. The design of smart, innovative built environments is often used to attract and retain top tier employees, who see this as a tangible measure of the firm’s success and commercial standing, and ‘buy-in’ to the culture that the brand represents. Other Australian companies in the vanguard of this emerging trend include insurance firm AMP; St. George Bank; Qantas Travel; Toyota; ­Diageo Australia; and the peak industry standards body, Standards ­Australia.41 Andrea Ehlers, one of the consultants who took part in the project to ­transform AMP’s built environment, notes that: We [Watermark Architecture] started working on a brief from AMP in 2001 for a major overhaul of offices in NSW and Melbourne (over 40,000 sq. metres), and presented our ideas to the 10 AMP executives. After we presented · 135 ·

M04_GATT6818_03_SE_C04.indd 135

2/24/15 3:42 PM

Dynamic Supply Chains

the ‘this is what you asked for scheme’ we then presented a ‘but this is what we think will benefit your future most’. Andrew Mohl was managing director of AMP Financial Services at that meeting and he was the one who took up the more innovative ideas we proposed about working styles, team versatility, information sharing, etc., and led the other directors to endorse the design which was very new thinking at that time. Andrew Mohl was appointed CEO in October 2002 and resigned at the end of 2007. We can say that operating earnings increased significantly during that period based on his simplified business model. The built environment was one tool to support Mr Mohl’s model.42

Social media The culture of organizations is now ‘bigger’ than the organization because of the emergence of social media and networking tools. Companies are using these to improve collaboration for silo busting and conducting business globally. There are some great new tools out there and available, and in some cases these are being used for capturing knowledge/wisdom as older staff members are leaving. A recent study suggests that executives who use social media to build emotional capital within their employee communities reap real benefits in terms of improved information follows, collaboration, lower turnover and higher employee motivation.43 Indeed, ‘a number of companies, including Best Buy and Dell, have succeeded in using social media internally to meet important objectives, such as reducing their costs, increasing revenues or stimulating innovation’.44 Nonetheless, the application of this new media to change and other activities inside the organization is still at a very early stage of development, but already the potential benefits are obvious. According to Altimeter Group, there are four ways enterprise social networks could drive business value as follows:45 ◆

encourage sharing;

◆

capture knowledge;

◆

enable action;

◆

empower people.

If we can get just a fraction of these behaviours happening it will be a big step forward.

· 136 ·

M04_GATT6818_03_SE_C04.indd 136

2/24/15 3:42 PM

Internal cultural capability

Culture pays Efforts to improve cultural alignment have been somewhat paltry in the last decade, it has to be said. But it’s been encouraging to see some top executives and boards start to show an interest in culture. At last we are seeing genuine attempts to come to grips with this hitherto mysterious area of management science. Certainly, online fashion retailer Zappos (now owned by Amazon) has put an extraordinary effort into building the appropriate company culture for its type of business, and been rewarded with extraordinary success. Among numerous many other awards, it was ranked number 31 in Fortune magazine’s 100 Best Companies to Work For in 2013. It is doing a lot right. According to Zappos’ management, the company is focused on developing its company culture, which leads to excellence in customer service.46 Sounds a bit like Richard Branson’s philosophy at Virgin Atlantic. But it’s still quite atypical. Most organizations are going through some type of change, but most of this is internally focused, with little attention to customers. This is where our dynamic alignment model is unique: it ties customers into the enterprise in a systematic way, and indeed gives them pole position in causing change. At the other end of the size spectrum, Centiro Solutions SA, a ­Swedish software house led by CEO and Chief Architect Niklas Hedin, was h ­ onoured as the third-ranked Great Places to Work in Sweden for m ­ edium-sized ­organizations in 2014, at an awards gala in Stockholm. Centiro has an impressive track record, having been among the top three Great Places to Work in Sweden for five consecutive years. Hedin knows that creating the right work environment and nurturing a culture that underpins his ­innovative approach to business are integral to his success globally. Now that’s a feat. And culture is at the heart of it.

Key ideas 1 It is the underlying culture that determines what gets done in ­organizations – not what you write down in your business plan. 2 Culture is the internal reality of the organization, or ‘the way we do things around here’. It is a long-term feature embedded in the enterprise and is difficult to change.

· 137 ·

M04_GATT6818_03_SE_C04.indd 137

2/24/15 3:42 PM

Dynamic Supply Chains

3 Culture should not be confused with climate, which is the mood of the organization, and is more transient. Ultimately, it is culture that drives strategic capability, not climate. 4 There are tangible levers you can use to manage this intangible thing called culture. We call them capability areas and we have outlined eight of them that can be used to drive operational strategies. 5 Now that you can map current, ideal and preferred subcultures in your organization, you can undertake aligned change management initiatives with more precision and greater probability of success. 6 Understand the difference between your customers’ dominant buying behaviours, which are permanent, and their perceptions of your business, which can change quickly. Use this to guide your approach to change management programmes. 7 Your leadership team should shape the subcultures necessary to underpin and drive proposed value propositions into the marketplace – there is no escaping this responsibility. 8 Neuroscience has a lot to contribute to our knowledge as to exactly how we can get old habits to change. Soon we’ll be able to say, ‘that’s the way we used to do things around here’. 9 Look and learn from the best companies when it comes to culture change and organizational transformation. 10 Know the cultural strengths that will support strategy, and harness these when undergoing change to engage staff and employees.

Your challenge What do you understand about the corporate culture and constituent subcultures in your own enterprise? Have you been actively trying to mould appropriate subcultures to underpin your supply chain operational strategies?

· 138 ·

M04_GATT6818_03_SE_C04.indd 138

2/24/15 3:42 PM

Chapter 5

Leading from the front How to revolutionize supply chain performance through inspired leadership

T

he older and grumpier I get the more I come to realize that the most important thing in the life of any enterprise is ‘leadership’. The fortunes of the enterprise rise or fall on the back of the leadership style of the C-level executive, as simple as that, and we have a myriad of examples to support this assertion. In this respect, Boards have a great responsibility, because they choose the CEO in the first place and should keep an interest in talent management in general.1 After that, the appointed CEO will gather his or her team around and the task of re-aligning the enterprise with its various stakeholders begins. The best, most authentic leaders are those that fully understand their customers and the wider market, and put in place appropriate strategies to serve it. They also understand the nuances of their own organization, and move strongly to build the corresponding internal capabilities that will successfully propel chosen strategies into the marketplace. This chapter explores the role of leadership in enterprises and their constituent supply chains. Everything is linked, but everything also depends on having the appropriate leadership in place at a particular point in the life cycle of the enterprise. How do you judge a good leader? Many of us can recognize good leadership when we see it, but it’s harder to define. My experience tells me that successful leadership is not necessarily transferable from one organization to another – nor is one style necessarily right for a particular organization through time. Leaders and leadership styles need to be just as dynamic as · 139 ·

M05_GATT6818_03_SE_C05.indd 139

2/24/15 3:44 PM

Dynamic Supply Chains

the people they lead and the customers they seek to satisfy. Effective leaders will be able to shape the subcultures and implement the strategy needed in a complex supply chain environment. As John Kotter put it, ‘institutionalizing a leadership-centred culture is the ultimate act of leadership’.2 Kotter in fact was one of the first management writers to recognize that ‘aligning’ people around a vision, and its related strategies, involved far more than simply organizing and staffing.3 Leadership and management are ‘two distinct and complementary systems of action. Each has its own function and characteristic activities. Both are necessary for success in an increasingly complex and volatile business environment.’4 Politics gives us some telling examples of how different leadership styles are needed for different situations or challenges. Sir Winston Churchill was a strong and decisive leader as British Prime Minister throughout the Second World War, but he was unsuccessful during the ensuing peace time and was soon replaced. A more recent example is New York’s Mayor, Rudolph Giuliani, who was heavily criticized before the 9/11 terrorist strike for his stance on race relations and civil liberties. But post 9/11, attitudes to Giuliani changed, even if his style did not. The Mayor’s strong, energetic and hands-on style sent a consistent message to the city that he was in control and the ‘right person’ for the job at that time of crisis. Deborah Ancona et al. take a very pragmatic approach to leadership when they suggest that ‘… no leader is perfect. The best ones don’t try to be – they concentrate on honing their strengths and find others who can make up for their limitations.’5 In their opinion, ‘… the sooner leaders stop trying to be all things to all people, the better off their organizations will be’.6

Leadership is about authenticity The point is that good leaders are rarely cardboard cut-outs. Leadership is about authenticity, and the best leaders have the unique qualities of a genuine sense of self and the ability to inspire. According to Mike Hanley, ‘in leadership circles, authenticity means “being yourself”’.7 According to Andrew Bryant, ‘when we are authentic and take action on what we love and are passionate about, we give other people permission to be themselves’.8 Look at the likes of current and former CEOs: Jack

· 140 ·

M05_GATT6818_03_SE_C05.indd 140

2/24/15 3:44 PM

Leading from the front

Welch (GE), Richard Branson (Virgin), Terry Leahy (Tesco), Gerry Harvey (Harvey Norman), Michael Hawker (IAG), Philip Green (United Utilities) and Silvano Cassano (Benetton); all share a certain quality. Bob Goffee, the London Business School professor, claims that ‘truly inspirational leaders are able to be themselves with great skill’.9 And managing the perception of others is key. Establishing your authenticity as a leader is a two-part challenge. First, you have to ensure that your words are consistent with your deeds; otherwise, followers will never accept you as authentic. Everyone acknowledges and understands the need for consistency when establishing authenticity, but a great leader does a lot more than just pay lip service to it. He or she will live it every moment of the day. Indeed, it’s not an exaggeration to say that a great leader is obsessive about embodying his or her beliefs.10

And about creating a winning mind-set I was impressed by Sir Clive Woodward, the 2003 England Rugby World Cup winning coach, when he spoke of leadership as creating a ‘winning mind-set’.11 He outlined five key elements of winning leadership as follows: 1 Lateral thinking: he gave the example of Paddy Lund, an Australian dentist who culled 95 per cent of his patients and continued to service only the 5 per cent he enjoyed working with. He was searching for a ‘happiness-centred’ business.12 2 Critical elements: get the right people into the business; then get them into the right seat. Talent alone is not enough; you need passion, bordering on obsession among at least a few members of the top management team. 3 Critical non-essentials: look for something that sets you apart from your competitors. Woodward brought in Dr Sherylle Calder, a South African, as the Eyes Coach for the England Rugby XV! She trained the players’ eyes to take in increased visual information.13 This was unheard of in rugby circles up to that time. 4 Enjoyment: Woodward feels that it is important to have a happy and contented team that enjoys working together under strong direction. For this reason he conducted a climate survey on his players every six months. This may seem excessive, but it worked.

· 141 ·

M05_GATT6818_03_SE_C05.indd 141

2/24/15 3:44 PM

Dynamic Supply Chains

5 No compromise: in Woodward’s view, no one remembers who came second, and he is right. Translated into commercial terms, analysts and shareholders are becoming increasingly demanding when it comes to financial performance, and if this is below expectations it is the leader or leaders of the business that are held accountable, including Board members. I share his belief that the difference between success and failure these days is marginal, so every initiative counts, that is, short of taking drugs! Joseph Grenny expresses a similar view about leadership when he says that ‘… leaders are responsible for intelligently and ethically influencing ­behaviour in a way that creates value’.14 He goes on to say that ‘… the most influential leaders – the 5 per cent who succeed consistently at influencing profound and essential behaviour change – spend as much as half their time thinking about and actively influencing the behaviours they know will lead to top performance’.15

Captains of disruption I like this term, first coined in a recent article by Ken Favaro et al.16 He and his co-authors make the point that ‘… the chief executive is the person most accountable for managing the disruption’.17 They go on to cite several principles that CEOs should keep in mind when developing a response to disruptive events. These are: ◆

The CEO is the single most critical player in crafting and carrying out a response;

◆

It is critical to begin breaking down human inertia;

◆

CEOs must make cogent decisions about the team of top executives; and

◆

It is often important to choose a small team of top decision-makers to lead the response.18

These principles fit especially well with our thinking on the design of fully flexible supply chains as detailed in Chapter 11. Indeed, the late Steve Jobs would have made a masterful captain of the fully flexible supply chain, and in fact that is exactly what he came to be at Apple. But Jobs’ leadership style was complex. ‘He was intensely focused when committed, confident enough to take risky leaps, and charismatic enough to enlist legions of

· 142 ·

M05_GATT6818_03_SE_C05.indd 142

2/24/15 3:44 PM

Leading from the front

employees and customers in the relentless pursuit of his aspirations,’ says Jon Katzenbach.19 Likewise, the editor of Fast Company describes what he calls a ‘generation flux’ leader, who thrives best in a volatile operating environment.20 The characteristics of a GenFlux leader are described as ‘embracing adaptability and flexibility; an openness to learning from anywhere; decisiveness tempered by the knowledge that business life today can shift radically every three months or so’.21 The former Commander of US Forces Afghanistan, General Stanley McChrystal, is a good example of a leader who has had to reinvent the way he thinks and acts. He says, ‘we grew up in the military with this [classic hierarchy]: one person at the top, with two to seven subordinates below that, and two to seven below that and so on. That’s what organizational theory says works.’22 But he goes on to explain that against al-Qaeda in Afghanistan, ‘we had to change our structure to become a network’.23 This all comes down to the fact we are entering an age which will require a special kind of leadership style. Jim Collins calls it, ‘returning to normal’. ‘Normal is chaos, disruption, uncertainty and change. That’s actually the human condition. Welcome, in all likelihood, to the rest of our lives.’24 This is the antithesis of the ideal conditions preferred by enterprise supply chains, so there is still a lot to be learned about how to extract the best performance under these increasingly turbulent conditions.

Failed leadership Often, leaders emerge or fail during times of crisis. The 2009 Royal Commission into the bushfires on Black Saturday in the State of Victoria, ­Australia, highlighted how Christine Nixon, the then Police Commissioner, and therefore the person with operational responsibility for the safety of Victorians, did not know what to do. She was just being ‘busy busy’ on the day, and her leadership was totally ineffective.25 Ultimately, the bushfires raged over two weeks in the summer of 2009 and caused the deaths of 173 people. Failed or unsuccessful leadership can be demonstrated in a myriad of ways and leads inevitably to either the collapse of an organization or just poor performance. Can you think of some recent dramatic examples? The leadership triad at Enron produced an unhealthy ‘group think’ culture that

· 143 ·

M05_GATT6818_03_SE_C05.indd 143

2/24/15 3:44 PM

Dynamic Supply Chains

ultimately led to the company’s demise: they were Ken Lay (former Chairman and CEO), Jeff Skilling (CEO for six months after Lay retired), and Andrew Fastow (Chief Financial Officer). In Italy, the Italian dairy company Parmalat SpA almost collapsed after its former CEO, Calisto Tanzi, defrauded the company of more than €500 million. He is now in jail. Parmalat SpA’s new CEO Enzo Bondi is working to restore the company, repay investors their lost funds and re-establish the firm’s credibility within the financial community. An early step along that long path was taken on 6 October 2005, when the company stock was re-instated on the Milan Stock Exchange. More recently we have witnessed the Deepwater Horizon accident in the Gulf of Mexico in 2010, which killed 11 workers and caused major damage to the environment. Essentially, this disaster was a failure at the top, which led to cost-cutting getting out of control and safety being compromised.26 Failure in leadership can have major implications. You might have also come across some of the poorer leaders in large corporations that are now being characterized as ‘workplace psychopaths’.27 Exhibiting the same ruthlessness and narcissism as a criminal psychopath, these leaders somehow manage to stay under the radar as they rise through the ranks to senior levels in organizations. They cunningly manage upwards, while behaving vindictively towards their subordinates and creating a culture of mistrust. These are the worst kind of leaders because they leave a trail of destruction, the effects of which are often felt for a considerable time after they have either departed or been unmasked. I have personal experience of one of these corporate psychopaths, and it’s not an enjoyable experience having to work under such a brute of a person. John Clarke quotes one such example in his book, Working with Monsters: David worked for a large insurance company, and had a variety of techniques and devious strategies that helped him get promoted. Among other things, he would steal co-workers’ projects so he looked better than they did, and would spread false rumors about his boss. He lied to clients to make sure he got the contract, and then passed the work on to someone else who would get the blame when services were not delivered as he had promised. David was an up-andcoming star in the company. Most people had no idea that he had ruthlessly achieved his numerous promotions at the expense of the people around him.28 However we judge them, it is fair to say that today’s C-level executives face several paradoxical situations that their predecessors were probably not

· 144 ·

M05_GATT6818_03_SE_C05.indd 144

2/24/15 3:44 PM

Leading from the front

even aware of. ‘Chip’ Goodyear, the former CEO of mining and resources giant BHP Billiton, summed up the predicament of today’s leaders when he said that ‘… there are only two types of CEO, those that have been fired, and those that will be fired in the future’.29 It’s tough at the top, but the job has to be done and done well for the sake of all stakeholders. After retiring from the top job at BHP Billiton in 2007, he joined Temasek, the ­Singapore-based sovereign fund in early 2009 but lasted only a few months. The challenge of strong leadership is being faced by boards and CEOs around the globe. Sony, for instance, took the radical step of appointing Howard Stringer, a Welsh-born American, to the top job in an attempt to boost its flagging fortunes. Jeff Bezos is still driving Amazon.com towards the promised profitability in a business that looks more like a logistics fulfilment operation every day. Sir Richard Branson’s entrepreneurial and unconventional leadership style is helping him create one of the world’s great brands in Virgin, and the reign of Sir Stuart Rose as CEO at the UK retailer, Marks and Spencer, helped to reverse its fortunes. Strong and successful leadership! The nirvana for many, but how do we identify, encourage, and sustain good leaders? Mark Hurd, the executive who took over HP after the demise of Carly Fiorina seemingly saved the company with brutal cuts and some fierce fiscal disciplines, but then faced a fresh set of challenges. According to Ashlee Vance, the … most pressing is the concern that [he] has built an inflexible, solipsistic giant so obsessed with schematics and data-driven fiscal machinations that it has lost the ability to deliver that prized and perennial Silicon Valley trick: to surprise and astound. In short, what may be missing in the formidable intellectual and strategic artillery that Mr Hurd brings to bear at HP is creative inspiration.30 This observation was prophetic, as Hurd fell from grace at HP in August 2010, and subsequently joined Oracle. He was replaced at HP by Meg Whitman, the former eBay CEO, who now has the task of restoring the fortunes of this once great company. In many ways, Carlos Ghosn, the saviour of Nissan, faced similar challenges. Interestingly, his biggest test at Nissan was overcoming the deep denial inside Nissan about the company’s true condition.31 This is all about changing an engrained corporate culture as described in Chapter 4, and it’s not an easy task, even when the enterprise is under threat of extinction.

· 145 ·

M05_GATT6818_03_SE_C05.indd 145

2/24/15 3:44 PM

Dynamic Supply Chains

In February 2007, he led the formation of an alliance between Renault and Nissan. According to Ghosn, ‘…the alliance enabled Renault to become a global company and taught Nissan to be much bolder’.32 Read into that, a freer more expansive culture. In the meantime, Indra Nooyi took over as CEO at PepsiCo in 2006. Another CEO that has caught the attention of analysts is Schneider Electric’s Jean-Pascal Tricoire, who took over the role in May 2006. Tricoire says that ‘he is building a business to withstand change’.33 And that he is surely doing, against the odds. Apart from several successful acquisitions on his watch so far, he recruited Annette Clayton from Dell, and she is driving radical change through Schneider’s global manufacturing and supply chain operations. The other CEO that deserves a mention in this context is Zhang Ruimin at Haier Group in China. He is determined to make Haier a global brand in the white goods space.34 And yet more complexities continue to come the chief executive’s way. Since the collapse of several high-profile companies around the world during the past decade, stringent new guidelines on corporate governance have been introduced by major corporations; and this was before the global financial crisis of 2008/09. Martin Hilb’s paper is the definitive work on this subject.35 Boards and CEOs cannot afford to get this vital part of their corporate responsibility wrong in the future. Yet they continue to do so. Witness the wholesale collapse of banks and other financial institutions during the GFC. Something must be done to raise leadership levels in the years immediately ahead.

Creating leaders Geoff Colvin in his article in Fortune gets it right when he says that ‘… your competition can copy every advantage you’ve got – except one. That’s why the world’s best companies are realizing that no matter what business they’re in, their real business is building leaders.’36 He goes on to describe how these companies do it. GE identifies promising leaders early, and makes leadership development part of the culture.37 Eli Lilly chooses assignments strategically for its upcoming leaders.38 Nokia takes the approach of developing leaders within their current jobs, and developing teams, not just individuals.39 Whirlpool and Natura are simply passionate about the feedback and support they give aspiring leaders.40 Hindustan Lever tries to exert

· 146 ·

M05_GATT6818_03_SE_C05.indd 146

2/24/15 3:44 PM

Leading from the front

leadership through inspiration.41 And General Mills encourages its up and coming leaders to be active in their communities.42 Caterpillar used Donald O.Clifton of The Gallup Organization to help it select employees for their talents and potential as future leaders.43 So every company has its own particular formula, but the common theme in all these leading companies is the recognition of just how pivotal leadership is to their ongoing fortunes. This is entirely consistent with my own view that leadership is the starting point in achieving dynamic alignment with your customer and supplier markets: without which you will eventually fail as an enterprise. Alexander Schieffer has the final word on the importance of leadership when he comments that ‘… the real fuel [essence] in leadership is understanding and believing in other people’.44 He defines a good leader ‘as someone who has faith in people’s ability and who uses every opportunity to create the means for them to offer their creativity to the organization’.45

Identifying leadership styles The P-A-D-I logic set (first introduced in Chapter 1) can provide a useful tool to help you recognize leadership styles and match those styles with particular customer groups and situations. If you recall, Figure 1.9 introduced the notion of four distinct leadership styles: P (Company Baron); A (Traditionalist); D (Visionary); and I (Coach). We identified these four primary leadership styles and up to 12 variants, all of which can be measured using the Myers-Briggs Type Indicator (MBTI®)46 or a similar instrument47 to assess preferred behaviour. I suggest that you update your preferred ‘Type’ by undertaking the full-length assessment with a properly accredited MBTI® agency. To complete the puzzle you should then refer to Figure 5.1 to translate your MBTI® into P-A-D-I terms, thereby facilitating comparisons with the other three levels of the dynamic alignment framework. Figure 5.2 describes each of the four pure leadership styles, and explains how each has both an upside and a downside. No single leadership style will be universally ideal in a multi-segment market, where the shaping of an equivalent array of matching subcultures is essential to achieve overall alignment. Each primary leadership style is then further explored on two levels, personal and management. In personal, an individual’s behaviour is exhibited in

· 147 ·

M05_GATT6818_03_SE_C05.indd 147

2/24/15 3:44 PM

Dynamic Supply Chains

Thinking

I

ISFP I

ISFJ

Consensus

AI

ENFJ

Id

Di

ESFP

INTP

Ia

Dp

ENTP

ESFJ

INTJ

DP

Ai

Pd

A

Figure 5.1 ◆

Individual

ESTP Pa

Ap A

D

D

INFJ

ISTP ISTJ

ENFP

IN FP I D

ES TJ P A

P

ENTJ P

P

Doing

Translating from MBTI® to P-A-D-I metrics

Source: Adapted from Figure 29.6 in Gattorna (1998), p. 480

personal settings, whereas in management we see the same person’s behaviour in a corporate setting. A Coach, for instance, is a person who is personally conscientious, respected for their principles and inspires people through the clarity and strength of their convictions. At a management level, these same attributes mean they are likely to develop the potential of their staff, dislike change that could threaten the unity of the group, and they prefer consensus-based rather than autocratic decision-making.

Company Baron (P) Personal:  Matter-of-fact, energetic, enjoys whatever comes along.

Tends to like mechanical things and sports.



May be a little blunt or insensitive.



Does not like long explanations by others.

Good with tangible things that can be worked, handled, taken apart or assembled.

· 148 ·

M05_GATT6818_03_SE_C05.indd 148

2/24/15 3:44 PM

Coach

M05_GATT6818_03_SE_C05.indd 149

Leadership styles

Source: Adapted from Figure 4.2 in Gattorna (2006), p. 99

F ig ure 5. 2 ◆

Continue to: • Lead by procedure • Use information to maintain control • Implement proven business tactics Watch out for: • Inability to respond to environmental change • Efficiency at the expense of effectiveness Traditionalist A

Consensus

Continue to: • Lead by teaching • Make decisions by consensus • Get the best from people Watch out for: • Slow response to sudden environmental change • Market-related performance

I

Doing

Thinking

Company Baron

Continue to: • Lead by objectives • Focus on what’s important • Plan for future profitability Watch out for: • Paralysis by analysis • Political in-fighting • Effectiveness before efficiency

Individual

Continue to: • Lead by inspiration • Respond to turbulence • Use information to create change Watch out for: • Tangential interests • Short on the detail • People policies • Inefficient response to opportunities

Visionary

P

D

Leading from the front

· 149 ·

2/24/15 3:44 PM

Dynamic Supply Chains

Management:  Comfortable with established procedures and rules. Likes to work for change within the existing systems and structures.

Good at finding compromises.



Skilled at manoeuvring for increased personal power.

Uncomfortable with displays of warmth and openness by others. Not always keen to put into practice ideas and policies that are considered new, unpopular or risky.

Traditionalist (A) Personal: Serious, quiet, achieves success by concentration and thoroughness.  Practical, orderly, matter of fact, logical, realistic, dependable.

Likes to be well organized.

Makes up their minds as to what should be accomplished, and works steadily towards this objective, regardless of protests or distractions. Management: Likes to maintain superior/subordinate distance.

Prefers clear standards and requirements for jobs.



Comfortable with the supervision of well-structured tasks.



Uses routines and procedures for getting things done.

Prefers infrequent changes in work patterns or organization structure. Does not like too much discussion about new ideas and what the future might hold.

Visionary (D) Personal:

Enthusiastic, high spirited, ingenious and imaginative.



Able to do almost anything that interests them.

· 150 ·

M05_GATT6818_03_SE_C05.indd 150

2/24/15 3:44 PM

Leading from the front

Quick with a solution for deficiencies and generally prepared to help people with problems. Often relies on ability to improvise instead of preparing in advance.

Can usually find compelling reasons for whatever they want.



Sometimes impatient.

Management: Likes to use personal influencing skills.

Comfortable with criticism, confrontation and conflict.



Good at working in poorly structured situations.



Good change agent.



Uncomfortable with details and routine.



Does not like constraints and established procedures.



Does not like to maintain group cohesion for its own sake.



Does not like lengthy decision-making procedures.

Coach (I) Personal: Success achieved by perseverance, originality and the desire to do whatever is needed or wanted. Puts best efforts into work and job. Conscientious, concerned for others, quietly forceful.

Respected for their firm principles.

Often followed because of their clear convictions as to how to achieve for the common good. Management: Likes to help develop the human potential among direct reports.

Prefers consensus-based decision-making.

Comfortable with changes in work patterns and flexible working hours.

Dislikes major changes that threaten the unity of the group.



Does not like autocratic patterns of decision-making.



Prefers to argue for changes in resource allocation.

· 151 ·

M05_GATT6818_03_SE_C05.indd 151

2/24/15 3:44 PM

Dynamic Supply Chains

Leadership in large enterprises means leadership at all levels, not just the executive team, so everything being said here applies to all levels. Clearly, in a large enterprise, the task of shaping the necessary subcultures can be allocated to different members of the executive team. In a small-to-medium enterprise, this is usually not possible, and the task inevitably falls to just a few executives. Either way, it is a complex task, and one that is best undertaken by executives that have a preferred leadership style aligned to the subculture of the organizational unit that they have been allocated. If not, it becomes a change situation. Ultimately, it falls to the Boards of enterprises to bear the responsibility for choosing the most appropriate CEO for the particular ‘season’ that an organization is in, and there are many examples of Boards doing just that over the past few decades. Perhaps the most striking contemporary example is Hewlett-Packard. Carly Fiorina arrived as CEO in 1999 and set out a vision to rebuild the image of the flagging organization by trying to ‘inspire employees with pleas to help her re-capture HP’s lost glory’.48 In P-A-D-I terms, Fiorina represented something of a dichotomy. On the one hand she pushed hard for innovation (D logic) at the same time as she was seeking synergies (A logic) via an integrated sales force. This is a difficult combination to execute because of the opposing subcultures these two strategic philosophies represent, and in the end she paid the price. As Business Week commented, ‘She’s playing CEO, visionary, and COO, and that’s too hard to do.’49 Prior to her tenure at HP the culture had been characterized by teamwork and consensus. Her entrepreneurial, customer-focused, results-driven leadership style caused confusion and attracted progressively increasing resistance. Ultimately, she was replaced because the HP Board said it wanted more focus on execution.50 Fiorina’s successor, Mark Hurd, appointed in March 2005, opted for the more compatible logics of focus by separating the printer and PC divisions (P logic), while pursuing overall cost-saving efficiencies via a dramatic programme to reduce staff across the company (A logic).

Change needs to be led not managed How can real change be driven through an organization? Can you see the different potential and the different roles of leaders and managers? We believe that just as an army must be led rather than managed into battle,

· 152 ·

M05_GATT6818_03_SE_C05.indd 152

2/24/15 3:44 PM

Leading from the front

so enterprises also have to be led first and foremost, and then managed. Leaders will produce useful change while managers will focus on controlling complexity. Both are essential but have very different capacities when it comes to change. Leaders will motivate, inspire and energize people; managers will develop the organization’s capacity to deliver through organizing and staffing – they plan and budget. The differences between the two are significant and can be seen in Figure 5.3. To put a finer point on the art of leading enterprises, various dominant coalitions within the top management team can be ‘genetically’ engineered to ensure the required cultural biases and corresponding cultural capabilities are embedded in the organization. These coalitions will ultimately be a mixture of the four generic leadership styles expressed in P-A-D-I code in Figure 5.2. Details of the characteristics of each type in the top management team are provided in Figures 5.4a and 5.4b. Have you ever seen a universally ideal leadership or management style? Not surprisingly, no single ‘ideal’ style exists. Instead, as with other elements

LEADERS PRODUCE USEFUL CHANGE

MANAGERS CONTROL COMPLEXITY

Make the change occur Set the direction for constructive change Relate to what the events and decisions mean to the people involved Focus on aligning people – communicate the direction – achieve common understanding of the vision – commitment to achieving the vision Influence people to achieve goals and objectives

Bring order and consistency – work within the current system Manage by planning and budgeting Relate to how things get done Develop capacity to achieve through organizing and staffing Responsible for performance and productivity Ensure plans are accomplished by controlling and problem-solving – rely on systems and structures

Motivate, inspire and energize – keep people moving in the right direction, despite obstacles to change

Figure 5.3 ◆

Leading versus managing

Source: Adapted from Figure 4.3 in Gattorna (2006), p. 103

· 153 ·

M05_GATT6818_03_SE_C05.indd 153

2/24/15 3:44 PM

Dynamic Supply Chains

D. CREATORS AND BUILDERS

I. REVITALIZERS AND INTEGRATORS

Shared values

Shared values Participation, cohesion

Creativity, innovation

Change

Rapid response

Team style

Team style

Sensitive to people

Move very quickly

Offer emotional support – have the ability to empower subordinates

Apparently haphazard – guided by shared vision

Individual aptitudes

Individual aptitudes

Consensus building

Individualism, vision

Good negotiation skills

Flexibility

Good conceptual ability

Tolerance for ambiguity

Individual knowledge

Individual knowledge

Group dynamics

Technical

Communications

R&D

Conditions

Conditions

Stable, traditional

Turbulent, uncertain

About to change

Rapidly changing

Strategy

Strategy

Developing long-term relations with customer About to change strategic direction

Figure 5.4a ◆

Creation of a market New product development

Characteristics of top management team (TMT) dominant coalitions

Source: Adapted from Figure 2.9 in Gattorna and Walters (1996), p. 40

of the dynamic alignment model, multiple styles have to be formed and sustained, sometimes in spite of the natural conflict and associated tension brought about by having several styles coexisting. As expected, the natural style and value system of the CEO is vital. This is certainly the case at ­JetBlue Airways, perhaps the leading low-cost airline in the USA. Here the

· 154 ·

M05_GATT6818_03_SE_C05.indd 154

2/24/15 3:44 PM

Leading from the front

P. GROWTH MANAGERS

A. PRODUCTIVITY MANAGERS Shared values

Shared values

Control

Objectivity, facts

Analysis

Results

Team style

Team style

Logical, analytical

Drivers

Provide clear structure for their subordinates

Set clear objectives for their subordinates

Individual aptitudes

Individual aptitudes

Good analytical skills

High energy

Logical

Clear focus on objectives

Desire for stability

Desire for clarity

Individual knowledge

Individual knowledge

Accounting

Marketing

Production

Sales

Conditions

Conditions

Established, mature

Settled down

Margins under pressure

Highly competitive

Strategy

Strategy

Consolidation, fine tuning

Gaining market share

Improving profits, productivity

Customer focus

Figure 5.4b ◆

Characteristics of top management team (TMT) dominant coalitions

Source: Adapted from Figure 2.9 in Gattorna and Walters (1996), p. 40

founder and former CEO, David Neeleman, and his executive team consciously tried to preserve the airline’s distinctive culture as it grew rapidly from a small to a big company.51 I have travelled with JetBlue in flights to and from Boston many times, and I have found the service to be polite, efficient and certainly no frills.

· 155 ·

M05_GATT6818_03_SE_C05.indd 155

2/24/15 3:44 PM

Dynamic Supply Chains

However, perhaps the most outstanding example of contemporary leadership is to be found at Li & Fung, where Victor Fung and his brother William have transformed what was a small, Hong Kong based trading company into perhaps the world’s first genuine global supply chain company, using all the techniques and technologies you would expect of such a leading company. In many ways, Li & Fung epitomizes the concept of dynamic alignment in practice, because it has managed to remain aligned and attuned to its customers and suppliers for nearly a century. Why? Leadership! As we will see in Chapter 6, Li & Fung has overcome one of the biggest hurdles to sustained performance by adopting an organization structure which involves specialist teams (‘tribes’) of 40 to 50 multidisciplinary personnel, dedicated to each of its major retail customers. Surely there are some lessons in here for other corporations? For more information about the Li & Fung phenomenon I suggest you read their book, Competing in a Flat World.52 As you can imagine, if the mix of leadership styles and cultures is inappropriate, as so often happens, then damaging misalignments can occur, which ultimately will hamper performance. So what do you have to look out for? The respective flaws of different types of leaders are revealed in Figures 5.5a and 5.5b. Most likely you will recognize some of these: leaders who are

‘I’ culture

‘D’ culture The ‘I’ manager

The ‘D’ manager Failure to share vision

Failure to achieve objectives

Seen as maverick

Protects subordinates from reality The ‘P’ manager

The ‘P’ manager Insensitive to group norms

Risk averse

Desire for more internal control

Misses the ‘big picture’ Subdues initiative

The ‘A’ manager

The ‘A’ manager

Distance from ‘real’ decisions Development of conflicting subcultures

Unnecessary controls Inflexible decisions Dismisses new ideas

Figure 5.5a ◆

Culture and leadership style – what to watch out for

Source: Adapted from Figure 4.5a in Gattorna (2006), p.107

· 156 ·

M05_GATT6818_03_SE_C05.indd 156

2/24/15 3:44 PM

Leading from the front

‘A’ culture

‘P’ culture The ‘I’ manager

The ‘I’ manager Undermines political forms

Inefficient resource allocation

Poor risk tolerance

Climate of frustration The ‘D’ manager

The ‘D’ manager Creates insecurity

Loss of output control

Leaves the rest behind

Loss of strategic focus The ‘A’ manager

The ‘P’ manager Systemic resistance to change

System becomes an end in itself

Mis-translation of objectives

Loses sight of external change

Fi g u r e 5 . 5 b ◆

Culture and leadership style – what to watch out for

Source: Adapted from Figure 4.5b in Gattorna (2006), p.107

inflexible, risk averse or fail to share the corporate vision. No ­wonder they are constraining growth at best, or worse, wreaking havoc!

Achieving multiple alignment through superior leadership So where does this leave the corporation? The task of the senior executive is to select the top management team, and in the process identify the natural leadership styles required for different technical disciplines. This has to be done in such a way that the embedded imbalance reflects the imbalance in the behavioural segments in the external market. This same imbalance or bias has to be embedded in the subcultures inside the company so as to either consolidate or further improve alignment. Remember our goal? It’s dynamic alignment in the supply chains that connects the enterprise with its customer and supply bases. Given the five generic supply chains already identified in Chapter 2, enterprises have to decide how many of these they are prepared to actively resource and support. The collaborative supply chain requires a leadership that is empathetic and consistent in the way it manages customer relationships. The lean supply chain requires a more conventional albeit steady style,

· 157 ·

M05_GATT6818_03_SE_C05.indd 157

2/24/15 3:44 PM

Dynamic Supply Chains

with the emphasis on efficiency and reliability, and no particular emphasis on external relationships. The agile supply chain must be driven by a leadership style which is predominantly results-oriented with an eye to responsiveness. And the campaign supply chain must feature a relentless attention to on-time and on-budget delivery. Finally, the fully flexible supply chain requires a leadership style that is predominantly visionary, tinged with the reality that any creativity or innovation introduced must solve a particular problem for a customer. You will see that we have come full circle since Chapter 1. Superior alignment, leading to superior sustained performance of the enterprise, always starts with the executive leadership being close to the market. The executive has to be close enough to customers to read and interpret all the signals coming their way. Think of Lord Coe, the Chairman of London’s winning bid for the 2012 Olympics. Such was his deep understanding of all stakeholder interests, he led a reversal of fortunes in the 18 months leading up to the International Olympic Committee’s decision to choose London.53 When leaders and their key customers and consumers are aligned, there is more than an even chance that the most appropriate strategies will be formulated, and that the underpinning subcultures so necessary to drive these into the marketplace will be also taking shape under the guidance of the same management team. Lord Coe and his bidding team still had to deliver on this last part, and they did. The London Olympics were a great success, by any measure. Look for yourself and run a test on your own enterprise using the diagnostics already introduced in this and earlier chapters; success always follows superior alignment. Since supply chains permeate all enterprises, achieving multiple alignment across an array of supply chains embedded in the business is essential if significantly higher operating and financial performance is to become a reality. Let us consider again the thoughts of management academic Hau Lee. When he described his idea of a Triple-A supply chain, he argued that several enterprises had achieved agility, adaptability and alignment to various degrees.54 The companies he nominated as proof of this were Lucent, Walmart, Dell, Zara, Nokia, Cisco and Toyota, and especially Seven-Eleven Japan. But the closing comment in his article is most revealing: ‘… most Firms already have the infrastructure in place to create Triple-A supply chains. What they need is a fresh attitude and a new culture to get their supply chains to deliver Triple-A performance.’55 What he did not say is that it

· 158 ·

M05_GATT6818_03_SE_C05.indd 158

2/24/15 3:44 PM

Leading from the front

all starts with inspired leadership! Achieving Lee’s ‘Triple A’ status is very difficult in practice, because we are dealing with the unseen cultural forces described in Chapter 4: the powerful force of human behaviour that lies beneath the surface of the performance iceberg. We have sought to improve our understanding of the mechanisms at work here through the new dynamic alignment framework and the diagnostics that we have outlined designed to measure the misalignments that can occur inside and between the organizations along complex supply chains. We are now in a position not only to describe the visible outcomes of misalignments, but also to identify where the misalignments are, predict their likely impact and design precise counter-measures, proactively. At last some control over our destiny, and now is the time to discard the mentality of denial, which has plagued so many enterprises to date. We need to confront and harness the human behavioural forces inside our own enterprises, because this is where the seeds of success lie.

Leadership, vision and values How clearly have you seen leaders articulate their vision and values? I believe great leaders invariably articulate a vision for their enterprise and then visibly live this vision day-to-day as an example to staff. This vision sets boundaries for everyone in the enterprise and helps to galvanize and focus the energy of the company on key customers, suppliers and other important stakeholders. And if you agree with my assertion (in Chapter 1) that supply chains are the business, then it’s vital that enterprises should clearly define the role that supply chains play in delivering the overall corporate vision. If you don’t develop such a vision, then the old Hungarian proverb probably applies: ‘If you are always trying to be like someone else, who’s going to be you?’ I believe vision formulation is so important that I’ve developed a fourpart formula for constructing a meaningful statement to guide every level of the enterprise in its daily actions. You will find this described in detail in Gattorna (2010),56 along with two examples of operating vision statements developed for large Asia-Pacific enterprises.57 You can also find a more detailed treatment of this topic in my 2003 Handbook on the supply chain.58 Neil Humphrey, SVP Supply Chain Europe Unilever says that they have ‘…narrowed our purpose in the supply chain down to three things: to deliver

· 159 ·

M05_GATT6818_03_SE_C05.indd 159

2/24/15 3:44 PM

Dynamic Supply Chains

growth, margin, and capital efficiency. These are pure business measures that sit right at the heart of the business, and are terms that we have identified as being understandable to everyone, not just the supply chain professionals.’59 At last, someone who understands that supply chains are the business! But how do we bring the vision to life? All companies need to draw up a corresponding set of values to underpin the words in the vision statement. These are the corporate values that everyone in the enterprise must sign up to. If they don’t, it’s highly likely they will become part of the ‘internal resistance’ movement in the enterprise. It is good to see that increasingly companies are making these all-important values explicit. Xerox is a good example. Xerox CEO Anne Mulcahy attributes the articulating of corporate values, and living these values, as helping her to bring the company through some tough times.60 Leadership, vision, values … they are all critical to success in business, and because supply chains permeate every business, we need to have these qualities present in equal measure, embedded in the supply chain organization. Peter Drucker, who died in November 2005, was a giant among management thinkers. Indeed, he was arguably the greatest management thinker of the twentieth century – his ideas were always years, and sometimes decades, ahead of their time. Let’s hope the legacy of insight and foresight he leaves us in an otherwise thin terrain will be used to the full by future leaders to improve the performance of their enterprises and supply chains – for the benefit of all stakeholders. Drucker once famously said that ‘there are no more advantages to big business, only disadvantages’. Why? He continues that, ‘once a company rises above a certain size, the head of the organization has to rely on subordinates for what is going on – who only tell him what they want him to know’.61 He clearly understood how difficult leadership of major enterprises was. Perhaps we should leave the last word to Ram Charan who is seen by many as the wise man of our generation of leaders. In his mind, ‘good growth comes not from cost-cutting or acquisitions, but rather by retooling resources and improving cooperation within the company’.62 Leadership is at the heart of this task. The bottom-line is that for enterprises to gain maximum competitive advantage from their supply chains, leadership at the C-level must fully understand and embrace the company-wide adoption of a ‘supply chain philosophy’, rather than stick with the narrow convention of treating the

· 160 ·

M05_GATT6818_03_SE_C05.indd 160

2/24/15 3:44 PM

Leading from the front

supply chain as just a specialist function that sits beside the other functions in the Firm. That is old hat!

Key ideas 1 Leaders and leadership styles need to be just as dynamic as the people they lead and the customers they seek to satisfy. The best leaders will have a great understanding of their customers and the capacity to articulate a vision focused on those customers. 2 As a leader, you must be authentic above all else. You can only motivate and inspire your people if they believe in you. A Hungarian proverb expresses this well: ‘If you’re always trying to be like someone else, who’s going to be you?’ 3 The place for leaders is not only at ‘the top’ of an enterprise; good leaders have to permeate the entire organization. The job of the CEO is to identify, nurture and empower leaders across the business. 4 When leading collaborative initiatives, executives who are charged with implementation should be prepared for opposition in other parts of the organization – it’s called ‘ambiguity’, and the best leaders will know how to live with this. 5 Leading CEOs also know how to live with, and manage, disruption. This is the ‘new normal’ of today’s marketplace and supply chain strategies need to be designed accordingly. 6 If you agree that supply chains are the business, then leaders need to define the role of supply chains in aligning your business to your customers and suppliers. Our dynamic alignment framework is here to assist in identifying the capabilities, operational strategies and subcultures that you will need.

Your challenge Are you articulating a vision for your firm and defining the role that supply chains will play in reaching your customers? Put simply, is your leadership focusing the energy of your people on the marketplace you serve?

· 161 ·

M05_GATT6818_03_SE_C05.indd 161

2/24/15 3:44 PM

M05_GATT6818_03_SE_C05.indd 162

2/24/15 3:44 PM

Chapter 6

Designing responsive organization structures How to get people working together, and focused on customers f all the internal capabilities in an enterprise, organization O design is perhaps the most important, after leadership of course. The structures that we set people to work in have a major influence on the responsiveness of the enterprise. Unfortunately, most contemporary enterprises have fallen behind in their organizational development, and consequently their organization structures are flawed and misaligned with increasingly demanding customers and consumers. In this chapter we go in search of new organization designs to underpin the added dynamism needed to service contemporary customers. We start with conventional wisdom and then proceed to critically review the designs of the past two decades. Finally, we propose a way forward that combines the strengths of functional structures with the embedded responsiveness of customer-facing, multi-disciplinary ‘clusters’. Indeed, help is on the way! It never ceases to amaze me how seemingly sophisticated enterprises go about their business. They construct an edifice they call an organizational structure; they develop plans and then execute operations with only scant regard for their customers’ expectations and preferences. Far too many enterprises have fallen into an ‘apathy trap’ – apathy about their real operational and financial performance. To be brutal, many of these ­enterprises have been guessing for years, and seemingly getting away with

· 163 ·

M06_GATT6818_03_SE_C06.indd 163

2/24/15 3:45 PM

Dynamic Supply Chains

it. But lurking underneath this façade of success have been the seeds of ­failure.1 This ­apparent good luck has just run out. The big banks were the first to fail, ­big-time, and they will be followed by many other enterprises in the real economy. If anyone is still in doubt, let’s be clear: you simply cannot ­conduct a sustainable business over time in a volatile operating environment unless the structure of your organization evolves with the operating environment, enabling you stay very close to your customers, and in some cases the consumers or end-users served by those customers. Everything starts and ends with customers and/or consumers. During the past two decades I have been developing and refining, through empirical fieldwork, the dynamic alignment model. This is what underpins my thinking on organizational design. Given the onset of increased volatility in the marketplace, it’s time has finally come. To recap, this is a holistic business-to-business (B2B) concept, which involves segmenting your marketplace along behavioural lines, and then linking these customer (and supplier) segments to the enterprise with the appropriate value propositions and supporting operational strategies. It is no more, no less than this.Yet there is currently nothing like this anywhere in business or commerce. Underpinning these value propositions and operational strategies, there needs to be an array of equivalent subcultures that will be capable of, and have the will to, propel them into the marketplace in ways that align with customers’ expectations. Behind all this action is a leadership team which must understand and empathize with the target marketplace. This leadership needs to develop the appropriate value propositions, strategies, and capabilities to serve customers and develop the corresponding subcultures inside the organization; everything has to be aligned, dynamically. This concept of dynamic alignment is one of the most powerful contemporary business models available today. It is relevant to enterprise supply chains because businesses are in effect just an aggregation of all the supply chains/pathways running through them – between all parties, upstream and downstream. The full array of multiple supply chains and all their possible variants are depicted in Figures 13.2 and 13.3 in Chapter 13. We will get to them in due course. Essentially, this is all about looking from the outside in. We need to work back from the marketplace, through the enterprise and back to the supply base, and forward again. The right organizational design is essential to achieve this, and yet we rarely see organizational structures that will enable this particular sequence to occur. Little wonder that we have so much

· 164 ·

M06_GATT6818_03_SE_C06.indd 164

2/24/15 3:45 PM

Designing responsive organization structures

under- and over-servicing going on, with all the attendant consequences of increased costs and lost revenue potential. Forget about taking the soap out of the bathroom and cancelling the newspapers in these tough times. Focus seriously on re-designing your organization, and realign your business (and its supply chains) with customers, suppliers and third parties. That will fix most things right there and then!

Organization design as a major shaper of culture I introduced the dynamic alignment concept in earlier chapters as a major new business model that will revolutionize the way we think and work. However, my main focus in this chapter is on just one facet of that model – organization design. We need the structure to be right so that we can shape the appropriate subcultures inside the enterprise to enable effective albeit sustainable linkages with our customers. Having discovered through rigorous empirical observations over many years that there are usually no more than five dominant customer buying behaviours evident in most markets,2 we can extrapolate this finding into the equivalent five supply chain configurations. I have named these configurations: collaborative, lean, agile, campaign and fully flexible. Other variations around these five types exist, as described in Chapter 2, but are not as common. These very different configurations require equally disparate subcultures to propel them into the marketplace, and one of the biggest factors in shaping the necessary array of subcultures is organization design (see Chapter 4). Why? Because to be truly effective and aligned with customers and suppliers alike, an enterprise must have different organizational capabilities embedded in it. The days of the one-size-fits-all organizational structure are just as ‘gone’ as one-size-fits-all supply chains.

From silos to silo busting Perhaps the best historical review of the different types of organizational structures deployed in the logistics and supply chain arena is by Soo Wook Kim.3 He identified five organization types as follows: the non SCM-oriented organization, the functional organization, the matrix channel organization, the process staff organization, and the integrated line organization.

· 165 ·

M06_GATT6818_03_SE_C06.indd 165

2/24/15 3:45 PM

Dynamic Supply Chains

None of these designs ever had the customer in mind; indeed, they were all internally focused formats. I am not interested in exploring these organization structures further because they are largely irrelevant to today’s externally focused operating environment, which demands we move away from thinking of supply chain as a function and embrace the idea that it is more of an operating philosophy for the whole enterprise to embrace. Ranjay Gulati goes further in his seminal paper on what he calls ‘silo busting’.4 He analyzes such globally successful companies as GE Healthcare, one of the world’s leading retailers, Best Buy, and Jones Lang LaSalle, the real estate and investment management firm. All have had significant success with organizational structures designed around customer needs rather than internally focused dimensions. More recently, Best Buy has struggled,5 while GE Healthcare6 and Jones Lang LaSalle7 have continued their strong growth. The big mistake identified by Gulati is that ‘many product-centric companies probably start out with a focus on customers. But after early successes, they institutionalize the notion that markets respond primarily to great products and services.’8 Wrong! If ever that was true, it certainly isn’t true now. If we search more widely in the world of organizational theorists we find Gareth Morgan’s work. His classic 2006 study Images of Organization9 provides a much richer and more eclectic perspective using such metaphors as ‘organizations as machines; organizations as (living) organisms; organizations as political systems’. Although not specifically directed at supply chains, his work provides valuable insights into how we might re-conceptualize supply chain structures to do the tasks required of them day to day. It’s a pity that designers of supply chain configurations have not invoked his work more widely. In any event we are left with the impression from Morgan that the way organizations should shape their supply chain structures involves more closely integrating the overall business design, and I strongly agree with this proposition.

Atomization of organizations In the 1980s, I observed McKinsey & Company experimenting with a radical new form of organization design called ‘atomization’.10 This concept involved breaking up the organization into small groups of personnel to force accountability across the conglomerate of which they were part. However, this led to unexpected inefficiencies and duplication, together with in-house competition

· 166 ·

M06_GATT6818_03_SE_C06.indd 166

2/24/15 3:45 PM

Designing responsive organization structures

and ultimately destruction of shareholder value. McKinsey tried the atomized configuration at BP, Fletcher Challenge (NZ) and Carter Holt Harvey (NZ), but the attempts failed to produce positive results. From a supply chain perspective, it is easy to see why. Supply chain management is about integrating processes across organizations, whether in real or virtual terms, but the atomization concept went in the opposite direction by fragmenting the organization, albeit for what appeared to be sound business reasons. More recently, McKinsey & Company has again broached the topic of organization design, but its focus has been on seeking ways to make people inside organizations more productive rather than seeking to satisfy customers, as can be gleaned from the following quote: Today’s big companies do very little to enhance the productivity of their professionals. In fact, their vertically oriented organizational structures, ­retrofitted with ad hoc and matrix overlays, nearly always make ­professional work more complex and inefficient. These vertical structures – r­elics of the industrial age – are singularly ill-suited to the professional work p­ rocess. ­Professionals co-operate horizontally with one another throughout a ­company, yet vertical structures force such men and women to search across poorly connected organizational silos to find knowledge and collaborators to gain their cooperation once they have been found.11 I agree with many of these sentiments, but the point McKinsey & Company has missed is that if you are able to achieve superior alignment with your customers, it’s very likely that the internal processes will fall into line and by definition will be more productive. McKinsey revisited the topic in 2011 when they introduced the notion of ‘splitting monolithic supply chains into smaller, nimbler ones . . . [to] tame   his sounds very much complexity, save money, and serve customers better.’12 T like my own multiple supply chain alignment concept, but McKinsey got there indirectly by analyzing the metrics – volume of SKUs versus weekly demand volatility (expressed as a percentage) – and not as a direct result of probing the customers. While they certainly made the transition from a ‘one-size-fits-all’ configuration to a more flexible combination of four supply chain configurations, using the same assets and network resources as previously, they did not say anything about how these new supply chains should be organized. Some three years later (2014), National Australia Bank has decided to break the organization down into 165 units in an attempt to lift accountability

· 167 ·

M06_GATT6818_03_SE_C06.indd 167

2/24/15 3:45 PM

Dynamic Supply Chains

and corresponding performance. Sounds and looks a lot like what McKinsey tried years ago, and they found some unwanted side-effects. It will be interesting to see if this type of restructuring works this time around. According to CFO, Craig Drummond, the restructure is ‘expected to drive “significant” cultural change’.13 But that could be at a cost.

The adaptive organization The Boston Consulting Group joined the debate in 2005 when it suggested that ‘an adaptive organization that interprets and acts on new signals coming from the marketplace’ was the way forward.14 Interestingly, their suggested approach has undertones of my own dynamic alignment model. Peter Robertson, an Australian supply chain expert who has worked extensively in the steel industry, came next. He proposed the adaptive supply chain, involving a linked set of adaptive agents constituting a network.15 Robertson suggested that ‘supply chain actions are adapted in order to best achieve specified goals. A mix of top-down and bottom-up optimization principles aligns local goals with overall goals.’16 In 2008, the Economist Intelligence Unit, on behalf of Laserfiche, surveyed 227 executives globally in five sectors: government, education, professional services, life sciences and financial services. The aim of the research was to ‘discover how organizations manage the tension between the autonomy required by professionals, and the centralized control required to run an efficient business and manage risks’.17 Its conclusion: ‘Done well, the balance between control and freedom can lead to a motivated workforce and an organization equipped to ride out tough times – while continuing to innovate and grow over the long term.’18 Easier said than done!

The customer drives the company Academic George Day provided some prophetic insights as far back as 1999 when he outlined four principles that he saw as essential to underpin his claim that the customer drives the organization. These principles are:19 1 Firms will increasingly evolve towards a hybrid or hypertext form of organization, combining the best features of horizontal process and

· 168 ·

M06_GATT6818_03_SE_C06.indd 168

2/24/15 3:45 PM

Designing responsive organization structures

vertical functional forms – in order to get closer to their customers. (Day’s words are relevant as this is exactly what I will be recommending later in this chapter.) 2 There will be a great deal of variety in the hybrid designs that are adopted, depending on the alignment of the value strategy and the core capabilities that are exercised in the processes. This will dictate the relative importance of staff groups, functional specialists and process teams. (In my view, the variety is determined by the make-up of the customer groups being served, as defined by behavioural segments.) 3 Advances in data networks will permit firms to link internal teams for better, faster decision-making, and to devise more interactive strategies that use information from the customer rather than about the customer. (This is using data mining techniques.) 4 As strategies become more interactive, leading to increased dialogue and collaboration with customers and (distribution) channels, there must be greater dispersion of information and decision-making throughout the organization. 5 The idea of the customer driving the company sounds a bit like Gary Barter, the Director of Golf Teaching at The Australian Golf Club in Sydney, who is often heard to say during golf lessons, ‘the left arm drives the company’, meaning the left arm (for a right-handed player) leads the golf swing and is therefore largely responsible for the resulting flight of the ball. Certainly Day was spot on with all four of his principles, more than a decade ahead of this book. Unfortunately, too many companies are incapable of differentiating their left arms from their right when it comes to the customer.

Self-managed teams in Brazil One major experiment in how to structure the way people work was started by Ricardo Semler at Semco in Brazil some 20 years ago and reported in both his books in 1993 and 2003.20 Semler believed in ‘participative management’ where the workers rather than management would devise strategies and execute them. His suggested organizational structure was unorthodox, akin to putting the inmates in charge of the asylum, but as noted author Charles Handy once commented, ‘the way Ricardo Semler runs his company is impossible; except it works, and works splendidly for everyone’.21 Semler’s

· 169 ·

M06_GATT6818_03_SE_C06.indd 169

2/24/15 3:45 PM

Dynamic Supply Chains

goal was to develop the creativity of his workers, which normally would have been suppressed in more conventional organizational formats. Interestingly, Semco is still thriving today, but few if any other corporations have followed his lead and adopted a similar structure. The test of Semler’s achievements is put this way by Tim Kastelle: ‘One of the Firm’s key performance indicators is how long Semler can go between making decisions. The time keeps getting longer, while the Firm has maintained around 20 per cent growth for nearly 30 years now.’22 Not bad for what was originally an experiment. Drawing on similar principles, the Irizar Group, a Spanish-based global bus/coach building company, has prospered during the past few decades. Here too, the company works ‘through self-managed multi-disciplinary teams which are integrated into the main process (from thinking about customer/market at one end, to the ‘end of life’ of the supplied coach)’.23 Similarly, Best Buy has already adopted this modus operandi, with local store employees being empowered to make decisions on the spot, leading to ‘an agile, demand-driven supply chain that can react to decisions made at widely distributed localities, not just at centralized higher levels’.24 Niklas Hedin, CEO and Chief Architect at Swedish-based software company Centiro Solutions AB, has a more radical variation to the self-managed teams mentioned above. He believes strategic leadership belongs at the bottom of the organization, where leaders work on strategic issues with 6–18 month timeframes. Above this he envisages tactical leadership, where leaders work to a horizon of six months or less. And around the rim are the autonomous teams, held together by a shared culture and other mechanisms. This structure is the epitome of openness and innovation, where ideas are freely shared, and we’ll talk more about this shortly. (You can also read Hedin’s views on customers and people in his Afterword at the end of this book.)

Fashion apparel companies first to break the mould The first enterprises to fully break with convention were the fast fashion apparel companies. They had to survive in the hot house of near realtime competition, but their functional organizational models simply lacked the necessary agility in this environment. The fast fashion enterprises hit the ‘unpredictability ceiling’ well before most other industries. One name stands out – Zara.

· 170 ·

M06_GATT6818_03_SE_C06.indd 170

2/24/15 3:45 PM

Designing responsive organization structures

Zara Zara has achieved wonders in the fickle world of fashion by showing how an enterprise can become more responsive to its customers than any of its competitors. The Spanish-based company achieved this without any special new technology or hidden processes. In the end, it has been all about the way Zara’s management has mixed the recipe with otherwise known ingredients. Zara has put in place cross-functional teams to manage the design, production and delivery of different apparel ranges to their target markets in women’s fashion, men’s fashion and children’s wear. These teams work closely with store managers in the Zara retail chain and are co-located to facilitate rapid communications. The result: Zara is able to process a garment from sketch on paper to product in the store in 15 working days, while no competitor can get anywhere near that. Postponement techniques are invoked, coupled with lean supply chains on the in-bound side, but the result is an ‘agile’ response to the changing fashion whims of their consumers. It is a great success story, and one still in the making.

Organizing around brands VF Corporation, the US-branded lifestyle apparel company based in Greensboro, North Carolina, uses what it terms ‘cross-coalition’ teams to speed up its responsiveness to customers worldwide. In the process, VF has effectively transformed itself from a manufacturing business (owning machines) to a sourcing business (owning brands) in less than a decade. It is now a ‘hybrid’ company, working at both retail and wholesale levels, and it is succeeding despite the intense competition. Why? Inspired leadership and an intense focus on innovation, in every aspect of its business.25

Icon Clothing, a business unit within Pacific Brands, one of Australia’s biggest apparel manufacturers, adopted a similar approach. It was established in 1994 and grew rapidly, positioning itself as a branded youth manufacturing, marketing and distribution company. The company describes itself as a ‘house of brands’, many of them secured under licence from VF Corporation.

▼

Icon Clothing, Pacific Brands

· 171 ·

M06_GATT6818_03_SE_C06.indd 171

2/24/15 3:45 PM

Dynamic Supply Chains

The dynamic alignment model for the supply chain was introduced into the company at the instigation of the Joint Managing Director, Stephen Little, and Operations Manager Kathryn Bolger. It had previously used a conventional, functional organization design, but following a pivotal workshop in March 2006 the company changed its structure from functions to ‘brand clusters’ once it established the customer buying behaviour for each of its eight brands. The new configuration, depicted in Figure 6.1, is working well, and has significantly increased the tempo of operations throughout the company.

The Decathlon Group, a French company and leader in sports products in Europe, has also adopted a cluster design around each of its brands, e.g., Tribord, Quechua, Inesis and Geologic. The company mixes designers with other functional specialists to improve the product innovation process, and has been very successful as a result. The company name has become ­synonymous with innovation, quality, design and performance. The Decathlon Group has a constellation of own brands named ‘passion brands’ and has developed a management structure called ‘variable geometry’: . . . starting from a vertical growth strategy, the Decathlon Group developed by creating new specialized brands and by launching a ‘federator’ innovation process as well as an R&D activity divided by sectors, not as a retailer owner of sub-brands, but as a manufacturer owner of ambitious and powerful autonomous brands. This strategy led to a dual system of innovation management, and finally, to a form of ‘variable geometry’ management.26

Organizing around industry verticals Arshiya, the Indian 3PL/4PL, is another company experimenting with horizontal clusters focused on industry verticals, underpinned by centralized shared services containing human resources, IT, and finance and administration. The clusters contain various service and operational elements, seen in Figure 6.2. The idea is to segment customers in the verticals along behavioural lines, and to train each cluster in how to align their offer with each buying behaviour. The clusters would report to a VP Integrated Enterprise Solutions, who in turn would report directly to the CEO. More about Arshiya in Chapter 14.

· 172 ·

M06_GATT6818_03_SE_C06.indd 172

2/24/15 3:45 PM

P

D

P

Brand clusters

P

D

P

Pragmatic

Agile

Collaborative

Agile

Production

Commercial

Shared resources – customer services, graphic design, administration, import and export, quality control

Operations

Organization design at icon Clothing

Marketing

Source: M. Nobhandhu, unpublished MBA research paper, MGSM, 2008

Fi gure 6.1 ◆

Mustang/Weekenders

S/M

Weekenders

Mustang

Golf Punk

S/M

D

Wrangler-Bluebell

S/M

D

Riders/Lee

S/M

Riders (Lee)

Lee

Functions

W

ra n

ll

Be

lue

r-B

gle

nk

Pu

lf

M06_GATT6818_03_SE_C06.indd 173

Go

Managing director

Design

Designing respOnsive OrganizatiOn struCtures

Customer buying behaviour

· 173 ·

2/24/15 3:45 PM

M06_GATT6818_03_SE_C06.indd 174

Rail

Road

Proposed customer-centric organization structure at Arshiya, India

Source: Gattorna Alignment fieldwork

F ig ure 6. 2 ◆

Future

Retail

Clusters 4

Future

Steel

Clusters 3

Shared services: HR/IT/F&A

Commercial FTWZ Distripark Logistics

3PLs

SC solns

Clusters 2

Global sales

Operations

Electronics

Retail sales

Services

Clusters 1

Integrated enterprise solutions

CEO

Dynamic Supply Chains

· 174 ·

2/24/15 3:45 PM

Designing responsive organization structures

The industrial world is doing it Aera Energy LLC is a self-sufficient, full-service oil and gas company based in California. Formed in 1997 using assets jointly owned by Shell and Exxon Mobil, the enterprise was established to extract oil from ‘brownfields’, or old oil fields being re-charged to extract more oil, and to do so safely and at a low cost. To achieve this objective Aera adopted a radically different approach to project management and a similarly different attitude towards its suppliers.27 The company introduced a variant of the cluster organization design discussed above, which they called their ‘daisy’ organization structure. This structure brought together all the processes in a particular project, from concept to implementation. Features of the daisy were: ◆

cross-functional teams,

◆

all team members focused on particular process outcomes, and

◆

suppliers included as accountable team members.

The results have been nothing short of startling. An on-site extraction p ­ roject at Belridge in California produced a 47 per cent reduction in d ­ rilling and completion costs, while achieving a similar reduction in health, safety and environment costs. Relentless execution led to these outstanding results, and the organization design was a prime reason for the success achieved in an otherwise difficult industrial operating environment. The Lean E ­ nterprise Institute says Aera ‘is using lean principles to improve several key processes, including drilling new wells and repairing existing ones’. In fact, the company depends on its enterprise-wide lean effort to help maximize the number of barrels of crude pumped each day at its s­ prawling Belridge Oil Field a few miles north-east of Bakersfield in California. Aera pumps about 150,000 barrels of oil daily – roughly one fourth of the daily production of Alaska’s North Slope. All the crude produced here is sent by pipeline to refineries in the San Francisco Bay Area or Los Angeles. While not exactly the size of a Chevron, Aera’s revenues were more than $5.6 ­billion in 2011.28 Aera has adopted the classic process-based organization structure that works so well in lean environments. ‘Many companies organize by function or geography,’ says Andy Anderson, VP Operations. ‘We decided to organize

· 175 ·

M06_GATT6818_03_SE_C06.indd 175

2/24/15 3:45 PM

Dynamic Supply Chains

by process, which allows us to develop very deep expertise around those processes.’ In the eyes of President and CEO Guardie Banister Jr., that process orientation has proven essential to Aera’s success. ‘Our people have learned how to map out the steps in a process and improve them,’ he says. ‘We’ve developed a culture of people who are committed to continuous improvement, and our folks get excited about getting a little bit better every day.’ Although Aera is not a manufacturing company, Banister points out the company has a ‘manufacturing mind-set’, with workers performing thousands of repetitive tasks each day. ‘There was a time when people in the oil industry believed these tasks weren’t repetitive, but we’ve proven that they are. There is no question that this is an innovative application of lean in our business.’29 Guidewire, a software company serving the global insurance industry, managed to gain a dominant position through the development of a new project management process called Scrum.30 At the core of the Scrum methodology is the so-called Sprint team. Each team is small and nimble, with no more than nine members. Every Scrum project starts with an understanding of the customer’s vision – what outcome does he or she want? The customer and development team define the requirements to deliver this vision. The development team works for 30 days (the Sprint) to meet as many of the stated requirements as possible. Meanwhile the customer continues to refine his or her vision to deliver the required business result. At the end of the first and every succeeding Sprint, customer and development teams review progress to check if expected business value is being delivered. Finally, at some point the customer will stop the development process and the software product will be refined and released for wider use in the business. In this way, the customer is able to steer cost date and business value on a continuous basis. Such has been Guidewire’s success, it had a spectacular IPO launch in January 2012.31 The latest phenomenon is the privately held Swedish company, Spotify, founded in 2006 by Daniel Ek and Martin Lorentzon, and launched in 2008. Spotify is a commercial music streaming service that had some 40 million users and 10 million subscribers in May 2014. Spotify talks about its ‘Agile Engineering’ culture. The company has moved away from using the Scrum technique described above, and now deploys what it calls ‘autonomous

· 176 ·

M06_GATT6818_03_SE_C06.indd 176

2/24/15 3:45 PM

Designing responsive organization structures

squads’ of up to eight people. These are in effect self-­organizing teams, each of which is tightly aligned to a particular mission. What they have discovered is that alignment enables autonomy. The squads work in the same area on different projects but collaborate freely. This ‘community’ effect is more productive than structure and tight rules of engagement. Spotify should know – the company has developed agility at scale because it has been able to imbue trust among its squads and individual employees, with politics and fear of failure relegated out of sight and mind. This is exactly what I am suggesting for the way we organize internally to drive the multiple supply chains necessary of the enterprise to align fully with its market. More about this experiment in a short video produced by Spotify.32

The US military is doing it too The US military is seeking similar gains in responsiveness through a design called jointness or going purple. These refer to the situation where two or more armed services seek to integrate their respective strategies, strengths and capabilities in ways that lead to effective synergies and improved performance in the field.33 The inter-service operations are known as ‘purple’ operations because that is the colour formed when the colours of the uniforms of the different armed services are combined. Now that is synergy!

Extreme organization design Perhaps the best example of organization structures working at their peak while under extreme pressure is in Formula One motor sport. Mark Jenkins espouses the principles that success in Formula One is built on:34 1 Continuously improve in every way, every day, no let up. 2 Team work and integration . . . working together to drive down costs and enhance customer experience. It’s not about the engine or the chassis – it’s Ferrari. (Here Jenkins is talking about Ferrari’s success in particular.) 3 The driver is just part of the team. You will see a telling picture of the Formula One pit stop in Chapter 9.

· 177 ·

M06_GATT6818_03_SE_C06.indd 177

2/24/15 3:45 PM

Dynamic Supply Chains

The common thread in these success stories All the success stories of fast, responsive organizational configurations have a common thread running through them. They all involve some type of crossfunctional team design, composed of personnel with inter-disciplinary capabilities, all focused on a common objective, and given incentives through joint KPIs that hold the team together under pressure. This approach meets the key design principle laid out by Worley et al., ‘to maximize the “surface area” of the organization by connecting as many employees as possible with the external environment’.35 What has become clear is that (vertical) functional silos on their own do not work because they are at least 90 degrees out of phase with the way customers buy (horizontally, across functions). It is encouraging therefore that recent research is surfacing to suggest that companies are at last beginning to recognize the critical importance of cross-functional teams.36 This research found that ‘the use of cross-functional teams will be an important supply management strategy because they provide a broader base of knowledge for decision-making and can lead to decisions that take into account the needs of all the stakeholders in the organization’.37 Two companies that are in the early stages of experimenting with cross-functional teams to propel their multiple supply chains are DKSH, the Swiss market expansion services company, primarily in Asia, and Schneider Electric, the global electro-mechanical and energy efficiency company. Fletcher Challenge Energy, a major New Zealand-based company, came to a similar conclusion a decade ago, and formed ‘market work teams’.38 These work teams focused on operational issues and were comprised of key decisionmakers across several functions. These teams were charged with the shared responsibility of meeting customer service expectations, while maintaining optimum inventories. Most importantly, they were empowered to manage operating issues and consequently were very responsive to the company’s customers. On reflection it is obvious that, with a few exceptions, we became apathetic in the 1970s and 1980s, thinking we had all the answers. Then when organizations began to recognize functional silos were not the panacea after all, we tried what turned out to be a series of weak structural solutions that just did not deliver the desired results.

· 178 ·

M06_GATT6818_03_SE_C06.indd 178

2/24/15 3:45 PM

Designing responsive organization structures

Perhaps the only enterprises that did ‘get it’ were management consulting firms. Enterprises such as Andersen Consulting (now Accenture) have long understood that you need both the vertical functional specialties to build deep capabilities and competences and horizontal teams of mixed disciplines with which to go to market and solve individual client problems. From their successes we can conclude that you need both vertical silos of specialists and horizontal teams of mixed disciplines focused on customers, with the exact mix being determined by a particular customer’s requirements and/or situation. And this brings us full circle back to the business of enterprise supply chains. So we’re fixated on teams are we? Not quite. To be successful, we have to build teams to a formula something like the guidelines set out by J. ­Richard Hackman in his interview with Harvard Business Review.39 He said teams: ◆

must be real;

◆

need a compelling direction;

◆

need enabling structures;

◆

need a supportive organization;

◆

need expert coaching.

Looking at these conditions, I feel satisfied they can all be met with our multi-disciplinary customer-focused clusters. Retired General Stanley McChrystal reinforces these ideas when he sets out to create what he calls ‘winning organizations’, where the best ideas win because of a ‘shared consciousness’.40 The General Manager of New ­Zealand’s FX Networks, John Landgraf, also describes the need for a smarter organization, where there are ‘multiple different kinds of brains, of intelligence, on topics, rather than just specialists’.41 Cisco has also adopted the multi-disciplinary team approach, ‘including representatives from planning, supplier management, manufacturing, corporate quality and the like’.42 However, despite this, Cisco has been losing its customer-centricity, in what is a mature market, but is now slowly recovering. At this point, it is fair to ask: just what exactly is it that separates the best companies from the rest?

· 179 ·

M06_GATT6818_03_SE_C06.indd 179

2/24/15 3:45 PM

Dynamic Supply Chains

The solution is more than just ‘teaming’ Henry Mintzberg understood almost three decades ago, when he defined his five organizational configurations, that something else is going on.43 According to Mintzberg, ‘some organizations do indeed achieve and maintain an internal consistency. But then they find that it is designed for an (operating) environment the organization is no longer in. To have a nice neat machinelike bureaucracy in a dynamic industry calling for constant innovation or, alternatively, a flexible adhocracy in a stable industry calling for minimum cost, makes no sense. Remember that these are configurations of situation as well as structure.’44 Mintzberg goes on to say that, Essentially, the organization has two choices. It can adapt continuously to the [operating] environment at the expense of internal consistency – that is, steadily re-design its structure to maintain external fit [for this read ­alignment]. Or it can maintain internal consistency at the expense of a gradually worsening fit with its environment, at least until the fit becomes so bad that it must undergo a sudden structural re-design to achieve a new internally consistent configuration.45 Mintzberg is telling us that structures, such as the team and clusters we see today, are not sufficient to respond to a changing market. In my view, there is a ‘third way’ and that is to make supply chains a key focus of your o ­ rganizational design. We need to hard-wire the business with up to five pre-prepared ­supply chain configurations, as only then will we achieve sufficient coverage as c­ ustomers change their buying behaviours, from one situation to another. Each of these configurations will be explored in more detail in Chapters 7 to 11.

The best-of-the-best supply chain organization designs What we sorely need at this critical time are fundamentally new supply chain organization designs: a new breed of designs that are capable of operating under volatile, sometimes extreme, market conditions. In this regard we have two role models to follow. In particular, the Li & Fung model is a good example because it embraces both demand-side and supply-side elements of the supply chain.

· 180 ·

M06_GATT6818_03_SE_C06.indd 180

2/24/15 3:45 PM

Designing responsive organization structures

Li & Fung, the supply chain service company based in Hong Kong, is perhaps the consummate example of using organization design to power growth. The Fung brothers coined the phrase ‘network orchestrator’ in their book, Competing in a Flat World.46 The Fungs transformed the original trading business through rapid acquisitions and by developing a completely new business model in the form of multi-disciplinary clusters, much as I am recommending. See what can be achieved if you break the old model! Li & Fung created 300 customer-oriented multi-disciplinary clusters (variously called ‘tribes’ or ‘little John Waynes’). Each of these clusters of 50 to 60 people focus on one or more customers and deliver revenue of $20 million to $70 million. On the customer side of the supply chain they have developed a genuinely customer-centric organizational structure; and on the supply-side these clusters focus on managing and indeed owning the relationships with nearly 10,000 factories worldwide. Li & Fung, therefore, are effectively the largest manufacturer in the world – and yet they don’t own a single factory. Victor Fung feels their success in this ‘asset lite’ business all boils down to managing the conglomeration of relationships at the front and back ends of their supply chains. The IT systems protect and nurture the relationships, and the ‘rainmakers’ create new relationships. Victor Fung47 believes that because these ‘relationships’ are so delicate, they can easily be destroyed. According to Fung, ‘if the pH level (read culture) is wrong, it kills the relationship; it’s as biological as that!’ With a very strong focus on customers, and an equally strong focus on supplier relationships, Li & Fung effectively orchestrate hundreds, perhaps thousands of supply chains linking suppliers and customers to each other around the world. More than anything else, the great success they are now e­ xperiencing comes from the organization design which by its very nature focuses ­personnel ‘on business challenges instead of functional (issues) that dominate in so many large organizations’.48 Each of these clusters is ­inter-­disciplinary; full of self-starters; and highly incentivized through a remuneration p ­ ackage that is heavily weighted towards results a­ chievement. Each cluster acts like the owner of their respective business, and is held to the central organization by a strong set of corporate values and financial disciplines. This is truly a success story quite unlike any other. But even here improvements and refinements are possible, and we will get to that discussion a little later in the chapter. Despite the success, all is not plain sailing at Li & Fung. With retailers procuring goods directly from manufacturers with the help of improved

▼

Li & Fung

· 181 ·

M06_GATT6818_03_SE_C06.indd 181

2/24/15 3:45 PM

Dynamic Supply Chains

technology and the Internet, Li & Fung is moving away from its traditional intermediary role and buying brands itself.49 Some commentators think this is a mistake, and suggest that Li & Fung should cease conglomeratebuilding and instead focus on extracting more value from its sourcing business.50 Time will tell who is right.

The other company to watch is Adidas. In the run up to the 2006 FIFA World Cup in Germany, Adidas management decided they had to design and implement a more responsive supply chain to capture the value of being one of the major sponsors of the four-yearly event. Traditionally Adidas had needed a lead-time of 120 days to supply replica soccer shirts from a standing start. Management knew that this would not be good enough for the 2006 World Cup. Jay Pollard, Lars Sørensen and their teams set about breaking old business practices and replacing them with a much faster, more responsive model.51 Here’s how they did it; they: ◆

instilled a mind-set change;

◆

developed cross-functional, fully integrated teams involving representatives from all disciplines;

◆

co-located the newly formed teams in the same building, called ‘the World of Football’, three years before the 2006 event; and

◆

organized sourcing offices around the world into similar cross-functional clusters.

The new regime was road-tested at the 2004 UEFA European Football Championship, with incredible results. For example, 35,000 Greece replica shirts were produced in 20 days following Greece’s unexpected win in the Cup final. This was an 80 per cent improvement over previous lead-times! Adidas found that the new organization design allowed it to scale up and down faster – providing much greater flexibility than previously thought possible. Overall, the experiment taught them that by forming an end-to-end integrated supply chain with multi-disciplinary clusters of personnel (from design to shelf and into the customers’ hands) and throwing out the old ‘silo’ system, the operational and financial benefits were immense. Adidas now plans to replicate this method at future major sporting events.

· 182 ·

M06_GATT6818_03_SE_C06.indd 182

2/24/15 3:45 PM

Designing responsive organization structures

It comes as no surprise, therefore, that sales increased 52 per cent in 2006, to a record €10.08 billion boosted by the Soccer World Cup and the acquisition of Reebok.52 However, Adidas will have to accelerate the r­ oll-out of this new model if its 2008–09 fiscal results are anything to go on. The burden of absorbing the Reebok takeover is taking its toll.53 N ­ evertheless, Adidas is not standing still. The company has introduced ‘Adidas window shopping’, which allows consumers to explore and buy Adidas products 24/7.54 T   he company is also changing the way it serves Europe. According to Adidas Group CEO Herbert Hainer, ‘consumer behaviour is changing fast in Europe: country borders are becoming less relevant for our ­consumers and customers [so] we have decided to go forward with one aligned strategy for Western Europe’.55 And the experimentation continues as we explore potentially new organization designs. Three more short case studies are described below;56 all are examples of fully flexible supply chains, largely competing on the basis of their innovative products. Oticon is a Danish hi-tech company and one of the world’s leading producers of hearing aids. The company, established in 1904, exhibited a very typical hierarchical organization structure that included ‘formal procedures, a conservative culture, employee loyalty, and consensus-seeking conflict-avoiding behaviours’.57 The company went through difficult times in the 1980s, and as is so often the pattern, a new CEO, Lars Kolind, was appointed in 1988 and given the mandate to turn things around. He reorganized the company and replaced the old hierarchical structures with a project team-based structure. The enterprise effectively became two-tiered; top management decided which projects should be undertaken and appointed the project leaders. In turn, these project leaders took full responsibility for managing all resources, budgets and outcomes and encouraged open communication and free exchange of ideas – not too dissimilar to the clusters above. Oticon consequently earned the reputation for having a ‘spaghetti’ structure.58 Interestingly, the physical layout of the office was changed to symbolize the change in philosophy, a new trend we have discussed in Chapter 4 on culture formation and implementation. Wendy Sadler-Moyes is in no doubt why Oticon was subsequently so successful, and still is. In her words, the answer lies in ‘the change orchestrated by Lars Kolind to a fully flexible

· 183 ·

M06_GATT6818_03_SE_C06.indd 183

2/24/15 3:45 PM

Dynamic Supply Chains

organizational structure, so bringing the company into dynamic alignment with the needs of [its] customers’.59 The company has since retreated from the pure ‘spaghetti’ structure and introduced elements of hierarchy. The new design features ‘business teams’ and a ‘competence centre’ providing support functions, including logistics.60 Continuing the innovation theme, W.L. Gore & Associates is best known for its innovative and technically advanced products, particularly its GORE-TEX fabric. The company uses a similar spaghetti-style organization structure to that of Oticon, where the primary aim is to cultivate a work environment in which creativity can flourish and is rewarded. Multidisciplinary teams of associates (not employees) are formed around opportunities, and leaders emerge naturally. The company founder, Bill Gore, was convinced that organizations should be limited to 150 to 200 people arranged in clusters in close proximity to each other so they could at least share any ‘expensive resources’. ‘The $1.84 billion company’s flat organizational structure makes it exceptionally nimble,’ according to Workforce Management magazine.61 The challenge facing Gore is to get bigger while remaining small. Growth is also impeded by the difficulty of finding people suited to this radically different work environment, temperamentally and intellectually. It helps that the company is privately owned. Chaparral Steel was the tenth largest US steel producer before being acquired by Gerdau Ameristeel in 2007. Gerdau is a Brazilian steel company. Chaparral Steel’s culture promotes problem-solving, innovation and experimentation; it has a horizontal organization structure that encourages its employees to innovate.62 Zhang Ruimin, CEO of Qingdao-based Haier Group, manufacturer of household appliances, is addressing the challenge that ‘. . . as a c­ ompany gets bigger, there is usually stricter control on its employees and less room for them to take ownership of their work’.63 So Zhang broke down Haier into what he calls ‘self-managed’ teams. Under this model, ‘any employee can generate his own idea – for a new appliance model for instance, or ­product feature – by examining customer comments and market ­information gathered from the Internet. If approved by management, the employee can create and manage his own team to implement the project, which involves persuading staff such as product designers, research e­ ngineers and marketing experts to join. Team members get a share in resulting profits.’64

· 184 ·

M06_GATT6818_03_SE_C06.indd 184

2/24/15 3:45 PM

Designing responsive organization structures

◆

The organization is a hybrid between market knowledge (focus on specific sectors) and buying behaviour.

◆

It’s a holoarchy, consisting of holons (self-organizing units).

◆

It has a distinct strategy, based on customer insight (which defines the tasks at hand).

◆

Each disc has up to four teams, and each team up to a maximum of eight members.

◆

Teams have no specific leader, but their own authority to do all the required work.

▼

Since 2009, Zhang has eradicated most of the middle management at the company in order to allow the teams to flourish. In this way he is setting up the conditions for his new self-managed teams to ‘take initiative and create value by listening to customers’. Zhang himself is conscious of the risk he is taking by making such a radical change, on such a scale, but he says, ‘I have to find a balance between reform and risk.’65 In effect Zhang’s reforms have moved the company away from a strictly hierarchical structure, to one which has introduced entrepreneurial elements; this has put the company in a stronger position to lead its competitors. On the surface he appears to have gone further and been more successful than Semler was at Semco, purely on the basis of the scale of the change introduced. What Zhang is doing at Haier is further supported by Gary Hamel’s latest thinking. His sentiments are exactly those of Zhang’s when he says ‘the challenge is how to drive more traditional organizations in a direction where there is more autonomy and innovation, and less formal hierarchy’.66 According to Hamel, ‘the trick is how you dispense control without losing it . . .’.67 Indeed, he has put his finger on the fundamental conundrum faced by management. The most recent example that I am aware of is happening at Centiro Solutions, as mentioned earlier in this chapter. CEO Niklas Hedin is pioneering an organization design that has overtones of Semco in Brazil, but also overtones of my own concepts, and more. The main principles of the new Centiro structure, which is now operational, are listed below and depicted schematically in Figure 6.3.68

· 185 ·

M06_GATT6818_03_SE_C06.indd 185

2/24/15 3:45 PM

Dynamic Supply Chains

◆

Teams have customers, and have their own P&L, but they are also rewarded for helping other teams – supporting the collaborative element between teams and discs.

◆

The hole in the discs illustrates the void in which communication and transparency exists between all individuals in the organization.

◆

All of which is supported by daily stand-up meetings by teams, weekly stand-ups with all teams/discs, and an internal social media.

◆

Leadership is at the bottom, illustrating the supportive attitude we have towards the leadership task.

◆

And finally, the structure is scalable and expandable. It builds on the principles of personal leadership and self-organizing, high-performance teams.

Contemporary designs now on the drawing board If it is true that there are a limited number of variants in the dominant buying behaviours of customers, and that we mostly see the same five types, irrespective of the product or service category, then the way forward becomes clearer. We can have the best of both worlds by combining both vertical and horizontal organizational structures. In our vertical silos, we capture functional specialism, where we can embed the specific capabilities we need; and in the horizontal plane, create customer-centric teams that have the necessary functions or disciplines to fully align ourselves with customers. This is an ‘and’ world not an ‘either/or’ world. So for those relatively few customers who we have identified as genuinely collaborative, we will engage the collaborative supply chain, driven by clusters of personnel seconded from the vertical functions. And here is the twist. Not only will all the functions be represented in these clusters (or teams), but we have the opportunity to engineer the mind-set of these clusters by taking into account the values of each team member recruited to the cluster. It is not simply a matter of having all the technical skills covered – the correct embedded bias in the team is just as important. This refinement goes beyond what Li & Fung is doing with its ‘tribes’, but it is a necessary refinement to get maximum alignment with the customer’s mind-set, in this case driven by relationship values. See Figure 7.3 in Chapter 7 for a schematic representation. Notice the solid line drawn connecting the customer-centric relationship clusters; they are accountable for meeting customer expectations, and the

· 186 ·

M06_GATT6818_03_SE_C06.indd 186

2/24/15 3:45 PM

M06_GATT6818_03_SE_C06.indd 187

Strategic leadership at the bottom, supporting the organization Illustrating a listening, coaching and empowering leadership style

Discs in alignment with market insight and strategy Disc leaders + COO = tactical leadership team Shared services in the middle

The disc An organizational unit with specific market focus One focus, one leader, one P&L Up to four leaderless teams Self-organized and cross-functional 1 team = 6–8 people, 1 disc = up to 32 people The hole illustrates openness and transparency, supported by social networks ONE FOCUS ONE LEADER

A BUNCH OF TEAMS

A holoarchy Designed for high performance

a holoarchy organization design at Centiro solutions aB

Source: Centiro Solutions AB

F igu re 6. 3 ◆

In a hierarchy, participants can be compared and evaluated on the basis of position, rank, relative power, seniority, and the like. But in a holoarchy each person’s value comes from his or her individuality and uniqueness and the capacity to engage and interact with others to make the fruits of that uniqueness available.

OCUS TOMER F CUS

ER FOCUS STOM CU

A holoarchy Designed for high performance

Designing respOnsive OrganizatiOn struCtures

· 187 ·

2/24/15 3:45 PM

Dynamic Supply Chains

functions are there to provide support as required. The customer-centric clusters, however many there are, all report to a line executive, most probably the COO or Global Customer Solutions Director. No more dotted lines for the customer-facing teams! However, to service those customers in the transactional segment we need something very different. Here the emphasis is on refining the various processes involved to deliver the lowest possible cost-to-serve via the lean supply chain configuration. See Figure 8.3 in Chapter 8 for a schematic representation. As in the case of the collaborative configuration detailed above, multidisciplinary clusters are formed. However, this time each cluster focuses on a major process rather than a customer, and the various processes come together to deliver the lowest cost and most consistent service possible for the particular target segment. To satisfy those customers who demand a quick response in an otherwise unpredictable marketplace, we need something different again. In this situation the multi-disciplinary clusters are designed for speed, and the bias embedded in the agile supply chains serving these demanding customers is just that – absolute speed. It is very much like what Zara and the Formula One race teams have done so successfully. See Figure 9.3 in Chapter 9 for a schematic representation. It is possible that there will be sub-sets of the ‘demanding/dynamic’ segment as depicted in Figure 9.3. For example, Zara has to service the demand for fashion in three different sub-segments: women’s, men’s and children’s wear. Then there is the campaign supply chain serving the projects segment. The schematic for this arrangement is Figure 10.4 in Chapter 10. Finally, in cases of unexpected events or crises, the fully flexible supply chain configuration is required to deliver innovative solutions, superfast. See Figure 11.7 in Chapter 11 for a schematic representation. There may be only one cluster necessary to service the innovative solutions segment and this could be composed of part-time members or volunteers, who only come together in times of an emergency. The individuals in this cluster are likely to be highly trained multi-talented personnel, capable of quick thinking and quicker action. There are plenty of examples of this type of structure in aid and military organizations around the world. A recent example is the voluntary fire-fighting crews that fought the large-scale bush fires in Victoria, Australia during the summer of 2009.

· 188 ·

M06_GATT6818_03_SE_C06.indd 188

2/24/15 3:45 PM

Designing responsive organization structures

Logistics clusters Yossi Sheffi elevated the organization design conversation to the macro level when he wrote about the clustering of companies with logistics ­capabilities in selected geographical centres such as Memphis, Singapore, ­Rotterdam and Dubai.69 According to Sheffi, ‘logistics clusters are able to “add value” by generating other industrial activities that go hand-in-hand’.70 The clusters approach is also being taken up by the Canton of Berne in ­Switzerland, which is encouraging the establishment of strong networks and cluster organizations in the region. Their theme is: ‘Birds of a feather flock together.’71 DHL also takes up a similar theme in its paper on what it calls City Logistics.72

Bringing it all together Based on all that we’ve said in this chapter, it is clear that any given supply chain has an upstream supply-side component and a downstream demandside component, as depicted Figure 13.1 in Chapter 13. The upstream or supply-side is focused on procurement and managing the inbound flow of materials into the production process. The downstream or demand-side is focused on sensing the type and levels of demand coming from consumers and customers in the target marketplace, and working out which supply chain type is best configured to satisfy such demand. The key is to have in place internal organizational clusters that power the different types of supply chain configurations (upstream and downstream) based on customer demand patterns and supply capabilities. It is also important to have in place internal linkage mechanisms to connect the various clusters in situations where supply chains are ‘hybrid’ in nature, i.e., different characteristics on the supply-side and the demand-side, which is quite a normal occurrence. This notion of ‘hybrid’ supply chains will be explored in more depth in Chapter 13. So the dual organization suggested earlier in this chapter to manage both horizontal and vertical flows of management control appear to be the way to go, and this stance is indeed supported by John Kotter in his recent book, Accelerate.73 Under Kotter’s proposed dual operating system, ‘everyone works within a traditional hierarchy [my vertical specialisms], but the

· 189 ·

M06_GATT6818_03_SE_C06.indd 189

2/24/15 3:45 PM

Dynamic Supply Chains

hierarchy assigns innovation, agility, and big change initiatives to an agile network of employees who volunteer for that effort [my clusters]’.74 We ­differ in the detail, but the thrust is the same. Ultimately, we need to design organizations that are built to change, continuously, and this is the theme taken up by Worley and Lawler,75 who explain, The key design principle here is to maximize the ‘surface area’ of the organization by connecting as many employees as possible with the external environment. Structures that accomplish this increase the external focus of its members; bring in critical information about trends, opportunities and issues; and prevent people from becoming ossified in their roles.76 Sounds very much like level 1 in my dynamic alignment model! They go on to affirm that, . . . the ‘front end’ of a front-back organization creates flexible, c­ ross-­functional and customer-facing teams to configure and sell unique products, services and systems. The ‘back end’ develops new technologies, products and systems; maintains the supply chain; and conducts other activities that support the front end. As a result, customer requirements, supplier relationships and other environmental demands have an ever-present influence (either directly or indirectly) on nearly everyone in the organization.77

And then there’s execution It is one thing to design a new organization structure, and quite another to implement it with real people on the ground. Care has to be exercised, because what is being suggested is a whole new way of working, one that involves a big change for many of the individuals involved. We have found from experience that the following approach works. 1 Select cluster leadership – If possible, select a cluster leader with the appropriate experience and the right personality type, according to the Myers-Briggs Type Indicator (MBTI®), which is aligned to the target customer segment. – If not available currently, you may have to either recruit someone or place strong emphasis on particular KPIs to drive the required outcomes.

· 190 ·

M06_GATT6818_03_SE_C06.indd 190

2/24/15 3:45 PM

Designing responsive organization structures

2 Build bias into cluster membership – Satisfy functional and experience requirements first; but – Include people with appropriate MBTIs wherever possible to create a bias in the direction of the customer segment logic (but avoid the situation where everyone in the cluster has similar MBTIs). – Treat the first cut of the clusters as a draft to be finalized after consequent operational and capability issues are explored, especially the balance between focus and achieving synergy; this matter can be discussed openly in a workshop. – In an SME, it is possible that some key personnel will have to play pivotal roles in more than one cluster, or in a cluster plus one of the shared services (such as IT, HR and finance). If you get the execution right, you will be closer to gaining the dynamic alignment needed to keep pace with the ever-demanding customers of today. The execution has to integrate the vertical and the horizontal functions in your organization so that they not only happily co-exist, but actively support each other. It will give your business the capability and agility to align with your different customer segments. No-one ever said transitioning from an inward-looking, silo-based organization would be easy, but it’s necessary!

Key ideas 1 Current organization designs often assume a one-size-fits-all world, and that’s a very long way from where we are today. Organizations need urgent retrofitting with more responsive configurations. 2 It’s impossible to separate overall enterprise organization structures and supply chain structures – they are one and the same thing. That is, if you want to be a success! 3 Start from the ‘outside in’ to redesign your organization. Segment your market along behavioural lines, then try to mirror these segments with a corresponding internal structure. Everything needs to start and finish with the customer. 4 The best structure will comprise the ‘best of both worlds’ – vertical functions that provide specialist capabilities combined with horizontal customer-centric and multi-functional clusters.

· 191 ·

M06_GATT6818_03_SE_C06.indd 191

2/24/15 3:45 PM

Dynamic Supply Chains

5 Converting your chosen organization design into an actual structure on the ground requires sensitivity and openness from your executive team. The best approach is to hold workshops involving all your people. 6 The latest example of a successful experiment in organization design is that of Spotify, the Swedish music streaming company that has grown in phenomenal style since inception in 2008. Spotify has demonstrated that self-organizing ‘squads’ do work, and can be scaled. Long live the combination of high alignment and high autonomy.

Your challenge Is your organization structure designed to meet the demands of your ­customers and markets – those of today and tomorrow?

· 192 ·

M06_GATT6818_03_SE_C06.indd 192

2/24/15 3:45 PM

Part 2

Configuring supply chains to maximize performance

· 193 ·

M07_GATT6818_03_SE_C07.indd 193

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 194

2/24/15 3:46 PM

Chapter 7

Collaborative supply chains: demand-side How to nurture the relationships cherished by truly ‘collaborative’ customers

T

his is the first of a quintet of chapters in which we describe the configuration of each of the five generic supply chains in detail. You will not be left wondering about what we think about c­ ollaboration and its corresponding supply chain type. Collaborative supply chains (previously called continuous replenishment in an e ­ arlier edition of this book) are quite special, but they are not for e­ veryone. Indeed, this chapter will help de-bunk many of the myths going around about ­‘collaboration’. Above all, our advice is to ­identify those ­customers who deserve a special relationship and make sure you retain them. After all, they are your best and most sustainable source of revenue and margin. In this respect, make use of the ­available ­technology (CRM) to manage deserving customers in a systematic way, and in return be rewarded by their loyalty. We also introduce the notion of consumer concerns about sustainability and corporate social responsibility in enterprise supply chains. We see these as a subset, indeed a sub-segment of the ‘collaborative’ (Ia) customer behaviour segment; ignore their growing influence at your peril. Can you spot a collaborative supply chain at 100 metres? It is the type of supply chain where customers are loyal and, in return, expect a high level of commitment and service. The collaborative supply chain has its highs and lows when it comes to demand, but all members of the supply chain seek to satisfy demand in the most cost-effective way. Possibly the most distinctive

· 195 ·

M07_GATT6818_03_SE_C07.indd 195

2/24/15 3:46 PM

Dynamic Supply Chains

characteristic of the collaborative supply chain is that customers are genuinely collaborative and loyal in their buying behaviour. You know you’re in a collaborative supply chain when all parties, including third-party providers, work as one to lower costs, meet demand, and continuously improve delivery times and service. A happy end-customer or consumer for one is a happy customer for all! Are we dreaming? No. Take a look at the Campbell Soup Company, which was one of the early innovators when it conceived and implemented its ­continuous (product) replenishment (CPR) programme in the early 1990s.1 Working with its main retail and wholesale customers, C ­ ampbell’s endeavoured to reduce the impact of demand fluctuations caused by its retail customers’ forward buying for promotional purposes. Such buying led to ­inefficiencies in Campbell’s production and logistics processes and inflated their own costs in storage and handling. A later version of this ­programme, CPR2, r­ecognized that market conditions required a combination of ­collaborative (low-cost ­production) and agile (promotional) supply chains, and the programme was implemented mainly through engineering changes in pricing policies. We’ll talk more about mixing supply chains in Chapter 13. Campbell’s used collaboration with retail customers such as Meijer and ShopRite. In the case of Meijer, Campbell’s participated in the Meijer ­MealBox programme designed to assist shoppers plan meals – by ­providing recipes, automatic shopping lists and related coupons.2 The programme focused on the needs of a strategically important common shopper, i.e., the on-the-go working Mom who wants quick and easy meals. The result was increased sale to both partners. A more contemporary example can be found at Joe White Maltings, an Adelaide-based malt business, and now a division of global farm and food products giant, Cargill. For some time, Joe White has locked in more than 55 per cent of its production of 450,000 tonnes at the start of the year. Over time it has developed very collaborative relationships with six major Asian ­breweries, which take on average 50,000 tonnes of malt each per year, at ­negotiated prices, locked-in via firm contracts for up to four years ahead. These breweries provide updated forecasts three months in advance and ­re-set shipping schedules every two weeks. As a result Joe White knows exactly what to produce, when, and ships a steady stream of malt in grain

· 196 ·

M07_GATT6818_03_SE_C07.indd 196

2/24/15 3:46 PM

Collaborative supply chains: demand-side

form by container to a regular, pre-agreed shipping schedule each year. Thousands of them! I ask again, are we dreaming? Collaborative customers such as these are the types of customers we want to attract and retain, and are superb examples of a collaborative supply chain in action.3 Is this possible in such a competitive market? Lynda Gratton of The Financial Times took up this point, describing the counter-intuitive nature of collaboration in this way: ‘The conventional view that business is all about competition is being challenged by the idea of collaboration, as companies look to find ways of exploiting the power of partnership.’4 I applaud this view; p ­ artnership at its purist is the way collaboration should work. By the same token, ­collaboration is not the solution for all customers and all situations, and genuine collaborative relationships must be identified over artificial ones. We describe the great benefits of collaboration below, but we also learn how to recognize the partnerships we must guard against, and if necessary, abandon.

Customers are forgiving – up to a point! Let’s start by looking at the customers in the collaborative market s­ egment in more detail. They are largely predictable in their buying behaviour; they demand regular delivery of mostly mature products and services. These customers normally like to buy from one or two suppliers only, and ­loyalty is taken very seriously. This is not a market that easily embraces risk-­taking. Trust is uppermost in the supply chain relationship. All ­parties in the ­collaborative supply chain readily enter into partnerships and ­joint-­development projects, and freely share information that will help the common cause of improved performance. Collaborative buying behaviours also tend to be very forgiving, and customers with this mind-set will put up with a lot, including being ignored at times. But they will only do so for a limited period, after which they are likely to go to the opposite type of behaviour and become adversarial and very demanding. This latter point is conveniently forgotten when we seek to beatify our collaborative partners. The balancing act here is to make sure we look after the truly collaborative customers with all the resources we can

· 197 ·

M07_GATT6818_03_SE_C07.indd 197

2/24/15 3:46 PM

Dynamic Supply Chains

afford, and step back from the ones who could become a danger either because of their changed operational circumstances or dissatisfaction with the partnership. Unfortunately, that is easier said than done. Companies rarely get a second chance to restore their relationships in a collaborative supply chain without investing a tremendous amount of time and money. Enterprises are often lax at differentiating which customers deserve their priority attention and, as a result, have lost some of their best long-term (profitable) customers. Some don’t even realize it at the time. Leading credit card companies such as American Express and Diners Club are prime examples of this phenomenon. They don’t appear to follow up lost customers and ask why they are no longer using their card or other services. It seems extraordinary that this should happen, but then it’s not actually that surprising. Companies lose their focus on collaborative customers because these customers are not overly concerned about price, their cost-to-serve is relatively low and margins are generally good, and most importantly they make little noise! In other words, they are easy to take for granted! All that these customers crave is recognition, and preferential treatment based on strong personal r­ elationships. They are prepared to trade-off other service parameters to achieve this. But ignore them at your peril. Why else do you think companies lose their focus on important ­collaborative customers? It’s not only that these customers are easily ­overlooked. It’s because enterprises become preoccupied with the other ­categories of ­customers, ­particularly those who are especially demanding and time ­consuming. You could call the latter category the Exocets of the ­commercial world, because they suddenly appear from ‘out of the blue’ and are highly destructive on ­contact. We will talk more about their behaviour in Chapter 16. ­However, suffice to say that companies seeking to avoid an Exocet strike will often ­provide erratic over- and under-servicing of these ­difficult, sometimes f­rustrating customers. Somehow, the challenge appeals to our competitive nature; we want to win them over! However, the i­nevitable result is deteriorating performance for customers overall. Unfortunately, ­suppliers respond inappropriately to customers every day. The trick is to ­recognize who are your most important customers and therefore who deserves the most attention. Fonterra, the global New Zealand-based company – the world’s No. 4 manufacturer of dairy ingredients – is a case in point.

· 198 ·

M07_GATT6818_03_SE_C07.indd 198

2/24/15 3:46 PM

Collaborative supply chains: demand-side

Fonterra In 2001, when global dairy ingredients company Fonterra segmented its 3,300 business (B2B) customers across 100+ countries along behavioural lines, it found that 25 per cent by number, and 40 per cent by volume, were exhibiting classic collaborative buying behaviour tendencies. But no one at Fonterra was aware of this at the time, so the revelation came as a shock. Consequently, many of its best and most loyal customers were not being given the appropriate attention, and previously good business ­relationships were souring. Fonterra quickly implemented new ­strategies to strengthen its service to these collaborative customers and reaped the benefits. The cost in doing so was relatively low, particularly when ­compared with trying to win new customers.

You want what, when? Of course, leading companies sometimes don’t mind being asked to deliver on challenging requests. Demanding customers can stretch p ­ erformance and create new standards – for the better. But you have to know when and at what point the extra effort is justified. The characteristics of ­collaborative ­supply chains (or base flow, as defined in Chapter  2) are the mirror image of customers’ collaborative buying behaviours; it’s as simple as that. The whole emphasis is on gradually building deep and sustainable ­relationships over time with customers that exhibit genuine collaborative values. ­Reliability and trustworthiness are essential ingredients for success in this type of supply chain, because customers greatly value these qualities. You need to respond in a requisite way: not too much or too little, but just enough. I call this requisite collaboration. The customers see value in entering into long-term strategic ­partnerships because they can secure the certainty and stability for which they are always yearning. Information is freely exchanged in both directions when this ­relationship is fully established. The customers provide forecasts of specific requirements, well into the future, and update these on a rolling basis. It’s important that the staff you select to serve these customers share their values and their commitment to a common goal. Without shared values, you are likely to lose these customers and their future revenue streams.

· 199 ·

M07_GATT6818_03_SE_C07.indd 199

2/24/15 3:46 PM

Dynamic Supply Chains

A company that appears to have all the appropriate characteristics for genuine collaboration is vehicle parts manufacturer Unipart, which has enjoyed a multi-year relationship with Jaguar worldwide. These two companies act as one. Unipart participates in every facet of Jaguar’s business, from design of the car and the manufacture of its component parts, through to worldwide distribution. It’s a uniquely successful relationship that has endured the test of time. Jaguar and Unipart are truly in the zone of collaboration. Has your company ever been in this zone? Would you be able to recognize it if you were? I suggest the only way you can come close to such an intense partnership is by only collaborating with the enterprises that really want to collaborate, and exhibit genuine c­ ollaborative values. Unilever’s former Chairman Antony Burgmans made this point strongly when he said, ‘If retail customers want to collaborate, we will collaborate with them. But if they want to fight we are ready to give them a good fight too.’5 This is an important distinction because it guides us on the priority for allocating scarce resources. For some, servicing customers has become an art form in that both collaborative and adversarial behaviours are practiced in the same marketplace. The former CEO of Woolworths Australia, Roger Corbett, put it plainly – if you ‘get too cozy with your suppliers . . . you’re in trouble’.6 During his time at the helm Corbett was constantly spilling the trading arrangements he had with suppliers. Yet independent field research found that a small number of key suppliers were (and still are) collaborating intensely with Woolworths on an ongoing basis, so why fracture the relationship? Upon reflection this double game makes sense, because true collaboration is very relationship-intensive and, therefore, can only be practised on a selective basis. Corbett’s approach may appear to send mixed signals to the supply base, but in reality it is a cunning strategy based on the idea that it is best to collaborate only with those parties who are really vital to your business. The rest simply have to take their chances. The Australian 3PL, Linfox Logistics, is following a similar principle by culling its client base. Collaborative responses do not happen by accident. Companies will need to carefully design strategies and manage the operations that underpin this special form of alignment between suppliers and their customers. Certain conditions must be present inside supplying companies for this to occur. Let’s talk about the strategies first.

· 200 ·

M07_GATT6818_03_SE_C07.indd 200

2/24/15 3:46 PM

Collaborative supply chains: demand-side

Strategy recipe for collaborative supply chains We discussed (in Chapter 3) the various value propositions and c­ orresponding strategy packages that should be formulated to align with customers’ buying behaviours identified in a given market. As we said earlier, the marketplace is the starting point for strategy formulation, but so many enterprises ignore this fundamental tenet. You can achieve the best operation of the collaborative supply chain by installing, where appropriate for your business, a combination of the 16 ­strategic dimensions below; these dimensions were introduced in ­Chapter  3. How these dimensions might work for your collaborative ­customers will depend on your particular circumstances, but the potential is explored below. A short list of the strategies is provided in Figure 7.1.   1 Product mix. Customers in a collaborative mind-set tend to buy mature or proven products, perhaps augmented with additional services. They are not in the habit of exploring new products because they are innately conservative and slow to change. In essence this type of customer is a ‘laggard’ and just wants the same product-service-technology experience repeated over and over.   2 Innovation emphasis. This type of customer likes quality and is not afraid to pay for it. Indeed, paying a premium is in effect their ‘­insurance’ that they will receive what they expect. They are happy to collaborate with suppliers in joint developments that lead to incremental ­improvements in the product and/or service experience. They share information, and in particular forecasts that will help the supplier. They are also keen to work with suppliers to improve processes and take cost out. Most of all, they will embrace any innovation that will lead to a material improvement in the relationship.   3 Marketing emphasis. The marketing effort with this type of customer is quite simply one of building brand loyalty with existing customers, i.e., market penetration. There may even be some product development, where other products in the suppliers’ range are bought on trust.   4 Channels of distribution. Channels are the commercial pathways along which products and services are sold; but they do not n ­ ecessarily move along the same pathways between the various agencies and ­intermediaries that share the functions and tasks of getting products and

· 201 ·

M07_GATT6818_03_SE_C07.indd 201

2/24/15 3:46 PM

DYNaMiC SuPPLY ChaiNS

Strategic dimension

Ideal strategy

1 Product mix

Emphasis on mature, branded, and augmented products

2 Innovation emphasis

Big emphasis on product quality and joint product development. Innovate to improve relationships

3 Marketing emphasis

Build brand loyalty

4 Channels of distribution

Either direct or via trusted outlets

5 Pricing regime

Price according to strength of brand; moderate price sensitivity

6 Promotional activity

Low promotional activity – simply not required

7 Service emphasis

Empathy with local customers; consistency of service; trust

8 Procurement/ sourcing approach

Select suppliers on basis of relationships and capabilities

9 Production

Low volume – high value add. Collaborate to reduce costs

10 Capacity considerations

Maximum utilization achievable consistent with serving customers

11 Fulfilment approach

Reliable/scheduled delivery; shared forecasts

12 Relationship intensity

Mutual dependence between customer and supplier

13 Systems/IT support

Emphasis on customer management; CRM essential

14 Resource allocation priorities

Focus on supporting the relationship to retain customers

15 Strategic risk profile

Low

16 Financial considerations

Relax credit terms. Undertake customer account profitability analysis

Figure 7.1 ◆

Collaborative supply chain strategy – protective

· 202 ·

M07_GATT6818_03_SE_C07.indd 202

2/24/15 3:46 PM

Collaborative supply chains: demand-side

services into the hands of the final end-user/consumer. For c­ ustomers in a ­collaborative mind-set, they will use trusted outlets to access the products and services they desire, so the channels are relatively few. The other fast growing channel is of course the online e-channel, which these customers are learning to trust through experience.   5 Pricing regime. These customers are price ‘aware’ rather than price sensitive. But service consistency is essential. Remember, it is b ­ etter to invest in personal service and keep the price at a level to support this, rather than cut the service in an attempt to reduce costs. That is ­foolhardy and quite unnecessary in this situation.   6 Promotional activity. Customers know exactly what they want and how they prefer to be serviced. There is usually no need for anything ­exceptional by way of promotions. Indeed, promotions are the last thing they are looking for, because it unsettles them. Save the money and invest it in relationship and brand building activities. Having said that, ­pre-announcement of price changes can be a big deal for these customers.   7 Service emphasis. The service that this segment yearns for is to be ­recognized as important by the supplier; and given the necessary p ­ riority to ensure consistent and reliable service at all times. They want their trust in the supplier reciprocated.   8 Procurement/sourcing approach. In order to provide the consistency required by this customer segment it is important to ensure the same consistency on the supply-side. This means selecting suppliers who share ‘collaborative’ values and will treat us, the buyer, with the same respect as our customers expect of us as their supplier. If this means outsourcing so be it. But we should never lose control of the overall supply equation.   9 Production. As the products this customer segment buys get towards the end of their life cycle we can expect volumes to drop off, but in turn we have to find ways to add value to these same products to extend their life cycle. Here again, the collaborative segment will work willingly with preferred suppliers to take cost out of the system. 10 Capacity considerations. Consistent with delivering a reliable ­product/service, we should be trying to reach and maintain high levels of ­capacity utilization, especially as the forecasts to which we are working are likely to be highly accurate. The forecasts are updated regularly in close ­consultation with our customers in the collaborative segment.

· 203 ·

M07_GATT6818_03_SE_C07.indd 203

2/24/15 3:46 PM

Dynamic Supply Chains

11 Fulfilment approach. Here again, uppermost in the customers’ minds is a reliable delivery schedule, with no surprises. Shared forecasts will also help to achieve this mutually desirable result. 12 Relationship intensity. True collaboration between buyer and seller involves trust and a high degree of interdependence. We must recognize this and seek to use this to our mutual advantage. In no circumstances should we allow non-collaborative customers to receive a higher priority than this segment when it comes to product allocation and service delivery. This segment contains your most profitable customers, and if necessary they should be protected from interference by other parts of our own organization in the service of less loyal customer segments. 13 Systems/IT support. We will talk more about this dimension when we address cultural considerations later in this chapter, because technology is a major shaper of cultural capability. Suffice to say that it is essential to use whatever technology is available to assist in the smooth management of loyal customers, e.g., Customer Relationship Management (CRM) systems, of which there are several on the market. 14 Resource allocation priorities. As already indicated, this segment should receive top priority in terms of product allocation and corresponding service attention. Conducting regular Customer Account Profitability (CAP) analyses can reinforce this approach; it will surely confirm that this segment is our most profitable and therefore most valuable. Lose them and we lose not just the corresponding margin on lost sales, but we lose a profit stream that would have continued into the future for months, possibly years. 15 Strategic risk profile. As the over-riding emotion in this segment is loyalty to the supplier and the brand, there is low risk – but only if we remain aware of, and empathetic to, these customers. If we ignore them the risk of losing them increases sharply. 16 Financial considerations. Relax credit terms and undertake customer account profitability analyses to confirm economic value of collaborative customers.

Capabilities to propel your supply chains With our strategies now in place, there remains just one more thing to get right – developing and executing the capabilities necessary to drive the ­collaborative supply chain, and in particular, shape its underlying subculture · 204 ·

M07_GATT6818_03_SE_C07.indd 204

2/24/15 3:46 PM

Collaborative supply chains: demand-side

so that our best laid plans are delivered as intended. Unfortunately, ‘there is many a slip between cup and the lip’. That’s what we must avoid! Earlier (in Chapter 4) we outlined the eight key capability areas that must be developed and nurtured. Without these, it will be difficult for you to achieve the value proposition for collaborative customers, which is e­ ssentially value you achieve through ‘close working relationships for mutual gain’. Doing this is what dynamic alignment is all about. How do you score in the following capability areas outlined below, which are summarized in Figure 7.2?

1. Customer interaction Customer relationships are particularly important in collaborative supply chains, so you must have highly developed customer interaction processes firmly set in place. There are two capabilities, both of which are common to all supply chain configurations: customer call centres (CCCs) and annual customer satisfaction index (CSI) surveys. Net promoter score (NPS) and net satisfaction score (NSS) surveys are also used by some companies, but are quite unsuitable as inputs to supply chain design. Many companies are missing out by not making the customer call centre a joint responsibility of sales and supply chain functions, thus significantly improving internal productivity and responsiveness to customer queries. The other capability in this category is the rolling survey of ­customers’ expectations and perceptions. A by-product of using the CSI methodology is that it can also be used to check on the behavioural segments ­previously identified in primary market research. The NPS/NSS methodology cannot do this, but it has other uses, although readers will know my thoughts about the relative merits of the two methodologies having read Chapter 2.

2. Transformation Once the new network strategy design and corresponding footprint has been completed, the next big task is to translate this into working models on the ground. This involves taking the aggregate flows from the network ­optimization models, and breaking these down to the SKU level, deciding where to store each SKU, and in what quantities. Significant analytical skills are required, overlaid by experience, and an understanding of the new behavioural segments. · 205 ·

M07_GATT6818_03_SE_C07.indd 205

2/24/15 3:46 PM

DYNaMiC SuPPLY ChaiNS

Capability area 1

Customer interaction

Capability • Customer Call Centre (CCC)

– joint responsibility*

• Rolling annual CSI/NPS surveys*

2

Transformation

• Translate strategy into working models*

3

Organization

• Risk management/mitigation • OD: multi-disciplinary cluster • People selection and positioning:

ensure bias of relationships (Ia) in cluster

• • • •

Analytics* Risk management/mitigation Project management* Strategic partnering

4

Processes [standard]

• Customer Account Management (CAM) • Key Account Management (KAM)

5

Planning

• • • •

VMI CPFR S&OP Co-planning with selected customers

6

Systems/IT

• • • • •

CRM for selected customers EDI Network optimization modelling* Inventory management Track and trace

7

Operations

• Delivery reliability (DIFOT) • MTS • FTL/FCL delivered direct from source • Transport selection and management

8

• • • •

Culture

• • •

Minimize change: keep status quo Internal collaboration-teaming Consensus decision-making Shared KPIs: emphasis on loyalty and retention Incentives: encourage participative schemes Job design: degree of autonomy negotiated by consensus Internal communications: consultative/face-to-face Training and development: team building Role modelling: managers with ESFP MBTI profile ideal Recruiting: team players

• • • • • Leadership style: Coach:

conscientious; lead by teaching; concerned for others; loyal, committed; politically astute; seeks agreement by consensus

* Common across all supply chain types

Figure 7.2 ◆

internal capabilities required to propel collaborative supply chains

· 206 ·

M07_GATT6818_03_SE_C07.indd 206

2/24/15 3:46 PM

Collaborative supply chains: demand-side

3. Organization Let us start with the big picture – the organization’s design. Developing the group sub-culture necessary for a collaborative supply chain means installing a design that is a combination of specialist vertical functions and horizontal, customer-facing clusters. Since I have covered this topic in detail in Chapter 6, I will simply recap the main ideas behind the proposed new model for future supply chains. You will note that my thinking has moved beyond the matrix structure suggested in the first edition of this book.7 It has taken nine years of research work, but I am now convinced you need to have both the vertical functions and horizontal clusters co-existing and synchronized in an enterprise; one without the other is insufficient, because they perform different albeit complementary roles. The reality is that vertical functional organizations are always going to be 90 degrees ‘out of phase’ with the ‘horizontal’ way customers prefer to buy products and services. While this has been conceded to some extent by the introduction of dualreporting matrix structures, when push comes to shove in a conflict between the two, the vertical (budget-holding) function inevitably comes out on top, and the customer-facing account management element loses out, so in effect everyone loses! Quite simply, we need a fundamentally new model, and some leading enterprises have already moved in this direction (Figure 7.3). Of course, in the best companies, capex and investment is on the horizontal line too, in synch with the customers/markets. Within this cluster structure there is the additional consideration of ‘people positioning’ and the inclusion of a customer call centre. In the financial services and tourism industries, centres often use technology employing caller identification software so that employees can identify the customer and update their information on a real-time basis. When customers call, a reference list of facts and preferences is readily available to employees so they can tailor their conversation to put the caller at ease – or feel special. One example of this is the Royal Bank of Scotland (RBS) in Britain, which operates several insurance companies, e.g., Direct Line, Privilege and Churchill. These entities are all aimed at different segments. Incoming calls all go to the same call centre, but the system tells the operators which company the customer is seeking so that they can respond accordingly. After the bailout in 2008 following the Global Financial Crisis, RBS redoubled efforts to regain the trust of its customers.8 NatWest, part of

· 207 ·

M07_GATT6818_03_SE_C07.indd 207

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 208

S/M

P

S/M

P

S/M

P

P

P

Procurement

Finance

Sales/ Marketing

Shared services: HR/IT/F&A

Production

‘Relationship’ clusters

Collaborative supply chain organization clusters

Source: Adapted from Figure 9.2 in Gattorna (2009), p. 140

F ig ure 7.3 ◆

Note 1: Account teams/clusters configured with a ‘relationship’ mind-set bias Note 2: Individual team members return to their respective functions for specialist training

L

L

L

P

COO

CEO

Logistics

Collaborative buying behaviour

Customer segment

Customer B

Customer A

DYNaMiC SuPPLY ChaiNS

· 208 ·

2/24/15 3:46 PM

Collaborative supply chains: demand-side

the RBS Group, undertook what it called its ‘Customer Charter’ in 2010, involving an extensive behavioural segmentation of its financial services markets. Up to 14 new customer segments were identified. This was an initiative in the right direction, but it subsequently became clear that the bank did not have the capabilities to carry out all its promises. In my view, they tried to manage too many discrete segments, and the complexity overwhelmed them, so customer service actually deteriorated.9 Putting technology aside for the moment, a more manual customer support system is used by veterinary surgeons who often refer to pets by their first name, and give the pet the owner’s last name. They chat about the animal with the owner and ask how things have been going since their last visit. All the information is contained on a card or computer index, but the vet gives the impression of knowing and caring about the much-loved pet. Whether your system is technologically sophisticated or simple and manual, the fundamental requirement is for the customer to feel important and wanted. The use of empathy and listening skills are essential in the process of these interactions. This is clearly recognized by the companies that tend to hire customer-facing staff with good people skills, such as ex-teachers or actors. This type of process is made or broken by the manner of the staff and their ability to exhibit good interpersonal skills, supported by technology that will provide adequate information and help in the delivery of the required processes. Some (but not all) people with ‘F’ (Feeling preference) in their Myers-Briggs Type Indicator (MBTI®) profile are essential in this cluster. Risk management and mitigation is vital when servicing this segment, and personnel with these attributes must be embedded in the organization clusters. And we can go even further using strategic partnering techniques, as we will soon see.

4. Processes It is important that the processes followed in the collaborative supply chain are participative, internally and externally, and, of course, ­standard and ­replicable. Leading companies will always put customer account ­management processes at the forefront, as well as joint-development processes. Everything about these processes is unambiguously focused on the long term. The aim is to maintain and deepen existing relationships with nominated customers in every facet of service; and this is what they expect and demand. For large

· 209 ·

M07_GATT6818_03_SE_C07.indd 209

2/24/15 3:46 PM

Dynamic Supply Chains

important accounts, companies often appoint a ­senior executive as Key Account Manager. He or she coordinates all of the account’s activities, supported by senior executive sponsorship, as high up as the Board level. The other important consideration is achieving ‘internal alignment’, and this plays well to our concept of designing unique clusters with embedded attributes that reflect the collaborative customers that are being served.

5. Planning Sales and Operations Planning (S&OP) is at the heart of matching supply and demand, and is one of the most critical activities inside the company, ­bringing all parties together for discussion of their respective forecasts and ­ultimately a­ greeing a single demand plan. The collaborative supply chain, s­ erving ­collaborative ­customers, is a natural sweet spot for S&OP, and ­consensus is r­elatively easy to achieve. Kinaxis is a software company that operates ­successfully in this space. Quite simply, in a more stable operating environment underpinned by trust, there is ample time to discuss and debate different forecasts and convert them into a single demand plan that all parties are committed to. Ideally, suppliers should involve trusted customers in these discussions. Apart from S&OP, vendor managed inventory (VMI) works well in ­situations like this where there is a free and open exchange of i­nformation. Up until recently this has been a very labour-intensive activity, but Dannon ­Company Inc, the international yogurt company, engaged Datalliance, the world’s largest i­ndependent VMI service provider, to significantly expand their VMI programme. Datalliance VMI makes it easy for suppliers and their ­customers to establish effective VMI relationships that fully align with ­business objectives, improve collaboration, and streamline supply chain operations. The result: higher productivity levels from VMI analysts; the number of supply chain partners participating in VMI expanded to 20; and superior performance maintained at approximately 60 stock-turns and 97 per cent inventory levels.10

6. Systems/IT Information technology may not seem like a culture shaper but it is ­important to get the right systems in place to overlay and institutionalize key processes. There is no point in seeking collaboration in a collaborative supply

· 210 ·

M07_GATT6818_03_SE_C07.indd 210

2/24/15 3:46 PM

Collaborative supply chains: demand-side

chain when your IT systems are designed for the opposite effect. IT systems in various combinations provide a ‘view’ of the business, and this can help you align your business processes and activities to match the profiles of your customer segments. Point-of-sale (PoS) systems can provide daily information on the purchasing profiles of your customers, and many retailers are now mining this data with great effect. In turn, this information materially assists the replenishment process. Data warehouses and business analytics are vital facilities now readily available to modern enterprises. In collaborative supply chains, transactional intensity is relatively low and systems complexity is likewise low because collaboration flourishes best when the operating environment is relatively predictable and stable. This means enterprise resource planning (ERP) systems are useful but not essential. However, additional systems applications that assist in managing customer relationships are important. The Kanban scheduling mechanism (more commonly associated with lean activities) is useful, as is vendor managed inventory (VMI) already mentioned, although this is usually an in-built capability of most contemporary ERP systems. Operational environments with more demanding VMI specifications will benefit from the advanced capabilities offered by some of the major ­supply chain management software vendors, e.g., Manugistics, i2, and ­AspenTech. The distinction between these providers is that Manugistics and i2 are geared towards more discrete product industries, while ­AspenTech is a ­process industry leader. Every day low price (EDLP), which is ­essentially a pricing strategy, is also important in this operating environment, as are ­collaborative demand planning (CDP), efficient consumer response (ECR) and collaborative planning forecasting and replenishment (CPFR). A ­number of companies have linked CPFR and S&OP, and reported b ­ enefits beyond those achieved with stand-alone CPFR and S&OP activities.11 Some of the hard benefits of linking CPFR and S&OP include: sales and margin growth; perfect order performance; reduced inventory cost; and product offerings tailored to the manufacturer’s and the retailer’s brand.12 The processes and systems applications for customer relationship ­management (CRM) are progressively being integrated into a portfolio of systems that combine to jointly service customers, and if used in this way they are extremely valuable in providing access to good customer information to support fulfilment. However, if used in isolation, CRM, while still useful, loses a lot of its potential power. We strongly suggest that a CRM

· 211 ·

M07_GATT6818_03_SE_C07.indd 211

2/24/15 3:46 PM

Dynamic Supply Chains

system be used where a ‘collaborative’ customer segment is being served, and that the P-A-D-I coding method be used to train and keep everyone in the Firm abreast of a customer’s buying behaviours, and in particular any changes occurring in their usual behaviour brought on by either internal or external pressures. In our view, a CRM system becomes less effective in the other three generic supply chain configurations because of a general lack of collaboration between parties. Additional systems on the ‘customer end’ of the supply chain include support systems such as point-of-sale, radio frequency identification (RFID) and the increasingly utilized Global Data Synchronization Network (GDSN®). Figure 7.4 is an attempt to depict the ideal systems configuration for the collaborative supply chain, using the Oracle Suite as an example. I will build this diagram progressively as we discuss each type of supply chain in the following chapters.

7. Operations In operations, the key attribute is reliable delivery, both in quantity and time. Given the exchange of forecasts on a rolling basis, this segment can often be served using stock that is available as a result of the ‘make-to-stock’ (MTS) philosophy, in large quantities, which in itself reduces cost. Where the opportunity arises, suppliers are able to deliver full truck or container loads to these customers, direct from the manufacturing facility. This is the ideal pathway, because it cuts down wasteful inter-facility movements that simply add cost but no value.

8. Culture Mark Barratt, at Arizona State University, has undertaken perhaps the most definitive research in this vexed area of collaboration.13 He identified 83 enablers of supply chain relationships (Figure 7.5) in coffee supply chains between a major manufacturer and a leading retailer in the UK grocery industry. On inspection, most of these enablers are related to culture and have underlying values that are clearly collaborative, such as commitment, mutual benefit, openness, jointly defined processes and timely exchange of information. The 34 inhibitors to supply chain relationships that Barratt observed also showed a bias towards culture-related factors (see Figure 7.6).

· 212 ·

M07_GATT6818_03_SE_C07.indd 212

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 213

Different combinations of IT applications sitting on top of ERP*

Campaign supply chain

Project accumulation

requisite technology for collaborative supply chains

Source: Adapted from Figure 1.5 in Gattorna (2009), p. 55

Fi gur e 7. 4 ◆

Agile supply chain

Demanding/ unpredictable

ERP transaction system and database (or can be SAP or legacy systems)

Lean supply chain

Transactional

* Using Oracle Suite as a sample to demonstrate

• JD Edwards • PeopleSoft (HR) • E-Business Suite (EBS)

e.g. Oracle Suite

OTM (G-Log)

Demantra PTP

Siebel CRM

ASCP/CBO

Collaborative supply chain

Collaborative

Customer buying behaviour segments

Fully flexible supply chain

Innovative solutions

COLLABORATIVE SuPPLY ChaiNS: DeMaND-SiDe

· 213 ·

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 214

YO

YTO

YT

59

16 20 68

6

38

45

37 80

26

31

34

44

70

26

8

ZYO

65

48

18

73

22 47

58

29

15

35

55

77 38

36

10

53

17

56

79

55

39

62

9

1 4 ZYT

41 40

63

83

46 ZYS

2

25 52

23 32

7

6

43

64

26

Supply chain relationship enablers – at three levels

58

30

4

YST

74

76

69

Source: Barratt, Mark A. (2002), Appendix 7A.1 in Gattorna (2010), pp. 460–461

F igu re 7. 5 ◆

78

57

42

YS

Manufacturer (Y)

81

ZT

ZO

ZTO

32

19

ZST 54

ZS

Retailer 46 (Z)

21

6

24

Dynamic Supply Chains

· 214 ·

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 215

Benefit demonstration Communicable strategy Context dependent relationship Creative thinking Full process review Individual chemistry Integrated relationships People relationship facilitators Supply chain manager System enabled processes Understanding buying behaviour Understanding demand aggregation Understanding information requirements Understanding role of suppliers Vendor managed inventory

OPERATIONAL   7 Common objectives and goals 8 Common philosophies 9 Communication 10 Communication mechanisms 15 Identifying communication channels 18 Integrated suppy chain plan

54 55 56 57 62 63 64 70 74 76 77 78 79 81 83

Source: Barratt, Mark A. (2002), Appendix 7A.1 in Gattorna (2010), pp. 460–461

TACTICAL 1 Advanced problem notification 4 Capability to share information 6 Collaborative/information-based culture 16 Information critical mass 17 Information quality 19 Interdependency recognition 34 Mutual understanding 35 Mutual agreed processes 38 Openness 39 Opportunism versus collaboration 40 People relationship skills 41 Proactive approach 42 Problems not symptoms 43 Relationship commitment 44 Relationship manager

STRATEGIC 2 Board to board dialogue 26 Multiple level relationships 46 Senior management commitment 55 Communicable strategy 69 Ongoing board level dialogue 20 21 22 23 24 25 26 30 31 32 36 37 45 47 48 52 58 59 65 68 73 80

Internal communication Internal understanding Joint replenishment decisions Jointly defined processes Long-term commitment Mean what is said Multiple level relationships Mutual honesty Mutual recognition Mutual respect Ongoing partner recognition Ongoing trust development Seeking industry best practice Share future plans Shared KPIs Understanding partner’s issues Customer implants Customer team clusters Integrated supply chain operations Maintain current information Solving operational issues Understanding role of people

Key for relationship enablers Collaborative supply chains: demand-side

· 215 ·

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 216

YO

YTO

121

97

118

112

119

112 86

95

85

ZYO

110

87

107

109

117

104 107

100

115

ZYT

108

116 98

113

ZYS

125

Supply chain relationship inhibitors – at three levels

101

91

YT

90

118

Source: Barratt, Mark A. (2002), Appendix 7A.2 in Gattorna (2010), pp. 462–463

F igu re 7. 6 ◆

122

102

105

96

YST

YS

Manufacturer (Y)

106

ZS

ZTO

ZT

ZST

ZO 124

92

84

93

120

94

100

103

Retailer (Z) 103

Dynamic Supply Chains

· 216 ·

2/24/15 3:46 PM

M07_GATT6818_03_SE_C07.indd 217

Source: Barratt, Mark A. (2002), Appendix 7A.2 in Gattorna (2010), pp.462–463

TACTICAL   84 Adopting a ‘customer’ mentality 85 Commercial pressures 90 Forecast driven DC 94 Increasing competitive environment 95 Information exchange accuracy 96 Information overload 98 Joint initiative resources 100 Lacking senior management commitment and support 105 Not sharing future production plans 106 Panic buying behaviour 107 Perceived supplier performance 109 Poor personal relationships 112 Role of EPOS 113 Short-term focus 116 Timeliness of information exchange 118 Collaboration slippage

STRATEGIC 103 Mechanistic relationship behaviour 125 Poor strategic relationships OPERATIONAL  86 Cost-focused 87 Cultural differences 91 Forecast-driven production 92 Functional-based teams 93 Functional silo mentality 97 Information starved 101 Managing change 102 Managing promotions 104 Misunderstanding decision implications 107 Perceived supplier performance 110 Product lead-times 112 Role of EPOS 117 Underestimating the scale of change required 118 Collaboration slippage 119 Differing trading strategies 120 Functional management style 121 Information location 122 Organizational size 124 Poor in-house logistics

Key for relationship inhibitors

Collaborative supply chains: demand-side

· 217 ·

2/24/15 3:46 PM

Dynamic Supply Chains

Interestingly, both the enablers and inhibitors were evident at strategic, ­tactical and operational levels within the manufacturer and retailer organizations participating in the research. The majority of enablers and inhibitors appeared to occupy the inter-organizational space in the supply chain between the supply chain parties. This is a significant finding given the current efforts by suppliers and retailers, particularly in fast-moving consumer goods (FMCG) globally, to achieve collaboration and make it a source of competitive advantage. Yes, it can be, but only under very specific conditions. If these are not present, all the technology in the world won’t cause parties in supply chains to act in a genuinely collaborative way towards each other. Of course, this suggests that all parties in supply chains now require a new array of competences in areas such as customer relationship ­management, continuous improvement, multi-level communications, joint KPI ­management, and many others. But collaboration on its own is not a ‘silver bullet’ for all occasions. So how do we attempt to create a subculture to support collaboration? I’ve heard ‘culture’ described as trying to hold a fistful of sand: inevitably it defeats you! We found, in Chapter 4, that nothing gets done unless the values of the people working in the enterprise support making it happen. Indeed, the fact that so many business plans never materialize is evidence of this phenomenon, although some would argue, quite wrongly, that such slippages are due to the actions of competitors. Actually, both factors impact implementation, but I’m convinced the insidious resistance that often lurks just beneath the surface of organizations is the major reason. On the flip side, the positive force of people behaviours and beliefs is a critical key to success. Barratt’s work on inhibitors and enablers also supports the idea that ‘culture is key’. Has your business ever sought to generate a particular work culture through change management processes or human resource management? You wouldn’t be alone. My experience tells me culture-shaping activities in isolation do not work: there are many factors that can influence and shape the subculture in an organization. For collaborative, our emphasis needs to be on building a predominantly Group subculture inside the enterprise. This subculture is characterized by people-focused values such as a commitment to customer relationships; a teamwork style of working that embraces and rewards participation; aversion to risk; and the pursuit of synergy through

· 218 ·

M07_GATT6818_03_SE_C07.indd 218

2/24/15 3:46 PM

Collaborative supply chains: demand-side

developing cohesive and loyal relationships. A bias towards these values should be evident in all functions that contribute to delivering products and services to collaborative customers. In turn, this means that suppliers and customers need to be open and respectful of each other. But where do we start? I have chosen several of the most critical capabilities that can help you to shape a group subculture, and I describe below how they are relevant to collaborating in collaborative supply chains. None is a silver bullet on its own, but putting in place elements of the capabilities listed below will help you to influence the success of your supply chain strategy. Above all, this customer hates change, so do your best to keep the status quo as much as possible. Performance measurement: Don’t we all love performance ­measurement? Unfortunately, this important area of management is often poorly understood and misused and abused as a result. Too often ­companies compile long lists of KPIs across a broad spectrum of f­ unctional areas ­without realizing that specific KPIs apply to each type of s­upply chain, or combination thereof. Early versions of the balanced scorecard approach developed by Robert Kaplan and David Norton14 proved both a ­blessing and a blight on the landscape; while bringing new disciplines to the ­monitoring and management of performance, in practice the scorecard did not always identify clearly enough the need to align different KPIs with particular customers. Instead, the impression was that an arbitrary list of financial, customer, internal operational processes and market KPIs selected by management, applied equally well across all customer-buying behaviours in the marketplace. This is simply not the case. The oversight has now been partly redressed with Kaplan and Norton’s latest insights on balanced scorecards.15 In any event, we would prefer to use the term ‘biased scorecard’, meaning that we select only those KPIs that are relevant to each type of dominant buying behaviour in a particular marketplace – and for a specific combination or types of supply chains. The mix of these buying behaviours is particularly important, because it will guide us in the selection process and the subsequent allocation of efforts in data specification, data collection, and monitoring of the selected portfolio of KPIs. For collaborative supply chains, our emphasis should be on m ­ easuring ­customer retention and loyalty, the length of individual customer ­relationships, and our business’s share of the customer’s overall spend in the particular category. Other measures such as the amount of information sharing and

· 219 ·

M07_GATT6818_03_SE_C07.indd 219

2/24/15 3:46 PM

Dynamic Supply Chains

insights to drive customer service improvement are also ­relevant. Measures such as service reliability, delivery-in-full-on-time-error-free (DIFOTEF) and parameters that reflect the way we are managing the ­all-important relationship with selected customers are also useful. In ­addition, customer account profitability (CAP) measures indicating strong profitability from this customer segment are extremely helpful. This just reinforces the need to isolate and focus on ‘collaborative’ customers – as a conscious priority. CRM systems are often used in implementing KPIs that focus on the relational measures commonly used in call centres, health insurance, ­financial services, and brand-oriented companies. In addition to customer retention rates, the cost of customer retention, as well as the ‘cost effectiveness’ of tactics used to achieve high rates of customer retention, is ­monitored, e.g., Toyota measures a range of KPIs that track customer loyalty and retention. Without a doubt, KPIs are a major shaper of culture in organizations, because people tend to do what is measured, irrespective of whether it is correct or the most appropriate thing to do in the circumstances. The world is full of examples where particular KPIs set in place inside the ­enterprise are driving dysfunctional behaviour. This could be an urban myth, but I once heard of a US airline that ostensibly found a ‘motivator’ for its pilots to reduce fuel wastage and so encourage more energy efficient flying ­practices. Pilot bonuses were linked to the reduction of fuel use. This was a very ­effective motivator for a behaviour change and resulted in ­considerable reductions in fuel usage. It also lost them customers! The pilots were turning off the air conditioning while queuing for takeoff clearance on the tarmac, which saved fuel, but in the tropics the passengers were sweltering in the heat. Call centres modify their KPIs according to the type of calls – in-bound or out-bound – and whether they are seeking to gather information, g­ enerate sales or build a relationship. Compare the likely KPIs used for a crisis ­counselling centre with those for a directory assistance service at a telephone company. Both services are provided by telephone, but the type and level of service is very different indeed. An extreme example maybe, but it illustrates the point. In call centres today, the time taken on a call is less important if the operator is trying to convert the caller into a customer. However, the duration and number of calls per day are still important when the aim is simply to deliver information, and not necessarily establish a relationship.

· 220 ·

M07_GATT6818_03_SE_C07.indd 220

2/24/15 3:46 PM

Collaborative supply chains: demand-side

Incentives: Encouraging staff to do what the organization wants them to can be achieved through incentives, and they go hand-in-hand with KPIs. In the case of collaborative supply chains, we need incentives that encourage participation and team behaviours. For a group subculture, any schemes that recognize performance, in a public way are appropriate, e.g., honour boards, team rewards such as dinners out or bonuses. These types of ­incentives need to carry a real level of achievement with them and not be something that is inappropriate or seen as irrelevant – otherwise they don’t work. Examples of incentives in this category reflect a participatory emphasis. Until the 1990s, McDonald’s used honour boards to acknowledge excellent customer service and exceptional levels of staff performance. Symbols were put on employees’ name badges to indicate the level of customer service they had achieved. IKEA, on the other hand, uses departmental sales targets rather than individual ones, encouraging their sales staff to perform as a team rather than compete for customers. Job design and job descriptions: Collaborative supply chains need to focus on teamwork and cooperation to satisfy customers. Ideally, any activities involving authority, autonomy or control should be decentralized and negotiated by consensus. Getting the line and customer-facing staff to agree on ‘who will do what’ in serving customers is especially effective, as it emphasizes how best to manage the relationship. The type of job design that supports this situation is descriptive rather than prescriptive. If employees are given both responsibility and authority commensurate with the level of their duties it tends to empower them to make more relationship-based decisions. However, this should occur under the guidance of a coach who uses meetings to discuss scenarios and their possible resolutions. Internal communications: Communicating inside an organization is a critical factor in shaping that organization’s responses to customers. But this importance has not been fully recognized. Suffice it to say that a Group ­subculture tends to flourish in an environment where ­internal ­communications are highly consultative, and the underlying theme is ‘we care’. Fortunately, this type of communication works well in a ­relatively s low-moving and stable operating environment, which is what the ­ ­collaborative buying behaviour is all about. However, as will be seen in later chapters, this style of internal communications does not suit a fast-moving world characterized by high levels of uncertainty and unpredictable demand.

· 221 ·

M07_GATT6818_03_SE_C07.indd 221

2/24/15 3:46 PM

Dynamic Supply Chains

The best vehicle for good internal communications in the group s­ ubculture is team-based, and face-to-face, hence, meetings, and lots of them! However, this can be slow and cumbersome and can sometimes become cliquey – in which case certain individuals and groups purposely withhold information from other individuals and groups. But the strength of the team approach is that staff turnover is relatively low, otherwise the subculture is lost. See Figure 7.7 for a summary of the communications style in a group subculture. Training and development: Much of the budget provided for training and development is all too often unfocused and undifferentiated, r­esulting in wasted resources. Then the budget is indiscriminately cut during difficult trading conditions such as in recessions, just when we should be ­singling out certain talent for further development and retention. Such is the world of onedimensional management. Remember, it is not essential to train all personnel in all skill areas. In order to foster a group subculture, ­training and development activities should focus on team building, and ­emphasize the value of relationships and the synergy that is derived from them if applied appropriately, both inside and outside the enterprise. See Figure 7.8 for a summary of the type of training and development needs in a group subculture. The most effective vehicles for promoting the rapport so necessary to this type of subculture are small work groups and a ‘hands-on’ style. F ­ act-based negotiation skills and a thorough understanding of group dynamics are also important. The group subculture is supported very strongly by the ‘buddy’ system, as used in many businesses that adopt project teams. In this case, the responsibility for a person’s own work and the development of another person becomes the norm, and results in successful team-building, e.g., consulting teams comprising a combination of senior members, c­ onsultants with a medium level of experience and a few junior associates. The j­unior associates work in quite directed environments, while still learning the ­culture of the organization. Role modelling: This is a little used lever in the cultural formation ­process, but nevertheless a very influential one if you can get it working effectively. Having ‘leaders’ in the collaborative cluster that demonstrably live the values of empathy and respect for staff and customers alike is a ­powerful shaper of behaviour among subordinates and fellow workers. For this cluster you would expect to find such role models exhibiting a lot of ‘F’ in their MBTI profile.

· 222 ·

M07_GATT6818_03_SE_C07.indd 222

2/24/15 3:46 PM

Collaborative supply chains: demand-side

Core need: Participation Systems: Informal within closed networks or groups, usually many-to-many Content: Value-driven, open to subjective interpretations, task-oriented, focuses on what is happening within the company Style: Consistent and regular, highly interactive participation encouraged, thoughtful, lengthy Information distribution: Broad, across hierarchies but only within groups, intergroup sharing poor, must be ‘discovered’, individual dependent

Figure 7.7 ◆

Communications style in a Group subculture

Source: Gattorna Alignment research

1. Action • Emphasis on team behaviour • Focus on motivating skills 2. Investigative • Ability to analyze complex, subjective phenomenon 3. Social • Emphasis on interpersonal skills on wide range of situations • Ability to manage conflict 4. Conventional • Ability to sublimate personal values to organizational values 5. Influencing • Ability to lobby for support 6. Artistic • Ability to find creative compromises among divergent views

Figure 7.8 ◆

Training and development needs in a Group subculture

Source: Gattorna Alignment research

· 223 ·

M07_GATT6818_03_SE_C07.indd 223

2/24/15 3:46 PM

Dynamic Supply Chains

Too often, personnel are recruited into organizations and selected for positions solely on the basis of a combination of their technical q ­ ualifications and previous work experience. Little if any consideration is given to the micro-culture that they bring to the organization as they enter, and the impact this could have on their performance and on the performance of those around them. If only it were recognized how this particular factor could be used to ‘genetically engineer’ organizational subcultures, we would see ­correspondingly more effective implementation of plans, across the board. What we are seeking to grow is a subculture that is personal, has people with good relationship skills, is team-oriented and empathetic, and above all, is focused on delivering personalized service to key customers – on a continuing basis. Leadership style: Perhaps the most vital factor of all in shaping ­subcultures in organizations is leadership style. You only have to look at the myriad of examples of successful and unsuccessful organizations over the past few decades to realize the impact that particular leadership styles can have on their ultimate fortunes. The case clearing houses in Europe and the United States are full of salient examples. The reality is that ­successful organizations tend to display an array of leadership styles consistent with the mix of dominant buying behaviours in their marketplace. This is a ­fundamental requirement for success in today’s world. In turn, the top management team in successful organizations tends to formulate strategies that are appropriately aligned to the needs of their ­customers or markets, because they are close enough to know what they want. They then develop and manage a corresponding array of s­ ubcultures inside ­ arketplace. The the organization to drive these intended strategies into the m key is this ‘alignment’ with customers, but it all starts from the leadership team recognizing their customers’ buying behaviours. Such recognition sets up the conditions for ultimate success. Without it, there is little chance of sustained alignment with customers (and suppliers) and therefore superior operational and financial performance. So the real conundrum facing today’s top management teams is how to develop and (coincidentally) maintain a mix of diverse subcultures inside the organization tasked with under-pinning particular strategies – especially when some of these subcultures have fundamentally opposing values. Few enterprises have yet found a workable solution to this very real problem.

· 224 ·

M07_GATT6818_03_SE_C07.indd 224

2/24/15 3:46 PM

Collaborative supply chains: demand-side

In the case of a Group subculture, it is important to have someone in the management team who has a predominantly coach leadership style, and ensures that the values required to form and deliver genuine ­customer-emphatic strategies are in place. A coach leads by example and teaching, is very conscientious and shows genuine concern for others. He or she likes to help, is loyal to subordinates and superiors alike, and remains ­committed to the vision espoused by the leader of the ­enterprise. The coach is also ­politically astute, seeking to lead by agreement and c­ onsensus. In ­Myers-Briggs terms, this leadership style is epitomized by an ESFJ (or ­extrovert-sensing-feeling-judging) type. IKEA is a company that has ­consistently embraced the coach style of leadership. This ­Swedish firm has a very group-oriented culture and aims to have a fairly flat ­organizational structure. Using Geert ­Hofstede’s classification for country cultures (see ­Figure 4.7), the characteristics for Sweden are high individuality, small power distance, low uncertainty ­avoidance, and, like the rest of the ­Scandinavian ­countries, highly feminine. Recently, IKEA has introduced the Yammer blog to improve the ­effectiveness of the way its people work together inside the organization, across the 25 countries in which it operates.16

Collaboration continuum As depicted in Figure 7.9, there is actually a continuum that stretches from full ‘Partners’ on the extreme left, to ‘Dynamic’ on the extreme right. For the buying behaviours on the left (I; Id; Ia; iA), there is a progressively reducing inclination to collaborate – but genuine collaborative sentiments are nonetheless present – and can be worked on. For the three buying behaviours on the right (A; Ap; aP), no collaborative sentiments exist, so it is fruitless to pursue collaboration with these customers.

Real or artificial ‘collaboration’ Genuine collaboration appears to occur when the parties in a ­particular ­supply chain have similar power, and hence their relationship is by ­definition more interdependent. Where a power imbalance exists, genuine c­ ollaborative behaviour is less likely to occur. Some companies achieve a ‘pseudo

· 225 ·

M07_GATT6818_03_SE_C07.indd 225

2/24/15 3:46 PM

DYNaMiC SuPPLY ChaiNS

Strategic partnering potential

Partners

Trying new Collaborative things, together mindset

Other non-partnering solutions required

Fair deal

Transactional/ adversarial

Demanding/ unreasonable (Trading Commercial/ mentality) pragmatic

Progressively less inclination to collaborate

Figure 7.9 ◆

Collaboration continuum

Source: Gattorna Alignment research

collaboration’ effect through the very power they exert on their suppliers, e.g., Walmart flexing its muscles with its suppliers. Despite these aberrations, the original principle remains true, i.e., seek to collaborate only with those parties in the supply chain who have collaborative values and genuinely wish to collaborate. Only in that way will truly win–win experiences be sustained over time. Andrew Humphries and Richard Wilding have developed an evolutionary approach to gaining trust and achieving collaboration, namely cooperation, coordination and finally collaboration.17 In August 2011, Walmart launched its Customer Advantage programme, a web-based portal designed to facilitate collaborative planning with its suppliers based on a common knowledge base about Walmart shoppers.18 I have found that strategic relationships between pairs of enterprises, ideally in collaborative supply chains, can take two forms: ◆

Supplier–supplier: these are horizontal relationships, which we will refer to as ‘alliances’. A good example of this type is the Qantas-Emirates alliance, which according to Qantas CEO Alan Joyce, ‘. . . is one of the most important strategic initiatives that we will ever do . . . and will help turn around the performance of Qantas’s international operations’.19 Another example at the industry level was the establishment of the New Zealand Kiwifruit Marketing Board in 1988 as a single-desk exporter under grower control. According to Sally Gardiner, General Manager of Zespri International, ‘the kiwifruit industry learned that to be successful, it needs to work together as one’.20 She went on to say that ‘Zespri manages the

· 226 ·

M07_GATT6818_03_SE_C07.indd 226

2/24/15 3:46 PM

Collaborative supply chains: demand-side

distribution and marketing of fruit exported beyond ­Australia. Today’s collaborative culture encompasses orchards, pack houses, and the entire supply chain.’21 ◆

Buyer–seller: these are vertical relationships, which we prefer to call ‘­partnerships’, typically between manufacturers and distributors or large end-users.

Both types of relationship can be explained using the dynamic ­alignment framework introduced in earlier chapters and depicted in a different way in Figure 7.10. Within each of these types there are at least five s­ ubcategories of relationships that closely parallel the types of customer behavioural ­segments that we identified elsewhere (in Chapter 2). These are: loyaltydriven ­relationships (collaborative), cost-driven relationships (cost/­efficiency/­ transactional), performance-driven relationships (demanding/dynamic), project-related relationships (project accumulation), and innovation-driven relationships (innovation solutions). However, irrespective of the type of strategic relationship, potential conflict can arise as a result of: ◆

different priorities caused by unclear focus;

◆

incompatible long-term objectives, e.g., cost minimization (supplier) ­versus profit maximization (distributor); VERTICAL

HORIZONTAL

Marketplace

Marketplace

Strategy

Strategy

Culture

Culture

Leadership

Leadership SUPPLIER

Figure 7.10 ◆

SUPPLIER

SUPPLIER

BUYER

Critical alignment interfaces in horizontal and vertical strategic

relationships Source: Adapted from Figure 13.1 in Gattorna and Walters (1996), p. 191

· 227 ·

M07_GATT6818_03_SE_C07.indd 227

2/24/15 3:46 PM

Dynamic Supply Chains

◆

different cultures;

◆

lack of communications/information;

◆

traditional ‘zero-sum’ negotiation strategies; and/or

◆

incorrect pricing.

Given the experience with conflict as noted above, the priorities for achieving effective strategic relationships must include the following initiatives: ◆

Develop a common/shared vision.

◆

Recognize each company’s independent objectives, e.g., ROI, budgets, market share.

◆

Develop common objectives that are as compatible as possible with ­independent objectives, but which ultimately optimize the mutual b ­ enefit to the parties involved.

◆

Get to know each other’s marketplace as this affects the interaction.

◆

Get to know each other’s culture, possibly by placing personnel inside each other’s company or by creating strategic project teams with ­employees from both companies.

Strategic partnering is most relevant to our discussion of collaborative ­supply chains because of the preferred collaborative values present on both sides. Indeed, the ability to select and manage successful p ­ artnerships is fast ­becoming a required competency. The unique strategic ­partnering ­methodology described in more detail below has been developed and refined through extensive fieldwork; it focuses on fostering growth in trust and shared information, through joint action. This in turn naturally leads to the development of joint competitive advantages for members in the same supply chain. The desired outcome is integrated business plans for the ­collaborating parties and subsequent sustained operating success. Corporations that have ‘collaborative’ values and practise strategic ­partnering usually have a number of ‘partners’. However, while relationships between ­partners should be unique, they need not be exclusive.The nature of the ­strategic relationship forged with one company may be quite different from that forged with another. The essential ingredient for success is that the partners are culturally compatible. Our definition of strategic partnering is detailed in Figure 7.11, along with the features and implications of this unique relationship type.

· 228 ·

M07_GATT6818_03_SE_C07.indd 228

2/24/15 3:46 PM

Collaborative supply chains: demand-side

Strategic partnering develops enduring corporate relationships based on understanding and shared knowledge. The process gets its name from developing and maintaining a strategic fit between an organization’s goals and capabilities and its changing marketing opportunities. FEATURES

IMPLICATIONS

Businesses develop a profound understanding of each other’s business operations.

The parties develop an approach to business which resembles a ‘good times, bad times’ attitude allowing for greater flexibility and ultimately control.

Two parties in a given supply chain commit to a unique, though not necessarily exclusive relationship.

Sometimes we work to develop relationships with customers only to lose them just before they start to become ardent supporters, or ‘advocates’ of our company.

This relationship is mutual and becomes part of the corporate structure.

Conflict is resolved quickly between the parties because they have similar objectives in the partnership.

The intention to commence strategic partnering is initiated at the highest managerial level.

This results in increased commitment to the technique and greater understanding at all levels in the organization.

A ‘meeting of minds’ is achieved by intra-company communications downwards, and horizontal inter-company communications.

Problems between parties can be pre-empted or solved quickly.

Mutual business plans and shared objectives may be a feature of the partnering.

Companies are in a superior position to their competitors due to their superior knowledge. Gains are achieved by the ‘two heads are better than one’ maxim.

Figure 7.11 ◆

Definition of strategic partnering

Along with others who have worked in this area,22 we have developed a one-day workshop-driven strategic partnering programme (Figure 7.12), which comprises two stages. In Stage 1, each executive management team attending the event completes a purpose-designed ‘quick’ dynamic alignment diagnostic questionnaire. The primary aim of Stage 1 is to assess the degree of compatibility between the cultures and leadership styles of the two parties.

· 229 ·

M07_GATT6818_03_SE_C07.indd 229

2/24/15 3:46 PM

Dynamic Supply Chains

Step 1 Vision formulation This step produces a vision (or philosophy) for ’what we stand for’ s­ tatements from both parties. The process significantly reinforces the awareness of the necessity to understand each other's business position and aspirations. It also prepares the way for an understanding of any conflict points where the companies may not fundamentally share the same objectives, yet both exist to serve the same end-user or consumer. Step 2 Environmental scan This step seeks to flush out and understand the various elements of the economic, government, consumer and organizational environment which do, or would, influence the proposed partnership. Step 3 Issues formulation This step solicits and documents critical issues from both individual ­c ompanies and jointly held perspectives. These issues are seen to be ­significant in as much as they can have a major impact on performance in a pre-determined time-frame. Step 4 Issues identification and definition This step tests each issue with pressure questions in an attempt to ­understand the rationale for its selection. The objective is to clearly resolve symptoms and causes. Step 5 Issues prioritization This step determines and graphically documents the position of the issues on an impact/urgency matrix to ensure that the resources available are allocated correctly. It also provides the key to the ongoing monitoring of issues which require attention when further resources become available. Step 6 Issues break-out This step translates the issues (those selected as critical, given the resources) into: ◆

assumptions

◆

objectives

Figure 7.12 ◆

Strategic partnering technique – steps

Source: Adapted from Appendix 7B.2 in Gattorna (2010), pp. 467–468

· 230 ·

M07_GATT6818_03_SE_C07.indd 230

2/24/15 3:46 PM

Collaborative supply chains: demand-side

◆

strategies

◆

action plans

◆

timeframes

◆

budgets

◆

monitor points

◆

responsibilities.

It ensures that both partners in the ’partnership’ understand and agree on what is to be done, by whom, and by when, to achieve the jointly agreed results. Figure 7.12 ◆

Strategic partnering technique – (continued)

Source: Adapted from Appendix 7B.2 in Gattorna (2010), pp. 467–468

In Stage 2, the proprietary workshop-driven strategic partnering ­methodology as described in Figure  7.12 is presented schematically in ­Figure  7.13. Significant success has been achieved with this accelerated workshop-driven technique, but for best results a preliminary screening process should aim to ensure that only parties with genuine collaborative values (and therefore part of the collaborative supply chain) are invited to participate. The ultimate outcome of the strategic partnering workshop is to enable agreement between the two parties on issues of joint and common ­interest they feel need to be resolved. The real-time process in getting to this point creates the required early momentum and creates pressure for action. ­However, it is important that before the inaugural meeting breaks up, the senior executives from both buyer and supplier organizations in the room appoint joint project teams to prepare detailed work plans for c­ onsideration at a s­ ubsequent workshop, approximately one month later. On the ­assumption that the recommendations are accepted all round, ­implementation of a range of joint initiatives can proceed immediately after that. There is no better communication process than having buyers and s­ ellers working together on joint initiatives for mutual benefit. This insight is further reinforced by examples of partnerships we have facilitated between Schneider Electric in Australia and its large distributor/customer, the L&H Group, and between DKSH in Thailand and its major retailer/customer Tesco Lotus.

· 231 ·

M07_GATT6818_03_SE_C07.indd 231

2/24/15 3:46 PM

Dynamic Supply Chains

STEPS 1. VISION FORMULATION

COMPANY A (principal)

2. LOOKING EXTERNAL/ INTERNAL

ENVIRONMENTAL SCAN

3. ISSUES FORMULATION

4. ISSUES IDENTIFICATION

COMPANY B (client)

Flush out and list CRITICAL ISSUES

COMPANY A

JOINT

COMPANY B

and ISSUES DEFINITION

1. 2. 3. 4.

9. 10. 11. 12. 13. 14.

5. 6. 7. 8.

URGENCY

IMPACT 5. ISSUES PRIORITIZATION

LOW

Figure 7.13 ◆

SIG

X

X

HIGH

X

SIG X

X

X

X X

ACTIONS/RESPONSIBILITIES TIMEFRAMES, BUDGETS

PRESS

6. TRANSLATE ISSUES INTO OBJECTIVES/ STRATEGIES/ ACTION PLANS

LOW

ISSUE

OBJECTIVE

Strategic partnering technique – workshop methodology

Source: Appendix 7B.3, Gattorna (2010), p. 469

· 232 ·

M07_GATT6818_03_SE_C07.indd 232

2/24/15 3:46 PM

Collaborative supply chains: demand-side

After all that, how does your enterprise measure up as a collaborative partner in the various industry supply chains you participate in? In fact do you need to take advantage of collaborative opportunities at all? Or do you have a mix of collaborative and other types of relationships across your various supply chains? Keep an eye out so you can spot the opportunities as they arise.

And then came sustainability and CSR Just like the Exocets described in Chapter 16, the two related Exocets that have come quickly over the horizon since publication of the first edition of this book23 in 2006 are sustainability and corporate social responsibility (CSR). The reason I raise these issues in this chapter is because they both have relationship (or Ia) dimensions, and are starting to look like a sub-­ segment within the classic collaborative segment as defined in Chapter 2. In the case of sustainability, this is mainly to do with the environment. On the other hand, CSR can relate to social, ethical and environmental concerns. Either way these considerations are influencing customer and particularly consumer buying behaviour, so they cannot be ignored. We will talk in more detail about both in Chapter 16. In their essay on green supply chain design, Luis-Antonio Santa-Eulalia et al.24 embraced many of my dynamic alignment concepts. They pointed to ways of modifying the different supply chains designed on the basis of different customer buying behaviours, allowing for differential energy use, greenhouse emissions, material consumption, and waste generation in each supply chain type. Agricultural co-operative, Ocean Spray, a producer of fruit juices, collaborated with a competitor to boost transportation efficiency, resulting in freight costs being cut by 40 per cent and greenhouse emissions by 20 per cent in one major lane.25 It is evidence of the potential for sustainability to add value to the supply chain, rather than being seen as a regulatory burden. If we start approaching the green way of doing business as an opportunity, as we do with other business issues, we can make it a source of competitive advantage. Now that’s sustainability!

· 233 ·

M07_GATT6818_03_SE_C07.indd 233

2/24/15 3:46 PM

Dynamic Supply Chains

Key ideas 1 Collaboration gives you the power to capture the benefits of partnership. Remember though, you must focus on your truly collaborative customers first and foremost. This takes a lot of time and energy; so don’t squander your efforts. 2 Learn to identity the enterprises that exhibit genuine collaborative values. Get into the ‘zone of collaboration’ with your partners, and guard against the artificial collaborators. 3 Use CRM technology to manage your special customers in the consistent and proactive way that they expect – and you will be rewarded with their loyalty. 4 Be aware that some situations will require a combination approach, e.g., maybe lean on the supply-side with suppliers, and collaborative on the customer-side. 5 Sustainability and corporate social responsibility are emerging issues that are closely related to the logic of collaboration because they both have a strong relationship dimension. Be prepared with the right responses and win a competitive edge.

Your challenge How many of your customers (in numbers or a percentage of your business) can you say truly exhibit collaborative values? And do you reward them for this loyalty?

· 234 ·

M07_GATT6818_03_SE_C07.indd 234

2/24/15 3:46 PM

Chapter 8

Lean supply chains: demand-side How to routinely deliver lowest cost outcomes for customers

M

uch is spoken about ‘lean’ because it seems such an obvious solution to achieving ever lower costs and prices. But there is more to it than meets the eye. In this chapter we explore the origins of lean principles and practices and make some fine distinctions between the early concepts of lean manufacturing and the more contemporary lean supply chains. They are not the same thing. Lean is very difficult to implement successfully because it is more of a philosophy that has to be adopted unquestionably throughout the enterprise rather than a ­prescription that can be applied by rote. There are dangers too. If you do succeed in removing costs, but take the leanness too far, the ­resilience of the enterprise will surely suffer when unexpected ­disruptions occur. We will find out how to tread this tightrope. How lean is your business? It’s the magic question, because being ‘lean’ is often seen to be the cure-all approach to lowering costs. It’s not so much how low can you go, but how lean can you get? Japanese car manufacturer Toyota got us hot under the collar in the 1980s when it introduced lean manufacturing into its factories. Organizations have been applying lean ­concepts to corporate logistics systems and the wider domain of supply chain management ever since. However, as so often happens when new ­concepts are applied to supply chain thinking, we can start to have u ­ nreasonable expectations about the actual benefits achieved. We can also get confused about what we mean by the concept itself. We can probably agree that lean principles are focused on eliminating waste in materials, processes, time · 235 ·

M08_GATT6818_03_SE_C08.indd 235

2/24/15 3:47 PM

Dynamic Supply Chains

and information. But can we expect all of this, plus creativity, flexibility and adaptability as Kate Vitasek and her colleagues seem to suggest in their Supply Chain Management Review article?1 I want to differentiate between two separate supply chains, c­ollaborative, as discussed in Chapter 7, and lean. It might seem like splitting hairs, but you ­cannot simply roll them into one, at least not in this brave new world. Why? Because not all parties involved in lean supply chains are going to be ­collaborative – and that’s an empirical fact! In contrast, p ­ arties in the ­collaborative supply chain will share information and help each other to e­ liminate waste; put ­simply, they willingly collaborate. I see the classic lean supply chain as one where low cost is achieved by ensuring c­ ustomers are not over-serviced, especially in recessionary times. Low costs are achieved by undertaking only the very basic processes, but doing them well. In ­collaborative supply chains it will always be a case of customer ‘pull’ ­combined with some informed ‘push’ from the business, but in the classic lean supply chain, if customers are not willing to share their demand projections, we will naturally have to ‘push’ product downstream using the best available forecasts in what is hopefully a fairly stable environment. So we are all agreed that lean is basically a ‘push’ strategy that is ­underpinned by supply values rather than customer ‘pull’ as is ­predominantly the case with collaborative supply chains. However, to work most e­ ffectively, lean supply chains require some collaboration with suppliers on the ­supply-side. Having said that, it is worthwhile understanding where the early lean concept and practices originated from.

Origins of lean manufacturing Toyota triggered the quest for lean production when it decided in the early 1980s that American-style mass production would not work in Japan. In the USA, companies were still using the assembly line approach in p ­ roduction that had been so successfully introduced decades earlier by Henry Ford. The mass production of cars was still in vogue, and this required a large market with fairly standardized manufacturing systems – resulting in a ­limited range of vehicle models. In contrast, the Japanese market was restricted due to international trade barriers limiting the importation of Japanese cars into Western nations. This market restriction was reinforced via the ban on foreign direct ­investment

· 236 ·

M08_GATT6818_03_SE_C08.indd 236

2/24/15 3:47 PM

Lean supply chains: demand-side

(FDI) by the Japanese Ministry of International Trade and Industry (MITI). The ban effectively curtailed the development of any highly capital-­intensive industry, such as the automotive industry, in a country which, just after World War II, had relatively no available capital. Although the size of Japan’s domestic market was small, the demand for variety from the Japanese ­consumer was very high. The Allied occupation forces also introduced labour unions into Japan, which led to demands for higher wages and restricted the ability of managers to lay off employees when the economy turned down, as they were accustomed to doing in the past. The Japanese labour market also had no temporary migrants to work in the nation’s f­actories (unlike in the USA, where migrant groups formed the bulk of the ­workforce). ­Consequently, Japan’s automotive factories had a higher wage cost ­compared to that of other nations. Toyota recognized the impact of these factors and developed the Toyota Production System (TPS), now more commonly known as lean manufacturing. The two major features of lean manufacturing that ­ ­distinguish it from mass production are: first, increased efficiency through the ­reduction of errors; and second, reduced carrying cost of inventories, achieved by ­manufacturing in relatively small ‘batches’. The key ingredient to these improvements was Japan’s highly skilled workforce. In lean manufacturing, skilled workers manage each section of the assembly cycle, which contrasts markedly with the equivalent mass customization processes. US automotive factories use primarily low-skilled labour on the shop floor and restrict knowledge on a ‘need-to-know’ basis. The combination of increased human capital in the Japanese workforce, increased individual responsibility, the practice of systematically and consistently tracing problems back to their source and rectifying the root cause (thereby eliminating errors and reducing waste – called muda in Japanese), along with reduced inventories, has resulted in considerable competitive advantage in the Japanese supply chain.2

The relentless customer You can guess what happened next. The Japanese customer – and ­customers globally – soon took to the product diversity and lower costs made ­possible through lean manufacturing techniques. But are all customers lean ­customers? How do you recognize the customer in what I’m calling the lean supply chain? One buying behaviour found in most – if not all – markets to

· 237 ·

M08_GATT6818_03_SE_C08.indd 237

2/24/15 3:47 PM

Dynamic Supply Chains

some degree or other is the desire for efficiency or consistency. In the lean market, this transactional-style behaviour is paramount. While loyalty and service are a p ­ remium in the collaborative supply chain, in the transactional customer segment, it is price and predictability that is most highly valued. With such stability in demand, forecasting on the supply-side becomes both feasible and necessary. Customers in the lean market will often shop around and use multiple sources in the search for steady supply and lowest prices. But in doing so, they can be impersonal or even adversarial, with few if any loyalties developing. This is a very transactional albeit impersonal style of marketplace, where information is power and little or no information sharing occurs between buyers and sellers. For suppliers, it’s a hard relentless market to serve. With customers so price-sensitive, there is little or no opportunity to differentiate value propositions. If you are looking to compete under these conditions, you must strive to be the lowest-cost producer, and sustain this advantage over time, using whatever techniques are at your disposal. Indeed, it reminds me of a story told by Cranfield University professor Malcolm McDonald3 many years ago when we were teaching a management development course together. Malcolm claims that he was working in the garden of his house just outside Oxford one Sunday morning, when his wife asked him to go down to the local village market and buy some apples. Having been caught not following instructions before, he asked her for some specific guidance on the price that he should pay. Her response: ‘around 21p [pence] per pound’. Some time later, he approached a market stall in the city-centre of Oxford, and duly found the apples section. Unfortunately for Malcolm, there were two stacks of apples: one stack was priced at 15 pence per pound, and at the other end of the table another stack of seemingly identical apples was priced at 32 pence per pound. Malcolm was confused. He asked the owner what the difference was between the two stacks, to which he received the reply: ‘None whatsoever, Sir.’ By this time Malcolm was even more confused, so he gathered up the courage to ask one last question: ‘Why then are the apples at that end of the table priced at 32 pence per pound?’ To which the market owner replied: ‘Those apples are for the people who want to pay 32p a pound!’ Such is the power of price as a signal of value, rightly or wrongly. In other words, people often use price to serve as an indicator of quality, and certainly people who know their apples would happily pay the lower

· 238 ·

M08_GATT6818_03_SE_C08.indd 238

2/24/15 3:47 PM

Lean supply chains: demand-side

price because they know there is no difference. This holds for all product and service categories.

Virginia Mason Hospital The Virginia Mason Medical Center in Seattle in the USA fully embraced the Toyota Production System and adapted it for use in the hospital, across all its campuses.4 Virginia Mason introduced the initiative in 2000 after recognizing that the hospital’s infrastructure was designed around the hospital’s needs, not the patients’. Sound familiar? It set out to ­identify and eliminate waste in the system and build patient satisfaction. ­Significant results have been achieved over time – an 85 per cent reduction in the waiting time for the return of laboratory results is just one example. Facilities have been redesigned with the patient in mind, and temporary labour expenses have been decreased by more than $500,000 per year. Dr Gary Kaplan, the Chairman and CEO of Virginia Mason, says, ‘we have more than enough resources in healthcare . . . we just need to stop wasting it and only do what’s appropriate and value-added, and we’d save millions’.5 Make that billions if only other healthcare systems around the world would follow their example! In a further initiative launched in 2005, Virginia Mason joined with local employers Costco, Nordstrom, Starbucks, King County Council and insurer Aetna to improve the quality of patient care and reduce the cost of treating common medical conditions such as back pain. By arranging same-day appointments for various treatments, and reducing the number of patient visits, the cost of care dropped, and patients returned to work more quickly. So there is real potential in embracing lean disciplines, but it takes leadership to initiate and follow through. Virginia Mason introduced other lean initiatives in 2011, including barcode medication administration to increase patient safety, reduce errors and allow faster processing.6 In 2013, the hospital also introduced a standard sonographic imaging process to reduce unnecessary imaging referrals.7

Value proposition The value proposition for lean supply chains, discussed in Chapter  3, is that we will derive value through offering our customers a consistent, ­low-cost response to largely predictable demands. Our customers are primarily, as we identified in this customer segment in Chapter  2,

· 239 ·

M08_GATT6818_03_SE_C08.indd 239

2/24/15 3:47 PM

Dynamic Supply Chains

transactional customers who want standard and reliable service; they don’t want s­ urprises – they prefer to know what they’re getting. The offering may still carry some bells and whistles, but it is supplied in such a way as to standardize the different components to ensure lowest cost (and therefore price) is achieved. The notion of innovation is still important here as it is really used to drive manufacturing standardization rather than product innovation per se. The Zara, Benetton and Toyota stories all demonstrate value-add and clear value propositions – and applied innovation thinking to minimize waste, which is where lean principles re-emerge. The lean (or semi-wave flow) supply chain configuration is really the best and only way to service such a low-cost/price, reliability-seeking m ­ arketplace. The primary focus is on efficient operations offering high volume and low variety, and mostly producing goods and services to forecast. This is the ­classic make-to-stock operating environment, compared to the more ­targeted make-to-order type of response that we see in agile supply chains and the ultimate bespoke environment of engineered-to-order in campaign supply chains, as we shall investigate in Chapters 9 and 10 respectively. For customers being serviced in a lean manner, we are offering the value proposition that: ‘You will benefit from low-cost production and efficient logistics, achieved by using all available synergies and economies of scale.’ The ability to forecast demand more accurately is a big advantage in this environment, and the fact that we are usually dealing with mature products with predictable wear-out rates and manufacturing lead-times makes the situation all the more manageable. However, these parameters come at the cost of reduced agility and resilience, and are best achieved when system capacity is not under pressure, and production is occurring under regular lower priority schedules. Such is the challenge of being lean.

Aligning your strategies to lean-loving customers Price sensitivity is front and centre in the lean supply chain. But how do you get the right price to your customers, in a world where we still have to do more and more, at lowest possible cost? We do so by formulating strategies that will align your business with the buying behaviours of lean customers in your market. The marketplace is the starting point for strategy formulation, but so many enterprises ignore this fundamental tenet.

· 240 ·

M08_GATT6818_03_SE_C08.indd 240

2/24/15 3:47 PM

Lean supply chains: demand-side

We recommend you consider a combination of strategy ‘recipes’ in the 16 strategic dimensions set out below (and summarized in F ­ igure 8.1). ­Getting the recipe right will enable you to tailor your response to the ­routine-loving transactional customers.

Strategy recipe for lean supply chains   1 Product mix. Customers with a transactional mind-set tend to buy mature, proven products. They are innately conservative, risk averse, and slow to change. In essence this type of customer is a ‘laggard’ and just wants the same product-service experience repeated on a consistent basis, and they will shop around to get just that. The lowest possible cost to drive the lowest-price offer to customers is essential.   2 Innovation emphasis. This type of customer puts price and consistency before product-service quality. The supplier must therefore find ways to continually reduce the cost of inputs, and seek to refine processes.   3 Marketing emphasis. The marketing effort with this type of customer is to sell the message of reliability of supply, at lowest prices.   4 Channels of distribution. This is a low price-volume business, so the widest possible array of channels should be sought to give customers every chance to easily access the product. In this respect, the new online channel is starting to emerge strongly.   5 Pricing regime. To succeed in this segment the supplier ideally should be the lowest cost producer in order to drive prices lower than ­competitors. The effort by Walmart to introduce Every Day Low Prices was p ­ rimarily designed to drive costs down in its supply chains by ­introducing more predictability, thus allowing it to consistently offer lower prices to consumers.   6 Promotional activity. Customers in this segment know what they want and how they want to be serviced. However, if the products they know and prefer are promoted at a lower price, they will surely buy. Remember the apples story above.   7 Service emphasis. The service this segment is looking for is quite s­imply 100 per cent reliability, at lowest cost-to-serve and ­corresponding price.

· 241 ·

M08_GATT6818_03_SE_C08.indd 241

2/24/15 3:47 PM

DYNaMiC SuppLY ChaiNS

Strategic dimension

Ideal strategy

1 Product mix

Stable product line; minimal variants

2 Innovation emphasis

Focus on ways to reduce cost of inputs and processes

3 Marketing emphasis

Lowest price; but reliable

4 Channels of distribution

Wide distribution through multiple channels

5 Pricing regime

Lowest price. EDLP

6 Promotional activity

Periodical promotions

7 Service emphasis

Efficiency and process re-engineering

8 Procurement/ sourcing approach

Outsource standard products to gain lowest cost production

9 Production

High volume – low cost; commodity

10 Capacity considerations

High utilization

11 Fulfilment approach

High reliability; predictable service and ready availability

12 Relationship intensity

Low

13 Systems/IT support

Emphasis on transactional systems

14 Resource allocation priority

Focus on cost reduction

15 Strategic risk profile

Low

16 Financial considerations

Focus on cost control/ management. Possibly use ABC costing

Figure 8.1 ◆

Lean supply chain strategy – incremental

· 242 ·

M08_GATT6818_03_SE_C08.indd 242

2/24/15 3:47 PM

Lean supply chains: demand-side

  8 Procurement/sourcing approach. If lower cost of production is ­available through outsourcing, then it is best to outsource, but usually only the standard part of the range and then only if high reliability can be maintained.   9 Production. Emphasis is on seeking lowest cost-to-serve for the high volumes involved. The products are usually in the mature stage of their life cycle, so margins are under pressure and little differentiation is possible. 10 Capacity considerations. The demand forecasts are usually fairly ­reliable at this stage of the product life cycle, so high capacity ­utilization is sought when serving this segment, which in turn serves to reduce unit cost. 11 Fulfilment approach. Uppermost in customers’ minds is a reliable delivery schedule, with no surprises. This has to be achieved without the benefit of shared information from customers, who nevertheless expect low price and consistency. 12 Relationship intensity. This type of customer does not want or expect the supplier to try and develop a close relationship. For them it is a ­distraction and not valued, even though it costs the supplier in the attempt. Simply accept that this segment does not require close ­working relationships and find other ways to overcome the void. 13 Systems/IT support. We will talk more about this dimension when we address internal capabilities later in the chapter, because t­ echnology is a major shaper of internal culture. The emphasis in this type of supply chain is on transactional (ERP) systems, although network ­optimization modelling (NOM) applications can prove useful working in tandem with the ERP system to remove cost by finding optimal pathways through the network to customers. The often unexpected complexity encountered here is the necessity to cleanse the data in ERP systems to a sufficient degree that it can be input into a network model. 14 Resource allocation priorities. This segment, because of its high emphasis on price and consistent service, can significantly erode ­margins. Using customer account profitability (CAP) techniques it is possible to make decisions about the priority that should be given to this type of customer, especially in situations where product supply is constrained.

· 243 ·

M08_GATT6818_03_SE_C08.indd 243

2/24/15 3:47 PM

Dynamic Supply Chains

15 Strategic risk profile. Because we are operating in a customer-market segment where demand (and supply) patterns are relatively ­predictable, risk is low. But on the other hand, these customers will quickly move away if alternative sources are found that have lower prices and more ­reliable delivery. Price and consistency is all that matters to them, ­wherever it can be found. 16 Financial considerations. Here the focus is squarely on cost control and cost management. Hitting budgets is important, with few excuses accepted or valid. Often, activity based costing (ABC) techniques ore used to track and aggregate costs. So having laid out all the dimensions that we have to work with in couching our strategy recipes for the lean supply chain type, we now turn our ­attention to the internal capabilities that must be in place if these strategies are to be successfully executed.

Capabilities required by lean supply chains Elsewhere (in Chapter 4) we outlined the eight key capability areas that have to be developed and refined to allow enterprises to deliver the p ­ otential benefits inherent in aligning with their respective markets and ­customers. We will now detail the specific capabilities within each capability area, ­making specific reference to the lean supply chain configuration. These are ­summarized in Figure 8.2.

1. Customer interaction There are two capabilities under this category, and both are common to all types of supply chain configurations, i.e., customer call centres and annual customer satisfaction index (CSI) surveys. Net promoter score (NPS) and net satisfaction score (NSS) surveys are also used by some companies, but are quite unsuitable as inputs to supply chain design. Many companies are missing out by not making the customer call centre a joint responsibility of sales and supply chain functions, thus significantly improving internal productivity and responsiveness to customer queries. The other capability in this category is the rolling survey of ­customers’ expectations and perceptions. A by-product of using the CSI methodology is that it can also be used to check on the behavioural segments previously · 244 ·

M08_GATT6818_03_SE_C08.indd 244

2/24/15 3:47 PM

LEAN SuppLY ChaiNS: DeMaND-SiDe

Capability area

Capability Customer Call Centre (CCC) – joint responsibility* • Rolling annual CSI/NPS surveys*

1

Customer interaction

•

2

Transformation

•

3

Organization

4

Processes (standard)

• • •

Forecasting Reliable delivery information Emphasis on cost

5

Planning

•

S&OP in relatively stable operating environment

6

Systems/IT

• • • • •

Replace legacy systems with ERP system EDI Network optimization modelling* Inventory management Track and trace

7

Operations

• • • • •

MTS Delivery reliability FTL/FCL delivered direct from source Transport selection/management Merge-in-transit

8

Culture

• • • •

Translate strategy into working models*

Risk management/mitigation OD: multi-disciplinary cluster built around core processes • People selection and positioning: ensure bias of (A/Ap) consistency/repetition/ efficiency in the cluster • Analytics* • Project management* • •

Minimize change: maintain status quo Adhere to central policies Central decision-making KPIs: DIFOTEF; forecast accuracy; productivity ratios • Incentives: conformance to policies • Job design: centralized control • Internal communications: regular; structured; ‘need-to-know’ basis • T&D: emphasis on analysis and measurement • Role modelling: managers with ISTJ • (A) MBTI profile ideal • Recruiting: players with deep analytical skills • Leadership style: Traditional: leads by procedure and precedent; implements only proven practices; cost controller; efficiency focus; uses information to control; seeks stability; is risk averse

* Common across all supply chain types

Figure 8.2 ◆

internal capabilities required to propel lean supply chains

· 245 ·

M08_GATT6818_03_SE_C08.indd 245

2/24/15 3:47 PM

Dynamic Supply Chains

identified in primary market research. The NPS/NSS methodology cannot do this, but it has other uses, although readers will know my thoughts about the relative merits of the two methodologies having read Chapter 2.

2. Transformation Once the new network strategy design and corresponding footprint has been completed, the next big task is to translate this into working models on the ground. This involves taking the aggregate flows from the network optimization model outputs, breaking these down to the SKU level, and deciding where to store each SKU, and in what quantities. Significant analytical skills are required for this type of analysis, overlaid by operational experience, and an understanding of the new behavioural segments.

3. Organization Capabilities with an organizational impact on lean supply chains are several, e.g., organization design, people selection and positioning, analytics, risk management, and project management. Analytics and project management are common to all supply chain configurations, and therefore have already been dealt with elsewhere (in Chapter 7). Risk management/mitigation is essential because customers served by the lean supply chain do not like unreliability or disruption of any kind; they crave stability and consistency. Organization design is perhaps the most powerful way to ensure ­customers receive focused attention of the type they prefer. The ideal ­organization structure for shaping the hierarchical subculture necessary to propel the lean supply chain is depicted in Figure 8.3. In this design, employees are organized in multi-disciplinary c­ lusters around several core processes in the enterprise that are replicable on a ­continuous basis. Teamwork is the key, both within and between the c­ lusters. Shared responsibilities and decision-making emphasizes teamwork in this type of organization design, and risk-taking is not readily embraced. A good, if novel, example of this situation is at the Fyodorov Eye Microsurgery Complex in Russia. Here, ­operating tables are mounted on a slide arrangement that allows them to move sideways from one operating point to the next.

· 246 ·

M08_GATT6818_03_SE_C08.indd 246

2/24/15 3:47 PM

M08_GATT6818_03_SE_C08.indd 247

S/M

P

S/M

P

S/M

P

Procurement

Sales

Marketing

Shared services: HR/IT/F&A

Production

CEO Logistics

Process clusters

Lean supply chain organization clusters

Source: Adapted from Figure 9.3 in Gattorna (2009), p. 140

Fi gu re 8 .3 ◆

Note 1: Process teams configured with a cost improvement bias, led by a process manager Note 2: Individual team members return to their respective functions for training and other specialist matters

L

P

FULFILMENT

L

P

ORDER MGT

L

P

SOURCING

COO

‘Transactional’ customer segment

LEAN SuppLY ChaiNS: DeMaND-SiDe

· 247 ·

2/24/15 3:47 PM

Dynamic Supply Chains

This means that specialists at each station can carry out different steps of the eye operation on each patient.8 Another striking example of this type of organization design is the phenomenon of the Dabbawalas of Mumbai in India.

The Dabbawalas of Mumbai Supply chains do not have to be incredibly complex to be efficient, ­effective and appropriate to the culture. The Dabbawalas of Mumbai are from a particular caste in India who developed a service for home-cooked lunches to be delivered to more than 150,000 workers every day.9 Carried in a round metal container called a dabba, the lunches are collected from home and delivered to workplaces; the dabba is then collected after lunch, ready for the process to begin the next day. And this is all to a level of accuracy far greater than Six Sigma. Photo 8.1 shows the Dabbawalas at work. In Mumbai, due to cultural traditions from early last century and overcrowding on the public transport system, employees generally do not take their lunch with them to work. However, buying lunch is an effort because workers would have to leave their air-conditioned offices for the crowded, polluted and hot streets of Mumbai, only to buy food of dubious quality. Home-cooked food has until recently been the preference, and an efficient industry has grown up over the past century to resolve the problem of delivery of lunchtime meals from the home to the office, on a daily basis. The Dabbawalas have established a network of distribution routes to collect lunches from workers’ homes. The dabbas are delivered to sorting points at the railway stations, loaded on to dedicated carriages on the normal commuter trains, sent throughout the city, then distributed to offices and ultimately to their owner. One hour later the dabbas are collected and returned to the home – following the reverse route taken earlier. This is achieved by a largely illiterate group of people who have developed a very efficient (albeit manual) system at an incredible level of accuracy – no more than one mistake in every 15 million deliveries!10 In addition to this efficient regular service, the Dabbawalas will collect a lunch that is not on the agreed weekly route or a late delivery – and deliver for an additional price. But even this foolproof system will fail when heavy rainfall similar to that experienced in July 2005 disables the train network! The Dabbawalas have organized themselves around specific tasks and processes. There is also an element of hierarchy based on age. The more senior or older Dabbawalas work at the various distribution points where they

· 248 ·

M08_GATT6818_03_SE_C08.indd 248

2/24/15 3:47 PM

Lean supply chains: demand-side

Ph o t o 8 . 1 ◆

Dabbawalas at work in Mumbai

Source: Getty Images / Lou Jones / Lonely Planet Images

load and unload the trains. The younger, less experienced Dabbawalas do all the running around, usually along pre-defined routes, each and every day. More recently, in 2013, the Dabbawalas arranged to feed some of Mumbai’s 200,000 street kids from leftover food, which the lunch ­owners said could be shared. The whole process takes place after lunch within ­little more than 15 minutes.11 That’s eliminating waste with a purpose! The Dabbawalas deliver 120 tonnes of food daily, and 16 tonnes of food is left uneaten. A similar, highly efficient and reliable network is operated by the angadias, who carry precious cargo in utmost secrecy.

People selection and positioning in the clusters is critical. The ideal ­ eople to distribute liberally throughout the ‘process’ clusters are those who p thrive on consistency, repetition and efficiency – this is the essential bias. In terms of the Myers-Briggs Type Indicator (MBTI®) profile, this ­translates to ­people who are ISTJs (Introvert-Sensor-Thinker-Judger) or ISTPs ­(Introvert-Sensor-Thinker-Perceiver). In my P-A-D-I code this means A and Ap respectively.

· 249 ·

M08_GATT6818_03_SE_C08.indd 249

2/24/15 3:47 PM

Dynamic Supply Chains

4. Processes When certainty and stability – at lowest cost – are paramount, ­transactional-type processes are critical. Lean supply chains are all about ­replicating ­standard ­processes to produce a standardized outcome. The unerring emphasis is on minimizing cost in all key production and ­logistics processes. Three typical core processes – sourcing, order management and fulfilment – are shown in ­Figure 8.3, but there are others possible d ­ epending on the situation, forecasting, reliable delivery information, and detailed c­ osting of products and customers. Most famously, McDonald’s led the way in its global application of how to produce and serve a hamburger. Another lesser known but telling ­example is Domino’s Pizza in Australia, which remodelled its business model to suit the Australian market.

Domino’s Pizza Australia When Domino’s Pizza entered the Australian market, it decided to modify its business model so that it could compete with the plethora of r­ estaurants and takeaway outlets that sell pizza in Australia. In North America, ­customers tend to eat fast food in restaurant-style outlets, while Australians usually purchase ‘takeaway’ food to eat elsewhere; either at home or another venue. This cultural difference, along with some other contributing factors, has resulted in changes to the Domino’s Pizza model in Australia. Labour costs for fast food outlets in Australia are higher than the USA, due to the lack of immigrant labour and a higher m ­ inimum wage. The cost of real estate, especially in state capital cities, is also ­relatively higher, with few locations available for the typical large fast food ­restaurants commonly seen throughout the USA. All these factors have an impact on the cost of goods sold. The solution for ­Australia was to develop shop-front pizza outlets (without dining areas) that used most of the store space for food preparation and the remainder for a ­comparatively small waiting area for customers. This type of store reduced the level of labour required in the stores, and eliminated the floor space needed for dining rooms (thereby reducing building and land costs), making ­Domino’s a very competitive fast food provider in Australia. To compete well in the low-cost market sector, Domino’s Pizza f­ ollows a strategy of reduced price promotions that ‘bundle’ the sale of pizza, drinks and extras, e.g., garlic bread. The pizza production processes are all standardized,

· 250 ·

M08_GATT6818_03_SE_C08.indd 250

2/24/15 3:47 PM

Lean supply chains: demand-side

resulting in a rapidly produced and relatively low-cost product, so although Domino’s may ‘lose’ money during its promotions on i­ndividual pizzas it makes money on the ‘total’ sale. Even with heavily discounted ­specials it has a policy of ‘not reducing the quality or q ­ uantity of ingredients used in the pizzas, as customers notice when the pizza doesn’t taste as good as the last time’.12 Domino’s also offers the option of extra toppings and changes from the ‘basics’, although it charges more for the service. In recent years, Domino’s has developed apps for mobile devices to encourage customers to order online. Customers can also order from their cars using Ford’s voice-activated SYNC system, instead of calling by mobile phone.13 Domino has heavily promoted these up-to-the-minute ordering systems. They not only make it easier for customers to buy pizzas, but also allow Domino’s to reduce labour costs.14

Staying on the retail side, factory gate pricing (FGP) trading terms are g­ athering momentum in FMCG markets around the world. Here, instead of the supplier making the delivery arrangements, the (retail) customer arranges collection from the supplier’s factory. Payment for transport is either by the supplier to the customer’s carrier, or, by charging the c­ ustomer a lower price for the goods supplied. It is just another reflection of the imbalance of power that exists today in the FMCG industry – and it is here to stay as there are benefits for large organizations with regular suppliers. However, it is unlikely to provide the same benefits for irregular seasonal categories such as apparel. Chevron, one of the world’s largest energy companies, adopted Windows Mobile devices in 2008 to standardize refinery process steps and deliver decision support to its field workers. The result was improved refinery reliability, reduced costs, better knowledge retention, and improved regulatory compliance. These process improvements are estimated to have saved the company $3 to $5 million, annually.15

5. Planning The pivotal planning capability in supply chain management is sales and operations planning (S&OP). Here, personnel from all the key functions of the firm gather and debate the forecast numbers, converting their respective

· 251 ·

M08_GATT6818_03_SE_C08.indd 251

2/24/15 3:47 PM

Dynamic Supply Chains

forecasts into one agreed set of planning numbers to which everyone commits. This is a far cry from earlier years, when every department had its own forecast numbers, which made it impossible to develop and commit to a single demand plan. Today’s S&OP process provides an effective alignment and decision framework for enterprises that are generally organized as silos. The more systematic S&OP processes are now mandatory for sustaining a lean supply chain, particularly in today’s more complex operating environment. The numbers support this thesis. Larry Lapide of MIT’s Center for Transportation and Logistics says that, ‘over the last 10 years there has been a resurgence of interest in formal sales and operations planning’. Lapide estimates that about 75 to 80 per cent of companies have an S&OP process in place today, versus 20 per cent two decades ago.16

6. Systems/IT The systems that support lean supply chains, such as enterprise resource planning (ERP) systems, generally involve significant capital investment. While these systems are essential to underpin low-cost processes, they are also useful as a foundation for all five generic types of supply chain. On top of the ERP system, you can install other non-optimal systems such as demand driven materials requirements planning (DDMRP), advanced planning and scheduling (APS), and distribution requirements planning (DRP) applications, as depicted in Figure 8.4. It is ideal if you can cap this off by interfacing a free-standing network optimization model (NOM) with the ERP system. This will allow you to test new network and operational scenarios at the tactical level from time to time to ensure that the overall network is meeting agreed service levels, at minimum total (system) cost. The SCOR® model17 also fits into this section as a useful tool for analysis; but it has its limitations. Other important systems capabilities include EDI, inventory management, and track and trace, all designed to produce predictable outcomes for the transactional customers served by lean supply chains. In terms of staffing, lean supply chains tend to work best with mostly ­permanent staff that are very experienced in their particular roles and enjoy the inherent routine. Labour management systems (LMS) may also be used in scheduling staff on shift work, estimating crew size, sorting out changeover of skill-sets as the type of work changes, and mapping skills, all designed

· 252 ·

M08_GATT6818_03_SE_C08.indd 252

2/24/15 3:47 PM

M08_GATT6818_03_SE_C08.indd 253

Different combinations of IT applications sitting on top of ERP*

requisite technology for lean supply chains

Source: Adapted from Figure 1.5 in Gattorna (2009), p. 55

Fi gu re 8 .4 ◆

Agile supply chain

Demanding/ dynamic

Campaign supply chain

Project accumulation

ERP transaction system and database (or can be SAP or legacy systems)

OTM (G-Log)

SNO (NUMETRIX)

Demantra PTP

ASCP/CBO

Lean supply chain

Transactional

* Using Oracle Suite as a sample to demonstrate

• JD Edwards • PeopleSoft (HR) • E-Business Suite (EBS)

Collaborative supply chain

Collaborative

Customer buying behaviour segments

Fully flexible supply chain

Innovative solutions

LEAN SuppLY ChaiNS: DeMaND-SiDe

· 253 ·

2/24/15 3:47 PM

Dynamic Supply Chains

to maximize labour resources within given constraints; even constraints as micro as ‘employees with fork-lift truck tickets’. In this type of supply chain, Point-Of-Sale (POS) and radio frequency identification (RFID) are ­valuable as they are able to automatically trigger re-ordering processes as goods and services are sold (POS) or move ‘off-the-shelf’ (RFID), in r­ eal-time if required. Retailers in particular are well aware of the benefits of applying RFID tags to individual items, yet relatively few are doing it. That could change very soon as ‘omni-retailing’ takes off, and make the adoption of item-level RFID imperative.18 Inventory o ­ ptimization ­software is also very useful. For example, Medtronic implemented inventory optimization (IO) software in conjunction with its lean practices, resulting in a 6 to 8 per cent reduction in finished goods inventory.19

7. Operations Once a lean supply chain is designed and executed, it is the day-to-day ­operations that matter most, and these have to be nothing other than ­routine. The important components of these routine operations are: m ­ ake-to-stock (MTS); delivery reliability; FTL/FCL delivered direct from source to ­customer; managing the transport function to achieve delivery reliability; and if necessary, arranging merge-in-transit to consolidate deliveries from several sources into a single final delivery to the customer. Customers hate receiving multiple deliveries for the one order.

8. Culture What sort of subculture do you think will work best in a lean supply chain? These supply chains need security and predictability to satisfy their ­customers: nothing too flashy or risky. The relentless cost-driven customers are best served by a hierarchical subculture, described in Chapter 4. This is a subculture characterized by policies and procedures, systems, s­ tability and order, control, logic and economy, to name just a few attributes. It is best staffed with people who enjoy working under relatively repetitive ­conditions. But it can prove frustrating for staff members who prefer variety and creativity. Below we discuss the specific capabilities (or levers) that have to be developed and nurtured in order to shape a hierarchical subculture. None

· 254 ·

M08_GATT6818_03_SE_C08.indd 254

2/24/15 3:47 PM

Lean supply chains: demand-side

of these levers alone provides the ‘silver bullet’, but the correct c­ ombination will help you to influence the success of your supply chain strategy. Key performance indicators (KPIs): Measurements that track ­accuracy, quality and predictability are the most relevant metrics for lean ­supply chains. Such metrics include logistics cost per unit, forecast accuracy, ­forecast/plan variances, utilization factors in storage facilities and transportation modes, delivery-in-full-on-time-error-free (DIFOTEF), and variance from established quality standards. These are what really matter. The measurement of relational factors is definitely not relevant in this type of supply chain configuration. Incentives: The most appropriate incentives in lean supply chains are those that encourage behaviours to conform to pre-set policies, procedures and rules. Incentives in this category include a retirement bonus or annuity payments, long-service leave and status symbols such as a large office on the executive floor. Job design: In the lean supply chain environment, job design focuses on adherence to process specifications. Precedent establishes authority/autonomy, and control is centralized by way of predefined rules and regulations with which everyone is expected to fully comply. Internal communications: The style of internal communications is formal, regular and structured to reflect the type of operating environment that is being formed, and the underlying message is that ‘we are efficient’. Information is communicated on a ‘need to know’ basis, and is mostly in hard copy format. In any case, communications in this type of subculture are very directive and staff generally react to such directions; being proactive is not a quality that is valued here. Because ‘information is power’ in the hierarchical subculture, it is often used as a weapon, which leads to a further reduction of trust in the lower ranks as individuals feel patronized. But this is not a subculture for individuals anyway, and the prevailing feeling is that there is safety in numbers. Taking any form of risk at the individual level is avoided at all costs. See a summary of the communications style in a hierarchical subculture in Figure 8.5. Training and development: The training component of this subculture stresses the use of systems and compliance to rules and procedures. There is a real emphasis on measurement and measurement systems. The style of learning is practical and involves workshops, use of workbooks and

· 255 ·

M08_GATT6818_03_SE_C08.indd 255

2/24/15 3:47 PM

Dynamic Supply Chains

Core need: Direction Systems: Formalized systems within closed hierarchical networks, usually one-to-many Content: Procedure-driven focused on the specific, factual details, task-oriented, internal orientation Style: Directive, cautious, quantity not quality, systematized, process is as important as actual content Information distribution: Narrow and shallow, (information is power), shared sparingly, systems dependent

Figure 8.5 ◆

Communications style in a Hierarchical subculture

Source: Gattorna Alignment research

the teaching of standard procedures. Competences in analysis, planning, scheduling and communications are mandatory, as are skills in continuous improvement regimes and root cause analysis. See a summary of the training and development needs in a hierarchical subculture in Figure 8.6. Recruitment: To solidify the hierarchical subculture, you need to seek out people with deep analytical skills and attention to detail. You should value highly a commitment to accuracy and process skills. Personnel ­coming into this operating environment should ideally enjoy and indeed thrive on routine. Many organizations already have long-established hierarchical ­subcultures simply because of their longevity, and there is nothing wrong with that. However, we are observing a distinct shift in customer demand characteristics away from the predictable to the unpredictable, and under these conditions hierarchical subcultures struggle to keep up with the speed of response increasingly demanded by an increasing number of customers. Role modelling: The role model in this cluster is the ‘cost controller’ who lives by this creed in full view of others. Leadership style: Leaders who thrive in this type of supply chain are ­traditional in that they lead by a combination of consensus and action. They regularly invoke procedures, and tend only to feel comfortable when

· 256 ·

M08_GATT6818_03_SE_C08.indd 256

2/24/15 3:47 PM

Lean supply chains: demand-side

1. Action • Emphasis on following procedures •

Ability to build systems and procedures

2. Investigative • Ability to systematically analyze and document complex processes and procedures 3. Social • Limited use of interpersonal skills 4. Conventional • Ability to sublimate personal needs and values to those of the organization 5. Influencing • Influencing achieved by way of understanding rules and procedures 6. Artistic • Ability to find solutions by using the system

Figure 8.6 ◆

Training and development needs in a Hierarchical subculture

Source: Gattorna Alignment research

i­mplementing proven business practices. However, that said, they tend to be very well organized, practical and efficiency focused, although sometimes at the expense of effectiveness. They embrace the values of reliability and productivity, and often use information to control. Their whole life is about maintaining internal company stability and order, a classic ISTJ (­Introvert-SensorThinker-Judger) in the Myers-Briggs categorization, or A in our P-A-D-I code.

A revolution is on the way We need to say a bit more about the importance of processes, especially in this type of supply chain configuration. Is your company prepared for the c­ oming revolution? The revolution is coming in the form of business process ­innovation and management and it could potentially envelop all five generic types of supply chain and their variants. Unfortunately, business process improvement – a vital area of management – has largely been underestimated in the past, as evidenced by the numbers in Figure 8.7.

· 257 ·

M08_GATT6818_03_SE_C08.indd 257

2/24/15 3:47 PM

Dynamic Supply Chains

‘System replacement’

‘Re-engineered’

‘Transformed’

No fundamental business changes (%)

Key processes re-engineered (%)

Processes and organization aligned with strategy (%)

0

1–3

5–10

COGS reduction

0–1

1–2

3–8

Overhead reduction

0–1

1–2

3–5

Inventory reduction

(30)–5

5–20

25–50

Benefit category

Revenue uplift

Figure 8.7 ◆

Benefits flowing from different degrees of process re-engineering

Source: Accenture; Adapted from Table 1.1.3 in Gattorna (2003), p. 8

But we believe it is f­ undamental to sustained alignment and, by i­mplication, future ­competitiveness. ­Business processes must endure for the life of the ­enterprise, and evolve as the ­enterprise transforms to stay in dynamic ­alignment with its customers and operating environment. Unfortunately, we have not yet seen enough of this more enlightened approach. Indeed, conventional wisdom has been to create a radical onceand-for-all process improvement. Put the ERP system in and then . . . what? It has been a bit like the old ‘set and forget it’ approach to production. But making radical changes implies accurate knowledge of emergent conditions in the future, and there is also the lag in implementing new processes and systems that has to be taken into account. So-called ‘best practices’ are really only best practices under specific market conditions. And contemporary ERP systems can only handle a limited menu of ‘best practice’ processes anyway. All this has connotations of a cat chasing its tail. The fundamental issue is that current ERP systems embody business processes in software applications and are by definition limited in their flexibility. A new way must be found to meet the flexibility requirements of increasingly turbulent markets. The solution lies in accepting the principle of ‘multiple alignment’ outlined earlier in Chapter 2.

· 258 ·

M08_GATT6818_03_SE_C08.indd 258

2/24/15 3:47 PM

Lean supply chains: demand-side

In this environment, we move away from trying to hit a moving target with constant and costly exceptions, and instead hard-wire into the enterprise up to five unique combinations of standard processes, each supported by the appropriate systems applications and underpinning organization structures and subcultures. Then, as operating conditions in the marketplace change and cause customers to move to alternative buying behaviours, we are likely to have these covered already. These pre-canned responses will already be embedded in the enterprise. ‘Flexibility’ takes on a new meaning under these circumstances, and most importantly, it becomes feasible at a lower cost.

When price alone isn’t enough I am sure your customers know what a ‘special’ is. But what about every day low prices (EDLPs)? The idea behind EDLP is simple: retailers promise to pass on discounts to consumer customers so that the supermarket consistently offers ‘low price’. The aim is to deliver a lower total cost per shopping event, every time – surely, better than a special! The concept, which gained prominence through the example set by Walmart in the 1990s, is superbly tailored for the lean supply chain. Lean supply chains are primarily about delivering efficiency across their length and breadth. This is made easier if the products are standardized and have relatively long life cycles. At every stage, price drives costs rather than costs driving price in lean supply chains. Companies will need economies of scale, considerable experience and relatively smooth demand so that capacity utilization can remain high most of the time. Coincidentally, suppliers are selected primarily on a price basis, sometimes with an eye to value, which we will define as ‘quality at a price’, but contrary to the conventional definition of lean, there is little loyalty in this marketplace. In the lean supply chain, forecasts are made at the generic product category level rather than at the individual stock keeping unit (SKU) level, and everything that can possibly be done to smooth the flow of product through supply chains is embraced. Hence, the emergence of EDLP. Walmart and Procter & Gamble joined forces so that they could smooth the flow of product and take out costs incurred in demand surges associated with promotional activity.20 But EDLP doesn’t necessarily work for everyone.

· 259 ·

M08_GATT6818_03_SE_C08.indd 259

2/24/15 3:47 PM

Dynamic Supply Chains

US retailer JCPenney found this out when it undertook a significant change in pricing strategy, eliminating promotions, and focusing on selling recognized brands. Sales declined steadily over time. The chain lost $3.3 billion in sales revenue in the first year.21 There was some collaboration in the Walmart arrangement mentioned above, that is, if you can collaborate with a gorilla. EDLP has since been implemented in various forms by many retailers around the world, especially supermarkets, to increase their market share. Often the promotion of EDLP is to ‘roll back the price’ and pass the savings on to the consumer. Unfortunately, the price reduction is often due to an imbalance in the supply chain that allows powerful retailers to ‘shop around’ and select cheaper suppliers, or through coercive tactics that force suppliers to reduce their sale price or lose the contract. While logically the low-cost, reliability-driven consumers should be responding well to the lower prices offered by EDLP, it seems they are a little confused. Many still view the EDLP’s reduction in prices (which is often identified with a yellow ticket) as a ‘special’ rather than an ­on-going approach that delivers lower prices for each and every visit to the ­s upermarket. Their confusion is perhaps unsurprising because supermarkets continue to offer specials in parallel with EDLP pricing. It will take a while before shoppers understand EDLP. In the USA and elsewhere, EDLP has apparently worked for Walmart. However, employees can find it difficult to manage the inherent conflict between promotional activities (P logic) and EDLP (A logic). Indeed, in the late 2000s, Walmart began to do ‘selective rollbacks’ on a large number of EDLP-priced items – essentially putting them on sale. You could call this a hybrid strategy.22 Businesses in the lean supply chain need to explain EDLP better to consumers – an educational campaign, for instance, could be useful. EDLP works best when the offer is aligned with buyer behaviour. It can have a significant impact when the customers are ‘trained’ to expect more for less. The Walmart experience raises a number of lean issues that are retail specific, e.g., leverage on suppliers; standard products versus ‘own brand’; wide SKU range reducing dependency on a supplier; local and national market dominance impact on rivals’ competitive strategies; vulnerability to monopoly legislation; vulnerability to suppliers’ cartels for protection, or as a

· 260 ·

M08_GATT6818_03_SE_C08.indd 260

2/24/15 3:47 PM

Lean supply chains: demand-side

way of balancing the power equation. And finally, the EDLP strategy simply doesn’t work with monopoly suppliers. The manufacturing equivalent of Walmart is of course Ford, whose demand for yearly supplier price reductions has had a similar effect. However, the underlying difference is that Ford will ‘help’ its suppliers to achieve these price reductions, whereas Walmart pushes the responsibility on to the suppliers entirely. Walmart’s recent foray into RFID is a good example of its unilateral approach, telling suppliers what standards have to be met, and then leaving them to foot the bill for systems development. This strategy has led to several state lawsuits. These examples highlight that while we think price is king in the lean supply chain, price alone is not the only answer. The problem has ­developed from the assumption that the original lean concepts developed for the manufacturing environment can be easily translated into today’s operating environments. However, lean ideas rely on the presence of collaborative relationships between all members participating in supply chains. But as we have seen, this is not necessarily so. At best we can influence collaboration on the supply-side.

In pursuit of leanness Can you imagine the complexity involved in managing 3-D value ­networks spreading out from national to regional and – in many cases – global ­markets? Such scale is difficult, but not impossible, to manage. The ­example of the newsprint company outlined in Chapter 2 gave us an insight into how to alter the business to compete internationally. But we need to revisit this important issue from a lean supply chain ­perspective – how to minimize the total costs of running large networks and keep them sustainable. This leads us to the topic of network optimization models as ­foreshadowed earlier. In a complex supply chain network, strategic and ­tactical d ­ ecisions about network design and the optimal use of the network go beyond the scope of experience-based or spreadsheet-assisted decisions. In these ­situations, where there are a myriad of trade-offs and i­nterdependencies to be ­considered, sophisticated decision support is essential. For this task a

· 261 ·

M08_GATT6818_03_SE_C08.indd 261

2/24/15 3:47 PM

Dynamic Supply Chains

network optimization model has become the accepted tool. Indeed, I can’t imagine how you can effectively manage a complex network, especially one of global proportions, without using network optimization models. See Deborah Ellis’s paper to SAPICS in South Africa for a comprehensive description of this topic.23 Building a network optimization model involves capturing all relevant costs, capacities, volumes and constraints in a particular supply chain ­network. The result is a very large data set. The data set is used to populate a model ‘shell’ containing literally thousands of equations. This algorithm is then ‘solved’ to satisfy an objective function, usually cost minimization of the ­network or (if revenue has been included in the model) to maximize ­profitability. Although the backbone of the model is usually off-the-shelf ­software with a ­mathematical ‘optimizer’, the characteristics of each and every possible pathway in the network has to be carefully configured from the available transactional data to ensure it accurately reflects what is happening in the enterprise. A base ‘validation’ model is built to match a period of sales and operations – typically using a period of a year. Next, a set of scenarios is identified by the organization and the corresponding data is run in the model to assess the impact of these different strategies on the performance of the network. The model is a strategic view of the entire supply chain network. In order to produce results which make sense at the strategic level, aggregations of the key elements are usually required. Thus products, suppliers and customers are typically aggregated into logistically meaningful groups. For product ‘groups’ the key driver is typically handling characteristics (driven by weights and measures). For customers and suppliers, location is, of course, a key driver as it determines transport time and cost. This alone, however, is rarely sufficient to capture different service requirements, and therefore determine the cost of servicing different types of customers. It is in this aspect of designing a supply chain model that alignment principles have been used to significantly enhance the power and efficacy of the results. This is amply demonstrated in the following example.24 We would recommend only two specialist modelling firms to work with in this space, i.e., LLamasoft, Ann Arbor, USA, with its Guru model; and Solvoyo, Boston, USA, with its planLM model. None of the larger software houses yet has viable options in the modelling space.

· 262 ·

M08_GATT6818_03_SE_C08.indd 262

2/24/15 3:47 PM

Lean supply chains: demand-side

CSR Gyprock is a major Australian building products supplier with a broad customer base, ranging from distributors and large commercial building contracts to large and small end-user installers. These customers were buying the same or very similar products, but their service ­expectations, buying patterns and underlying needs were very different. When an optimization model was developed for this business a ­critical aspect was to capture the key buying differences in the c­ ustomer g­ roupings and to factor in the format of the order and ‘service package’ that was purchased. The customer groups for this NOM were d ­ eveloped using behavioural segmentation based on the customer’s ­purchase ­preference (project or non-project) and the level of direct support required from the supplier. On one end of the spectrum were distributors (including all formats of resellers) who ordered regularly for stock and whose ­priority was for reliable and consistent service. ‘Commercial project’ and ­‘residential project’ were segments of customers identified as having longterm relationships with the supplier and ordered for one-off projects with specific requirements. Their priority was responsiveness and flexibility. At the other end of the spectrum the ‘commercial’ and ‘residential support’ customers were generally (but not always) smaller end-users who required delivery to site, but also often needed easy access for last minute requirements. These customers valued technical support and day-to-day relationships with their supplier who they saw as the ‘hub’ of their trade network. The service and product packages these customers purchased were defined for modelling as: bulk (larger, stock orders picked up or ­delivered); crane-ups (deliveries, with narrow delivery windows to meet crane ­schedules); house lots (larger mixed orders picked up or ­delivered); ­standard orders (smaller mixed orders picked up or delivered); and ­immediate orders (pick-ups with no advance notice). Many of these ­packages were purchased by more than one type of customer. Product groups were determined by the product’s weight, handling characteristics and manufacturing characteristics (as manufacturing was also considered in the model). The network developed using these ­parameters, and evolved by trying various management scenarios and model runs, is illustrated in Figure 8.8. The resultant metropolitan distribution network (MDN) features three major pathways to the customer. The bulk pathway is in effect the same as our lean supply chain, and is designed for high-volume, regular activity and includes supply to facilities in the other two pathways. The pick pathway,

▼

CSR Gyprock

· 263 ·

M08_GATT6818_03_SE_C08.indd 263

2/24/15 3:47 PM

Dynamic Supply Chains

or agile supply chain, is more responsive, capable of shorter lead-times and geared for a less predictable workload. There would be one or two of these facilities to support each metropolitan area. The trade pathway, or collaborative supply chain, is a multi-facility network located close to the end-user’s home or site location, providing not only small-volume and top-up products but also technical support and the relationship aspect of the tradesman’s service needs.

The strength of combining the decision support capability of the ­network optimization model with dynamic alignment is the ability to ­minimize cost within the context of a focused and appropriate service network. By ­bringing together the physical aspects of the business and its products, and the ­dominant buying behaviours of customers and suppliers, the n ­ atural ‘­pathways’ through the complexity of a supply chain network start to emerge. See ­Figure 8.9 for a description of the phases involved in ­building a NOM. We have since developed this unique methodology further in work with ­Schneider Electric in the Asia-Pacific region and China, and the grains ­handling c­ ompany, CBH Group, in Western Australia, with universally ­startling results. Figure 8.10 gives an indication of the results we have achieved over time with network models. Logistics network costs have been cut by an average 11.1 per cent to date, but more recent applications have been significantly higher, possibly because of the finer alignment achieved through behavioural segmentation. Overall, the cost reductions from our network optimization projects have ranged from 5 per cent to as high as 22 per cent. Promising indeed.

It never stops! A good example of a company that is endeavouring to become leaner yet more responsive to its markets is BlueScope Steel (BSS), a global leader in adding value to commodity flat steel products to produce branded products used in the building sector. BSS has revenues of $4.3 billion and a network of steel manufacturing and processing facilities in 16 countries. BlueScope’s progress on the project is described below.25

· 264 ·

M08_GATT6818_03_SE_C08.indd 264

2/24/15 3:47 PM

M08_GATT6818_03_SE_C08.indd 265

RESIDENTIAL PROJECT

RESIDENTIAL SUPPORT

Logic: Ia Focus: Relationship

COMMERCIAL SUPPORT

TRADE CENTRE

Logic: Pa Focus: Flexibility

resultant metropolitan distribution network at CSr gyprock, an australian building materials company

COMMERCIAL PROJECT

PICK CENTRE

Source: Carpenter Ellis, 2006; Figure 6.4 in Gattorna (2006), p. 153

Fi gur e 8.8 ◆

DISTRIBUTOR

DISTRIBUTION CENTRE (Bulk)

Example: Focused service offer and tailored operations to achieve alignment

LEAN SuppLY ChaiNS: DeMaND-SiDe

· 265 ·

2/24/15 3:47 PM

Dynamic Supply Chains

PHASE I: Strategic review

PHASE II: Data acquisition Project scope Information systems assessment

PHASE III: Model development

Data development PHASE IV: Validation

OUTCOMES ◆ Define production/logistics and pressures for change ◆ Set objectives and agree scope/context of optimization project

Strategy workshop (1–2 days)

Data specification

Data acquisition

Define model structure

Model development

Model calibration

OUTCOMES Standard unit of measure for logistics systems ◆ Determination of key logistics ‘products‘ categories, e.g., based on different unit pack types ◆ Activity-based cost relationship ◆ Definition of customer service needs forms the behavioural segments ◆ Historical operating transactional data ◆ Demand/cost project changes ◆

OUTCOMES ◆ Customization requirements

◆

Working model customized to business issues

OUTCOMES ◆ Establish accuracy of model ◆ Gain consensus among key stakeholders

‘Sign-off’ by key stakeholders PHASE V: Strategic development Assessment of available and/or feasible channels

Optimization

‘Scenario testing’

PHASE VI: Blueprint

Figure 8.9 ◆

OUTCOMES ◆ Meet objectives from Phase I ◆ Scenario development and testing ◆ Selection of a preferred scenario ◆ Optimal logistics systems selected

Action plan and corresponding timetable and draft a budget prepared and submitted to the Executive

Methodology for building a network optimization model

Source: Appendix 8A, Gattorna (2010), p.470

· 266 ·

M08_GATT6818_03_SE_C08.indd 266

2/24/15 3:47 PM

Lean supply chains: demand-side

As percentage of total network operating costs 22%

20%

20%

18% 14%

13%

12% 10%

10% 6%

Distribution 10% Manufacturing 5%

t s t r s in ct al al al re en , pe s ge nt Pa ttyl tri R tri y, du SR to s m o ob n Pa egi s era er's a ou in – t us CS k Gl sia rk us an C . s Bro uip ind sia pro – C ods t e t c v R d d t s W s c p p k A r i A n In er – ro St Ba Be Fo D cha ma De ace l eq Tra one ing rer two d, wo al i com AP r– p r K r– re ia – d b an et ld tu f y– ur y to tu ct G r/G ustr any In Bui ufac So br n Glo cts an c u a e f u p a n y ib d p u m uf io an M od In om str an m co sh an pr di c m fa m

Figure 8.10 ◆

Savings achieved from network optimization models

Source: Extracted from Gattorna Alignment and Carpenter Ellis consulting assignments

BlueScope Steel In Stage 1, BlueScope re-segmented its customers and aligned its key value propositions to match the new segments. It aimed to reduce order lead-times using vendor managed inventory (VMI) and other methods. On the manufacturing side, BSS focused on identifying and managing the controllables and sought to standardize processes wherever possible. In Stage 2, the company emphasized aligning key supply chain ­processes in manufacturing, distribution, planning and scheduling, and performance measurement. It introduced a ‘supply chain ­velocity’ ­programme across the organization with the aim of developing and ­implementing lean manufacturing. Stage 3 involved focusing on reducing and managing variation, as it became obvious that the key to achieving more responsiveness in the delivery to customers was to have the ability to ‘flex’ capacity to follow more closely forecast demand and supply variations. Overall, improvement in delivery performance as measured by DIFOT has so far proved elusive, despite all the initiatives. However, external customer surveys have revealed a steady increase in customer satisfaction. The project remains ‘unfinished business’. Despite all this effort, the company has continued to struggle because of increased raw materials cost, weak demand and a high Australian dollar. Further lean initiatives have been undertaken at its Western Port plant; rail has been substituted for marine transport where possible; and restructuring has been almost continuous.26 That’s the reality with lean – you can never let up. · 267 ·

M08_GATT6818_03_SE_C08.indd 267

2/24/15 3:47 PM

Dynamic Supply Chains

Lean works So, approached in the right way, lean’s low-cost, reliable supply chains can be designed and operated to provide the efficiencies, predictability and low costs desired by customers. But, as the above examples highlight, it’s not simply about reducing freight rates, or squeezing the providers of third-party services; rather, it is much more creative than that. It is about ­smoothing product flow, reducing errors and producing goods to forecast right across the supply chain. And, just as importantly, a lean, low-cost ­supply chain will only deliver value when aligned with the appropriate buyer behaviour. Indeed, lean protocols will be quite dysfunctional in an o ­ perating ­environment where customers demand high levels of r­esponsiveness in unpredictable trading conditions. This is your great challenge: ‘go lean’ where it is appropriate, but recognize that other pathways to customers with different requirements must also be running in parallel, or in series, and above all, in synch. That is what it’s all about: dynamic alignment with all segments of your supply chain. In summary, perhaps the most critical element of lean is the ability to collaborate with suppliers on the supply-side in order to smooth out inventory holding and associated costs as you grapple with customers on the sales-side who sometimes treat you and your product like a common commodity.

Beware the ‘dark side’ It is possible to take lean practices too far and in the process damage the resilience of your supply chains; this tendency should be avoided. In any lean programme, the ‘continuity challenge’ in the face of unexpected ­disruptions must always be considered, e.g., a fire in a key supplier’s factory, or an ­earthquake that disrupts supply of a key component. These types of events have happened in the past and will happen again. More about this ­phenomenon in Chapter 11. During a recent project for Schneider Electric in China we ­discovered a variant of the conventional lean supply chain – the fast rhythm lean ­supply chain, or Ap in our coding regime. This is a supply chain c­ onfiguration that operates in high reliability mode, at speed, often reflected in the projectstyle industrial markets being served. This type of ‘routine speed’ supply

· 268 ·

M08_GATT6818_03_SE_C08.indd 268

2/24/15 3:47 PM

Lean supply chains: demand-side

chain is similar to the agile supply chain design adopted by I­ nditex (Zara) in its consumer fashion apparel markets; more about this in Chapter 9.

You must be tenacious The principles of lean production and management have been around long enough to be understood, but the difficulty of putting these into practice is also well known and documented. Indeed, many companies have found to their cost that the gap between the underlying philosophy of the ­original Toyota Production System and the prevailing system of management in their business is just too big to bridge. Dr Jeffrey Liker, author of the i­nfluential The Toyota Way and an expert on Toyota’s lean philosophy, understands the challenges inherent in applying the leanness of Toyota to other firms. He makes a pointed observation in this interview: [Western company] leaders are either unable or unwilling to grasp one ­essential lesson: that they should first understand the Toyota principle, then build their own capabilities using these principles. And they must be willing to do it slowly, step by step.27 Being lean is painstaking work, and you can’t simply leapfrog this l­ earning phase with software. Liker concludes that making the deep cultural changes required to implement lean systems is a tall order for many Western companies.28 But it can be done if done right.

Key ideas 1 Customers in the lean supply chain don’t want anything too flashy. They’re looking for reliability and routine. Oh, and the lowest price! 2 Original lean concepts developed for manufacturing provide a guide, but they must be adapted and, if needed, run in parallel with other supply chains. Collaboration, particularly, must be built; it cannot be guaranteed. 3 Don’t over-service. Your lean supply chain should have the technology, operational excellence and culture to serve your customers, but only at the right price.

· 269 ·

M08_GATT6818_03_SE_C08.indd 269

2/24/15 3:47 PM

Dynamic Supply Chains

4 To resolve complexity, you will almost surely require the help of a ­network optimization model to guide you to where costs can be cut without endangering service. Or service improved significantly for the same cost. 5 Matching the performance of the ultimate lean machine, Toyota, requires a specific type of cultural capability, combined with several other capabilities. You must identify carefully how lean principles can work in your business, and then, never let up! 6 Don’t rule out the emergence of the fast rhythm lean supply chain variant, which delivers routine low cost service, at speed.

Your challenge Are you applying lean concepts and principles, step by step, and only where they will add value? Or are you going overboard?

· 270 ·

M08_GATT6818_03_SE_C08.indd 270

2/24/15 3:47 PM

Chapter 9

Agile supply chains: demand-side How to design and deliver capacity for a fast response

T

his chapter is all about developing a capability to service ­customers, at speed. The challenge lies in the fact that being able to react quickly requires spare capacity strategically located ­throughout the system, and this comes at a price. So it may be ­necessary to select those customers you want to deal with, and cull the rest. It’s a choice you have to make because resources are not ­unlimited. To achieve speed, you will have to instil a subculture that will support fast ­decision-cycle times, and here the OODA loop, ­borrowed from the ­military, comes into play. You will also have to configure your ­organization for speed, and populate it with individuals who are ­comfortable with working fast and prepared to take measured risks. This is not a place for ­consensus-seeking individuals. It is the third millennium. We all want to be better, cheaper and faster. Let’s make that faster, faster and faster. Stop the planet, I want to get off ! A new breed of enterprises is certainly demonstrating what is possible when it comes to responding to customers in a fast-moving operating ­environment, where life cycles are short and variety reigns supreme. Apparel ­companies Inditex (Zara) and Adidas; technology companies Dell, Nokia, Apple and Cisco; medical appliance manufacturer Cochlear; energy ­efficiency ­company Schneider Electric; grains handler, CBH, and supply chain s­ ervice c­ ompany Li & Fung are among these leaders. The winners in this environment are those that can respond urgently and effectively. Think of the ultimate example set by the crew during a pit stop in a Formula One grand prix race as · 271 ·

M09_GATT6818_03_SE_C09.indd 271

2/24/15 3:48 PM

Dynamic Supply Chains

depicted in Photo 9.1. The highly skilled individuals in the crew work in perfectly executed harmony, racing against the clock and doing so in a confined space. This is a world where milliseconds count, where we worry about speed of execution first, and capacity utilization and cost, a distant second. Races have been won and lost during pit stops. But good planning also underpins a quick response. Many pit stops are scheduled and therefore predictable – planned to the lap. It’s the unplanned pit stops where you see the difference between success and failure, winners and losers. The world for businesses operating agile supply chains is similar; the only thing is we have neither the budget nor the capacity of an F1 team standing by, on alert 24/7, 365 days a year. Yes, speed is paramount in this 21st-­century world. But in keeping the roving, foraging customer firmly in our sights, we need to deliver in a cost-effective way; otherwise we will find ourselves careering off the track in a high-cost, high-speed wreck. Possibly, we are getting a little carried away. But the point to make is this: is such an extreme response necessary for all our customers? As with the collaborative and lean supply chains, there is a time and place for everything. The focus in agile supply chains is on being fast and also on being smart about how to

Photo 9.1 ◆

A Formula One pit stop

Source: Getty Images / Rainer W. Schelegelmich

· 272 ·

M09_GATT6818_03_SE_C09.indd 272

2/24/15 3:48 PM

Agile supply chains: demand-side

s­ atisfy demanding customers. Sometimes the answer may be that we don’t want to even attempt to serve them, or at least some of them. It’s called ­culling your customers. Often high responsiveness requires an ability to forecast capacity accurately, rather than predicting the next hit product, and being prepared to switch into high-priority production when the time comes. The challenge for companies is to know how to satisfy their ­customers as they migrate from predictable to unpredictable operating environments, knowing when to scale-up, and especially, when to scale-down as many enterprises are having to do during the current extended recession. In our ‘new normal’ world of volatility, it’s more important than ever that we should know these demanding/dynamic customers.

Watch out, they’re hostile We thought the customers were relentless in lean supply chains. Now they are virtually hostile, or at least the operating environment is. You might have a customer who is absolutely chaotic, but still expects lightning s­ ervice, at a discount. Or else you are dealing with a business whose customer is just plain disorganized. Sometimes it’s justified – their behaviour could be driven by uncertainties caused by world oil prices, terrorism-related demand changes or new government regulations. The unpredictability is not so much the result of one customer causing chaos; it’s the combined effect of an uncertain world rippling up and down your supply chains. Often the longer the supply chains, the more complexity and increased potential for the ‘bullwhip’ effect.1 To combat this, ‘some companies are establishing supply chain “war rooms” to make fast decisions across functions . . . populated by leaders from production, procurement, logistics, and sales – these teams meet weekly or even daily to devise near-term operational plans’.2 Sound familiar? Indeed, we are now under increasing pressure to respond to the demands of all categories of customers, from consumers and end-users through to the most sophisticated corporate enterprises. You know when fast response is important when a company such as IBM uses a television campaign to promote its ‘on-demand’ supply chain capabilities.3 In industries such as fashion and consumer technology, the plethora of products seems to increase exponentially while at the same time life cycles are forever contracting.

· 273 ·

M09_GATT6818_03_SE_C09.indd 273

2/24/15 3:48 PM

Dynamic Supply Chains

Remember, though, that sometimes the urgency is needed, and sometimes it’s not. We need to work out when the demand is genuine and therefore absolutely necessary, and if so, respond in quick time. And we need to know when the customer does not absolutely need the product immediately, or if they do, there is a price premium to pay. Perhaps the best solution is the fast (and regular) rhythms used by Spanish retailer Zara to replenish its global network of retail stores, which it does at least twice a week. This is a ‘best of both worlds’ strategy: predictable yet fast, very fast. This is exactly what fashion-loving customers demand, and get. Other enterprises with similarly perishable products going to a known network of customers would do well to replicate the example of Zara. However, you also have to do all the other things that make this a great strategy; more about this later. It will come as no surprise to you that the dominant buying b ­ ehaviour of customers in an agile supply chain is demanding/dynamic. These ­customers seek a rapid response to unpredictable supply and demand conditions, but all too often this is a response designed to compensate for a lack of prior planning rather than an essential requirement. However, where market conditions are genuinely unpredictable, high priority is placed on getting an urgent response from suppliers, and there is little time for relationship development. The exception is if the relationship between a buyer and seller has been in place for some time, or the parties agree to collaborate to achieve a fast response, as was the case with Ericsson and some of its telecom customers. There is usually an opportunistic edge to the demanding/dynamic ­buying behaviour. Suppliers may be treated as an ad hoc source of supply where loyalty is relatively low, overshadowed by an almost obsessive quest for a ­particular outcome. In some ways, this is simply the commercial real world: one tinged with pragmatism and driven by a focus on results, but not to the point that lowest price is essential. People who live and work in this world understand that trade-offs sometimes have to be made between ­high-performance responsiveness and the corresponding cost. Can you predict what the inherent problem will be with these ­customers? It’s not so much the ‘need for speed’, but in a similar way to the ­transactional customers discussed in Chapter  8, it’s the impact on the rest of your ­customer base that is the real concern. The demanding/quick response ­buying behaviour of these customers requires an agile response and they can very easily derail your efforts to deliver consistent and reliable service to the rest

· 274 ·

M09_GATT6818_03_SE_C09.indd 274

2/24/15 3:48 PM

Agile supply chains: demand-side

of your customers. This is particularly the case for loyal ­customers, simply because your organization could be swamped by surprise demands from other powerful customers. The resulting disruption as the enterprise attempts to satisfy all demands from all customer types is one of the fundamental reasons why the resolution of complexity in supply chains has fallen short of early expectations. Indeed, it is not too far-fetched to s­ uggest that if demanding/ dynamic customers were given free rein, they would ­create chaos across the business. This is not to say they are not valued, but rather to suggest that they must be managed carefully and with a plan in mind, rather than on an ad hoc, reactive basis. The use of decision support ­system applications can help immeasurably in these tight situations, and an o ­ verall awareness of the particular customer’s contribution to the business is ­mandatory for quality decision-making.4 In some situations it may be prudent to embargo parts of production, or even an entire factory or production line, to reduce the negative impacts caused by customers placing random demands on your enterprise. Global dairy ingredients manufacturer Fonterra (see Chapter 7) recognized the negative impact of demanding customers on its loyal customers in 2000, and took steps to protect them.5

Being quick and cost-effective How can we respond to the growing band of demanding/dynamic customers without being overwhelmed by them? Quite aptly, the agile supply chain is also described as a surge-flow supply chain because demand surges during unpredictable, high-variety market conditions. We need to focus on embedding responsiveness in the extended enterprise to match uncertain business conditions into the future. I think it’s safe to say these markets are not going to go away. If we get it right, we can capture significant new business. Surges through supply chains may also be the result of our own commercial practices, e.g., pricing policies, payment terms and promotional activity, so to some extent the solution is in our own hands. Make-to-order (MTO) and configure-to-order (CTO) capabilities are critical for quick response to customer demands. Hewlett-Packard has long adopted the practice of postponing final assembly of its printers when the exact country or market, and configuration, are unknown; manuals are then

· 275 ·

M09_GATT6818_03_SE_C09.indd 275

2/24/15 3:48 PM

Dynamic Supply Chains

added, with the power plugs and leads supplied at the last possible moment. Likewise, Vision Express meets delivery deadlines for prescription spectacles measured in hours by assembling frames and custom lenses at the last moment. Dell too is masterful at CTO and delivery within days, but it gets paid even quicker! For most, however, responsiveness comes at a price unless you are very well organized. BMW are also getting in on the act. According to Rich Morris, VP Assembly for the BMW Manufacturing Co., ‘flexibility is defined as the ability to shift production of different models among plants as demand shifts in different global markets [or] within the same plant where BMW offers a wide array of factory-installed options . . . the way individual customers order them’.6 ‘The real battle,’ says Morris, ‘is the race toward efficient flexibility.’7 Typically, high responsiveness cannot be achieved for minimal cost. Customers (and suppliers) have to make a choice. Otherwise the business becomes unmanageable and unprofitable. There is always an ­incremental cost associated with servicing demanding customers, but those who g­ enuinely need urgent service will pay a premium, albeit grudgingly at times. They will do their sums, make their own internal trade-offs and decide if it is worth it. Of course, in practice we often see a mix of make-to-stock (MTS) and MTO processes. Companies will MTS for high-volume ­products that are subject to predictable demand; they will also build low volumes of ­unpredictable product configurations to meet specific customer orders. Schneider Electric in Australia has completely transformed its ­logistics footprint by changing the role of its existing distribution centres and ­altering the transportation flows into and through the network. Mixed c­ ontainers filled with fast moving products, consolidated at (overseas) source f­ actories, come direct to each distribution centre serving a ­particular State, thereby minimizing costly inter-facility transfers and associated handling costs. All the other slower-moving products subject to more unpredictable demand go into a central agile centre, and are dispatched by fast transport as required, sometimes using merge-in-transit techniques to ensure c­ ustomers with mixed orders receive just one or two deliveries. The trade-off here is cost savings from consolidating inventory versus higher-cost transport, and it is very clearly an improvement on the previous practice of spreading all inventory items (approx. 28,000 active SKUs) across all distribution centres.

· 276 ·

M09_GATT6818_03_SE_C09.indd 276

2/24/15 3:48 PM

Agile supply chains: demand-side

The unique value proposition of agile supply chains is that they can and do respond rapidly and with high priority in unpredictable supply and demand conditions. To do this sometimes means holding spare or redundant capacity aside to cope with unpredictable surges in the pipeline, but that is part of the price you pay to be in that particular market. Anyone who knows about fluid mechanics is familiar with the essential role of surge tanks in absorbing rapid changes in flow volumes through pipelines; the same is true for supply chains. For instance, Zara has two very large distribution centres at La Coruña and Zaragoza in Spain, which at times may only be 50 per cent utilized. This is a conscious strategy rather than an oversight. Zara management understands the cost of redundancy, but they also know the benefit and indeed the necessity of having adequate transient capacity available to support their rapid-fire replenishment business model. So this is yet another example where the previous one-dimensional emphasis on incessant cost reduction for its own sake, is flawed. Going back to the Formula One pit stop analogy, the team’s success is partly due to in-built redundant capacity being kept on high alert for the duration of the race, ready for action at a moment’s notice, at speed. Maintaining this stand-by capacity pays off.

Agility and the OODA loop A vivid example of agility occurred in the immediate aftermath of Hurricane Katrina, which swept through the US state of Louisiana in August 2005. One of the most affected businesses was a major oil company, which lost all of the computing equipment in its customer service centres. The company contacted Hewlett-Packard, its regular hardware supplier, with a priority request to replace 1,000 specially configured PCs as quickly as possible. HP got back a few days later with a commitment to deliver the replacements by Christmas – Christmas 2005! This was not the answer the oil company wanted to hear, so it called Dell, which had not previously been a preferred supplier and asked the same question. Back came the answer almost immediately: ‘Is Monday okay?’ Dell got the business and won a new customer as well. Obviously the story improves with the telling, but the essentials remain: one supplier could meet an urgent request and the other could not. How could Dell deliver in such a short time? Probably a combination of lots of spare capacity built into their network; power over their suppliers;

· 277 ·

M09_GATT6818_03_SE_C09.indd 277

2/24/15 3:48 PM

Dynamic Supply Chains

and good scenario planning. Clearly, Dell demonstrated the more responsive culture on this occasion. And all that accompanies this, including an agile supply chain for new product. Dell’s embedded agility enabled it to respond inside Hewlett-Packard’s cycle time with a faster OODA loop. The OODA loop was originally designed for the military by Colonel John Boyd as a tool to assist combat forces to out-think the enemy.8 It stands for observe, orient, decide and act. The OODA loop is now used to better understand decision-making processes in commercial environments. According to Bud Baker, speaking in a business context, ‘If I can make decisions faster than my competitor, if I can get inside his decision-cycle, then I’ve got him.’9 The best enterprises are applying this principle to their supply chains.

Agility at the heavy industry end Agility is not just confined to FMCG or electronic high tech products – it is also very prevalent in heavy industry as well. Look at the case of Daewoo Shipbuilding & Marine Engineering in Korea where they ‘pull the plug out of the dry dock on Friday night and float out [several] ships on Saturday morning, leaving Monday to Friday free to build more ships’.10 Daewoo Shipbuilding & Marine Engineering, one of the five biggest shipyards in the world, built 271 massive ships (ore carriers and oil tankers) in 2004, and had a forward order book of 300 ships at the time. It builds the ships in a series of large blocks – as large as a house – ­offsite, then transports them to site for final assembly before launch. This is ­postponement par ­excellence. See Photo 9.2 for an aerial view of Daewoo’s shipyards.

And innovation plays a further role Others have innovated to find a way around the ongoing after-sales service problem. Michelin has been highly creative in its approach, introducing eTires for its customers. The eTire is a device like a RFID (radio frequency identification) chip, inserted at the time of manufacture; it monitors air pressure in the tire when in use. With the right air pressure, tires perform optimally and last longer; correctly inflated tires also reduce fuel consumption, which is a significant cost in the transportation business. In this case

· 278 ·

M09_GATT6818_03_SE_C09.indd 278

2/24/15 3:48 PM

Agile supply chains: demand-side

Daewoo Shipbuilding & Marine Engineering in Korea – agility at the heavy industry end of the spectrum

Photo 9.2 ◆

Source: Soekyong Lee / Bloomberg via Getty Images

‘service’ has been added to the product itself, and becomes a source of ­differentiation for Michelin compared to its competitors. And this agility does not necessarily mean higher cost. Companies such as Haier, the giant Chinese domestic appliance ­company, combine low production costs with rapid innovation to d ­ evastating effect. An example of this ‘quick-cycle’ mind-set came after the company discovered the reason for an unusually high incidence of service calls to repair failures in some of its washing machines – customers in rural China were washing their vegetables in their machines! Haier rapidly re-designed the valves in the affected models to accommodate this unusual application and the level of service calls reduced significantly.11 Haier has moved fast to internationalize itself, and as reported in China Economic Net, is intent on ‘creating marketing networks, logistics networks, capital networks, ­information networks, and HR networks [in overseas domestic markets]’. This is ‘helping Haier to capture the demands of consumers worldwide faster and more accurately’.12 It seems that in the harsh environment of the emerging markets of Brazil, Russia, India and China, the so-called BRIC countries, companies learn

· 279 ·

M09_GATT6818_03_SE_C09.indd 279

2/24/15 3:48 PM

Dynamic Supply Chains

survival techniques fast. These markets are characterized by high volatility in demand, low disposable incomes and high consumer expectations. According to Donald Sull,13 there are perhaps 10 to 20 companies in the emerging markets today that are potentially category killers, and in a decade there will be 10 times this number.14 Maybe such threatening news will at last prod Western enterprises into accelerating their own transformations. The alternative is to be swamped by companies with access to relatively lowcost labour, and the ability to adapt and innovate faster than their Western counterparts. A frightening thought. Superior agility doesn’t just happen by accident. It is the result of combining specific processes and techniques with a responsive mind-set. Techniques such as strategic sourcing and postponement play a central role in the scheme of things. Everything must align if a quick and cost-effective result is to be achieved without plunging the enterprise into uncontrolled and costly chaos. Agile success is also dependent on the ability to ‘compartmentalize’ lean activities into modules, and have the in-built flexibility to recompile (or reconfigure) the modules in ways that provide the desired responses. This requires quick decision-making cycles, and absolute clarity regarding the roles, responsibilities and level of empowerment that is available to the personnel involved, i.e., what staff are able to commit to the customer. This becomes part of having the appropriate subculture in place to underpin the strategy. Before diving into subculture, however, we must first revisit the issue of the most ‘appropriate’ strategy package needed to serve the ­demanding/dynamic customer segment.

Converting value propositions into strategies The value proposition for the agile supply chain, which we first learned about in Chapter 2, is that we will respond rapidly and with high ­priority to the unpredictable demands made by our most dynamic customers. ­Chapter  3 introduced the 16 strategic dimensions that we can use to meet the varying demands of customers in different supply chain ­channels. For our agile supply chain, the strategies that will equip you to cater for the demanding/dynamic customers are discussed in more detail below; these provide the essential ‘strategy recipes’ that you can use to link your business to a rapidly changing market.

· 280 ·

M09_GATT6818_03_SE_C09.indd 280

2/24/15 3:48 PM

Agile supply chains: demand-side

Strategy recipe for agile supply chains   1 Product mix. Customers in a demanding/dynamic mind-set tend to like choice and convenience. Choice means a greater variety in the product range, but the emphasis on meeting the quality specification is strong too.   2 Innovation emphasis. This type of customer is seeking differentiated products and services, and will pay a premium if necessary. The challenge for suppliers therefore is one of ‘continuous improvement’.   3 Marketing emphasis. The marketing effort with this type of customer is to keep up with the rapidly changing tastes of end-consumers, and launch new products in the marketplace before competitors. It is another example of the OODA loop at work.   4 Channels of distribution. The demanding customer is looking for easy access to products and services, i.e., convenience. So, as volumes grow, the channels of distribution should be widened to accommodate this desire. The new online channel comes into play here.   5 Pricing regime. Pricing for this customer does not have to be the ­lowest, just competitive with other equivalent products and services. And to cover the extra effort and cost when responding quickly to ­customers in unpredictable environments, the pricing has to be higher to avoid margin erosion. This is the world of deal makers!   6 Promotional activity. A lot of promotional activity occurs in the agile environment as suppliers attempt to attract customers. This higher level of promotions inevitably pushes costs up, so the pricing regime must cover this additional cost (including the impact of ‘loss leaders’). Where possible, efforts should be made to anticipate and smooth the peaks in demand that flow through the system.   7 Service emphasis. The service required is a timely response to the customer’s sometimes unreasonable demands, and these customers can be impatient!   8 Procurement/sourcing approach. It is important to have a selection of suppliers available who have spare capacity in order to respond to our unforecast orders, quickly.   9 Production. The agile supply chain will most likely use a combination of in-house production and outsourcing to get the required capacity in the short lead-times involved.

· 281 ·

M09_GATT6818_03_SE_C09.indd 281

2/24/15 3:48 PM

DYNaMiC SuppLY ChaiNS

Strategic dimension

Ideal strategy

1 Product mix

Larger range; choice important

2 Innovation emphasis

Seek product differentiation

3 Marketing emphasis

Quick response to changing customer requirements

4 Channels of distribution

Provide easy access to consumers; convenience

5 Pricing regime

Competitive; moderate price sensitivity

6 Promotional activity

High; fashion-style approaches

7 Service emphasis

Performance to specifications

8 Procurement/ sourcing approach

Market knowledge and distribution

9 Production

Shorter runs; flexible scheduling; make-to-order

10 Capacity considerations

Lower utilisation because of ‘buffers’ in the system

11 Fulfilment approach

Short lead times; use postponement

12 Relationship intensity

Low

13 Systems/IT support

Use modelling and analysis

14 Resource allocation priority

Build spare capacity to cater for volatile demand

15 Strategic risk profile

Higher risk

16 Financial considerations

Focus on cost of additional (redundant) capacity. Monitor cash flow

Figure 9.1 ◆

Agile supply chain strategy – operational

· 282 ·

M09_GATT6818_03_SE_C09.indd 282

2/24/15 3:48 PM

Agile supply chains: demand-side

10 Capacity considerations. With such wide fluctuations in demand ­patterns, it is essential to build in spare capacity, or ‘buffers’, along the way; these can be in the form of additional suppliers, more production capacity, additional inventories and extra manpower, etc. 11 Fulfilment approach. The agile supply chain by its nature requires quick response to orders, so postponement techniques combined with ‘buffers’ are essential to meet customer expectations. 12 Relationship intensity. Customers are more interested in outcomes than processes or smooth relationships. So accept that the relationship intensity will be low and avoid over-servicing. 13 Systems/IT support. The emphasis is on achieving a quick response to sometimes-unreasonable demands. For this purpose it is essential to have a network optimization model available to run scenarios and help decide on allocation priorities. 14 Resource allocation priorities. The focus here is on forecasting and building additional capacity in order to cope with volatile demand. By using customer account profitability techniques, it’s possible to decide what priority should be given to this type of customer, especially in situations where product supply and capacity are limited. 15 Strategic risk profile. Because we are operating in a customer segment where demand (and supply) patterns are relatively unpredictable, risk is high. On this basis contingency plans should be prepared to mitigate some of the risk of disruption in supply to key customers. 16 Financial considerations. Focus on cost of additional (redundant) capacity. Is the investment worth it? Monitor cash flow. It is now time to turn our attention to the capabilities that must be present to drive these operational strategies into the marketplace.

Capabilities required by agile supply chains There are eight key internal capability areas that have to be developed and refined to allow enterprises to deliver the potential benefits inherent in aligning with their respective markets and customers (see Chapter 4). We will now detail the specific capabilities necessary to underpin and propel the agile supply chain configuration. These are summarized in Figure 9.2.

· 283 ·

M09_GATT6818_03_SE_C09.indd 283

2/24/15 3:48 PM

DYNaMiC SuppLY ChaiNS

Capability area

Capability

1

Customer interaction

• Customer Call Centre (CCC) – joint responsibility* • Rolling annual CSI/NPS surveys*

2

Transformation

• Translate strategy into working models*

3

Organization

• Risk-taking • OD: multi-disciplinary clusters focused on Pa segment [speed] • People selection and positioning: ensure bias of agility (Pa) in cluster • Analytics • Project management

4

Processes (standard)

• Forecasting capacity • Proactive delivery information • Postponement • Process short-cuts

5

Planning

• S&OP – aggregate capacity planning focus • Demand planning

6

Systems/IT

• SCP • CoV • APS • EDI • Network optimization modelling • Inventory management • Track and trace

7

Operations

• Speed of response • MTO at shorter lead times • Time-specific delivery • Digitization • Merge-in-transit • Less than truck load (LTL) • Value-added services

8

Culture

• Individual decision-making • Individual KPIs and incentives focused on speed • Incentives: cash and in-kind bonuses • Job design: authority levels established by clear and published limits • Internal communications: formal; regular; action oriented • Training and development: problemsolving; resource allocation • Role modelling: managers with ESTJ (Pa) • MBTI profile are ideal • Recruitment: result-oriented personnel • Leadership style: Company Baron: leads by objectives; embraces change; goes for growth; focuses on what’s important; analytical, fact-based negotiations

*Common across all supply chain types

Figure 9.2 ◆

internal capabilities required to propel agile supply chains

· 284 ·

M09_GATT6818_03_SE_C09.indd 284

2/24/15 3:48 PM

Agile supply chains: demand-side

1. Customer interaction There are two capabilities under this category, and both are common to all types of supply chain configurations, i.e., customer call centres and annual customer satisfaction index (CSI) (and/or net promoter score (NPS) and/or NSS) surveys. Many companies are missing out by not making the ­customer call centre a joint responsibility of sales and supply chain functions, which could significantly improve internal productivity and responsiveness to c­ ustomer queries. The other capability in this category is the rolling survey of c­ ustomers. A by-product of using the CSI methodology is that it can also be used to check on the behavioural segments previously identified in primary ­market research. The NPS methodology cannot do this, but has other uses, although readers will know my thoughts about the relative merits of the two methodologies having read Chapter 2.

2. Transformation Once the new network strategy design and corresponding footprint have been completed, the next big task is to translate this into working models on the ground. This involves taking the aggregate flows from the network optimization models, and breaking these down to the SKU level, deciding where to store each SKU, and in what quantities. Significant analytical skills are required, overlaid by experience, as is an in-depth understanding of the behavioural segments.

3. Organization The organization is ideally set up in multi-disciplinary clusters as depicted in Figure 9.3. Zara does this with finesse, bringing together personnel from different functions to make quick decisions on everything from choosing the next range to be released, to finding innovative ways to improve speed. This group should have a bias for speed and risk-taking, which is not to say everyone in the cluster has to have that profile, just the majority. As with the previous clusters, we also need personnel with opposite profiles to create some sense of dynamic tension. One might ask: who needs structure anyway? This is the point where we again diverge from convention and use a dual design already explained in Chapter 6. However, in this case the ‘clusters’ are designed around speed,

· 285 ·

M09_GATT6818_03_SE_C09.indd 285

2/24/15 3:48 PM

M09_GATT6818_03_SE_C09.indd 286

‘Speed’ clusters

S/M

P

S/M

P

S/M

P

P

P

Procurement

Sales

Marketing

Shared services: HR/IT/F&A

Production

CEO Logistics

Agile supply chain organization clusters

Source: Adapted from Figure 9.4 in Gattorna (2009), p.141

Fi gu re 9 .3 ◆

Note 1: Clusters are focused on different parts of the same segment but possibly different product categories Note 2: Individual team members return to their respective functions for training and other specialist matters

L

L

L

P

COO

Sub-sets of ‘dynamic’ customer segment

DYNaMiC SuppLY ChaiNS

· 286 ·

2/24/15 3:48 PM

Agile supply chains: demand-side

and focused on individual customers or groups of customers with quick response as their individual and joint expectation. The cluster will have all the various functions represented, but the embedded bias is speed. It is a harsh, unrelenting work environment and team members will rotate on a reasonably regular basis back to their functional specialties to refresh and receive additional training. It is almost essential for individuals in this type of cluster to be co-located physically near each other, but where this is not possible they can operate virtually, with team members spread across geographies. Whatever the case, the essential values of this cluster can be summed up in two words – collaborative individualism. Companies such as Zara, Li & Fung, Dell and Sears Canada have managed to breed this type of responsive culture into their organizations, as have Virgin Atlantic and Southwest Airlines. In all these cases their success to date, and continuing success, depends on the responsiveness they are able to produce from inside their organizations, mirroring their customers’ desires. Dow Chemical, especially in Europe, evolved from a narrow but successful product flow function in the early 1980s, to materials management in the late 1980s, to a strong integrated supply chain management function by the mid-1990s. These were all functional organizations, with loose business alignment, until 1998 when the pendulum swung back in favour of individual business units and perhaps went too far. Dow’s full-blooded business alignment resulted in a loss of leverage, lots of duplication, and did not deliver the uplift in earnings before interest and tax (EBIT) that was expected. So the story continues to unfold today with perhaps some misgivings. The company still cannot find the right formula, and this is one of the world’s best chemical companies. What hope is there for the rest? In real life, however, pure examples of particular business models seldom exist. We live in a hybrid world, which brings with it dangers for the unsuspecting. Charles Fine, the renowned MIT professor and management writer, highlights just what can happen when two business models come together, as was the case with the acquisition of Chrysler by Daimler-Benz in 1998 to form DaimlerChrysler AG.15 A ‘modular’ supply chain in Fine’s terms is roughly equivalent to agile in my terms, displaying ‘relatively flexible and interchangeable relationships among suppliers, customers, and partners’.16 This was Chrysler pre-takeover. Daimler-Benz had a much more integral product and organization architecture, equivalent in my terms to a cross between collaborative and lean supply chains, underpinned by a functional organizational structure. In this case, the two architectures were like oil and

· 287 ·

M09_GATT6818_03_SE_C09.indd 287

2/24/15 3:48 PM

Dynamic Supply Chains

water, which is one reason why the merged entity has struggled to perform ever since, culminating in Chrysler going into Chapter 11 in May 2009. Fine highlights the imperative to align the supply chain and product architectures because ‘they have a powerful impact on each other’.17 He uses three companies to exemplify this point – Toyota Cars, Dell and Nokia: Toyota cars, known for their reliability and flawless performance, have an integral supply chain and product design. Dell’s renowned modular designs match its standardized multi-vendor supply chain. Nokia employs a deliberately designed hybrid approach, with a modular semiconductor and software core, highly integrated components for the rest, and a complementary supply chain design.18 Zara’s business model uses cross-functional teams known as ‘commercials’ to manage the design and production of clothing lines in specific fashion ranges, for women, men or children. These teams work closely with the store product managers and travel extensively to observe purchases and ­communicate with the local store managers. Employees are given a high level of autonomy to make decisions within their individual businesses. However, a note of caution is also appropriate here, because there is i­ncreasingly too much rhetoric on company websites and in company reports about how they are shaping a more ‘responsive culture’, and in the same breath they claim to be cutting costs and becoming leaner. The two can coexist – but such ­precision, call it a ‘coalition’ if you like, is still relatively rare. In effect, what has to happen is that individuals are empowered to pull together the a­ ppropriate modular components to make things happen the way the ­customer wants them to happen, fast. When it comes to the people you should position in the agile supply chain, the ideal is to liberally sprinkle people who thrive on speed, and are capable of reacting quickly to hitherto unknown situations, ­throughout the cluster. This is typical of the ENTJ (Extrovert-Intuition-ThinkingJudging) or INTJ (Introvert, Intuition, Thinking, Judging) profiles in the ­Myers-Briggs Type Indicator (MBTI®), which translate to P (Producer) or Pd (Producer-developer) in my P-A-D-I code.

4. Processes The further we move to the right along the continuum of supply chain types, the less we need formal processes. But you still need good processes, and plenty of them, to cover the more predictable side of your business. This is not an

· 288 ·

M09_GATT6818_03_SE_C09.indd 288

2/24/15 3:48 PM

Agile supply chains: demand-side

‘either/or’, but an ‘and’ situation. In the agile supply chain, processes are still necessary, but they are fewer by definition. Any process that slows down response time is dispensed with via creative process re-engineering. Short-cuts are invoked and the risks increase, but not to the point where safety is compromised. Ways are found to work around regulations, and there is generally an opportunistic flair embedded in the remaining processes. However, we are not talking about creating a myriad of costly exceptions. Quite the contrary, the processes that drive and support agile supply chains are mostly unique combinations of standard processes. This is the key to containing costs while delivering rapid bursts of obsessive service over short periods of time. So the idea is to reduce the number of processes as much as possible and go for speed of outcome. Seek out process short-cuts, and look for ­opportunities to use ‘postponement’ techniques. Research sponsored by ­supply chain m ­ anagement leader Ryder in August 201319 was revealing in that only 21 per cent of respondents said they were familiar with the concept of ­postponement and product completion centres. Ryder defines the product completion centre as: A unique distribution solution to postpone final product customization closer to the point-of-sale. This approach consolidates multiple vendors and services into a single facility from break-bulk to packaging to retail delivery. I would have thought that ‘postponement’ was fundamental to any agile ­supply chain these days. Avon now postpones the creation of its final product by applying labels in the targeted local language; this strategy enables them to accurately match customer demand without increasing their inventory.20 Similarly, companies such as Hewlett-Packard, with its Deskjet printers, and Indian watch manufacturer Titan have been using this postponement technique for some time.

5. Planning In terms of forecasting and planning, the emphasis shifts to forecasting likely capacity requirements, rather than absolute numbers of SKUs produced and delivered. This means forecasting manufacturing capacity, alerting outsourcing partners of volume requirements well ahead of time, and finally advising contractors of the specific products to be made and/or transported at the last possible moment.

· 289 ·

M09_GATT6818_03_SE_C09.indd 289

2/24/15 3:48 PM

Dynamic Supply Chains

In a demanding and volatile operating environment, the sales and operations planning process has to become an effective capacity management tool that can be acted upon within a short cycle-time. There is no longer the luxury of long meetings and time to reach a consensus.21

6. Systems/IT Agile supply chains are best underpinned by an ERP system similar to those used in other supply chain types, but that is where the similarity ends. We need to invest in an array of additional systems applications designed to optimize capacity and reduce the risk of interfering with the more standard regimes in the collaborative and lean supply chains. See Figure 9.4. In particular, capital should be invested in applications that support scenario development and analysis, e.g., the broad category of supply chain management systems, which include supply chain planning; advanced planning and scheduling; and supply chain event management supplemented by postponement methods. Because of rapid obsolescence, and the changing nature of the marketplace, one wonders if many of the tools being offered by the ERP providers are just too cumbersome. MySAP and NetWeaver seem to aim for more modularity, flexibility and, most importantly, value. The uncertain nature of demand on the agile supply chain type means there is significantly more management time involved. Experienced, multiskilled staff members are preferred because the complexity that has to be resolved is greater than in the collaborative and lean supply chains. Above all, you should remember it is fruitless to go in search of ever more forecasting accuracy in unpredictable demand situations, when forecasting is not really possible at any level. The guiding principle here is to plan for capacity . . . and execute to demand. Companies such as Zara follow this principle to perfection, s­ ourcing raw materials and components in distant low cost markets in the Far East, ­pre-booking manufacturing capacity in advance in locations closer to ­consuming markets and using postponement techniques and agile organizational formats to rapidly produce up-to-the-minute fashion for swift delivery to regional markets. The formula has not been successfully replicated to any significant degree by competitors to date, and Zara has the capacity to enter other apparel markets at will and work well inside the delivery cycle times of more traditional retailers such as Marks and Spencer; there’s that

· 290 ·

M09_GATT6818_03_SE_C09.indd 290

2/24/15 3:48 PM

M09_GATT6818_03_SE_C09.indd 291

Different combinations of IT applications sitting on top of ERP*

requisite technology for agile supply chains

Source: Adapted from Figure 1.5 in Gattorna (2009), p.55

F ig ure 9. 4 ◆

Agile – PLC

OTS (G-Log)

SNO (Numetrix)

Demantra PTP

Rapid planning

Agile supply chain

Dynamic

Campaign supply chain

Project accumulation

ERP transaction system and database (or can be SAP or legacy systems)

Lean supply chain

Transactional

* Using Oracle Suite as a sample to demonstrate

• JD Edwards • PeopleSoft (HR) • E-Business Suite (EBS)

e.g. Oracle Suite

Collaborative supply chain

Collaborative

Customer buying behaviour segments

Fully flexible supply chain

Innovative solutions

AGILE SuppLY ChaiNS: DeMaND-SiDe

· 291 ·

2/24/15 3:48 PM

Dynamic Supply Chains

OODA loop in action again! If Zara chooses to follow this route it will be bad news indeed for their new direct competitors. Benetton is probably best positioned to do likewise because, of any fashion firm, it is the most likely to start matching Zara’s agile approach. A strong component of systems in this type of supply chain is the decision-support and analytics capability, which helps you understand the cost of doing business with various customer accounts. Indeed, customer account profitability (CAP) analyses should be undertaken for all major customer accounts that fall into the demanding/dynamic category of buying behaviour. Zara’s ability to achieve responsiveness in the fashion industry has been due to its determination to monitor constantly both what is popular in the marketplace and what sells well in its stores, in close to real-time. There are formalized (and well proven) communication links between the store ­network and its roving ‘commercials’ teams, who provide daily updates of sales information, including customer comments. This gives Zara a­ ccurate information not only for product re-orders but also about ‘what the c­ ustomer wants’, so it can produce designs within very short lead-times. Of course, the ultimate example of postponement that provides almost infinite agility is the mixing of paint colours at the point-of-sale. In the automotive industry it is at the point-of-application. The other sizable global enterprise that follows the same principles is Li & Fung. A typical example is when Li & Fung heard that Levi Strauss was ­planning to order one million garments – style and colour unknown.22 Since the specifications would only be revealed four weeks before delivery, Li & Fung ­ went ahead on trust with both customer and suppliers to reserve un-dyed yarn while coincidentally locking-up production capacity at mills and the ­downstream manufacturer of the finished garments. Li & Fung o ­ rchestrated the lot and achieved the relatively short delivery cycle required by Levi’s. Finally, for this type of supply chain it is almost mandatory to develop and maintain a network optimization model (NOM),23 because this has the capability to materially improve the quality of strategic and tactical decisionmaking at the executive level when key issues need to be resolved, e.g., should we close a particular distribution centre? Will we continue to use a particular third-party logistics provider (3PL)? What part of the product range should we produce in particular plants throughout our production network, including outsourcing? With a NOM facility available to undertake

· 292 ·

M09_GATT6818_03_SE_C09.indd 292

2/24/15 3:48 PM

Agile supply chains: demand-side

intense analytical work, the chances of achieving optimal alignment between the enterprise and its various customer segments, including the d­ emanding/ dynamic segment, are significantly enhanced. Point-of-sale and RFID ­systems also help drive the required responsiveness. Essentially, systems are very important in the agile supply chain because of the speed of events. These include supply chain planning; advanced ­planning and scheduling; coefficient of variation; track and trace; and ­various i­nventory analytical tools. It is also important to understand which ­products in the range perform in a volatile manner so that they can be grouped together and perhaps held in a central location. This reduces ­inventory, but the trade-off is that fast transport is necessary for items in this category to catch up with other more standard lines on the same order. Otherwise customers receive too many split orders. This is achieved through use of merge-in-transit techniques with the help of 3PLs.

7. Operations The whole operation is geared around fast cycle-times. In m ­ anufacturing, we use make-to-order, albeit in the shortest possible lead-times. It’s also ­essential to offer customers ‘time-specific’ delivery, and meet these ­commitments. Digitization comes into its own in this supply chain because of the absolute necessity for speed right along the supply chain. Merge-­ in-transit, as indicated already, is an important process aimed at reducing ­lead-times for orders and ensuring customers receive their orders delivered in as few split deliveries as possible. It is also quite usual in this supply chain for customers to require a range of special value-added services such as packaging, special pricing and special delivery instructions. All these requests must be met, at speed. And if it is necessary to ship in less-thantruck loads (LTLs), then so be it.

8. Culture The agile supply chain must be populated by people who are comfortable with making individual decisions based on less-than-perfect information. There is usually no time for consensus gathering. It is beginning to sound as if we are going to need employees with ­roller-blades on! It would be very handy indeed to have all the cross-directional

· 293 ·

M09_GATT6818_03_SE_C09.indd 293

2/24/15 3:48 PM

Dynamic Supply Chains

momentum made possible by roller-blades in order to serve some of our unpredictable customers. The subculture embedded in agile supply chains is the rational subculture: it’s action-oriented, competitive and, above all, driven to perform. It is a subculture that values achievement and promotes a sense of urgency. High levels of activity can sometimes disguise less than optimal effectiveness, but brute energy makes up for this. Maybe we should trade the roller-blades for hockey sticks and ice-skates! In this subculture the focus is predominantly on the external operating environment. The policies and rules so evident in the internal-oriented hierarchical subculture are replaced by softer guidelines, where individual employees are expected to behave proactively, guided by the principle that you do what is best for the customer. We will now look at what conditions are necessary for a rational subculture to develop in the first place. Having said that, look at what is happening with many leading US-based companies, e.g., Dow Chemical, Exxon Mobil, and Applied Materials, who are reducing headcount in their global organizations and bringing key decision-making back to the centre. Where is the flex in that? Decision-making speed, action orientation and solution-based logical thinking are all key elements of this vital subculture. I have chosen the same critical capability levers as used in the two previous supply chain configurations. Key performance indicators (KPIs): In the rational subculture, the key performance metrics are absolute speed of response to customer enquiries and firm orders, and the ability to be first into the marketplace. Measurements such as elapsed time from concept to launch of new products, including delivery lead-time to customers, are a fundamental indicator of good or bad performance. Another good indicator is optimization of capacity at different points along the supply chain, and overall optimization of the entire supply chain in terms of the service/cost equation. Frankly, this area is one of the biggest challenges facing the supply chain community.You have to get it right. Incentives: The most appropriate incentives are those that encourage results-oriented behaviour, such as achieving budgets and stretch targets. Rewards come in the form of cash bonuses, increased salaries and fringe benefits. The achievement-oriented rational subculture is motivated by ­tangible rewards and recognized performance. But here again, be careful to choose the right incentives for your company. Many would argue that these types of cash incentives can have the opposite effect, and destroy agility – because the business becomes self-centred rather than customer-centric.

· 294 ·

M09_GATT6818_03_SE_C09.indd 294

2/24/15 3:48 PM

Agile supply chains: demand-side

Maybe this is one reason why Dow Chemical has not performed up to early expectations? Job design: The designs that help shape the rational subculture are those that focus on clear output requirements. Authority and autonomy is ­established by clear structural limits, and control is centralized by setting clear guidelines and principles for action. Internal communications: Competing in an agile supply chain, you will do well to adopt internal communications that are relatively formal, regular and very action-oriented. The underlying theme in all communications is that ‘we respond’. Communications are open and preferably ­face-to-face, although emails, text messages and mobile telephones are used for ­convenience and time efficiency. With the emphasis on results, the tone is impersonal and business-like. The risk you need to watch out for is that staff will withhold information; if this happens silos will start to form within the business. In a cost-saving exercise Dow Chemical had eliminated most of the cell phones in the company, only then to face some significant ­communication problems after Hurricane Katrina. A false economy if ever we have seen one! See Figure 9.5 for a summary of the communications style in a rational subculture.

Core need: Clarity. Systems: Planned, open systems, e.g., committees, reports, meetings. Content: Performance-driven, factual, logical, goal-oriented, focus on external environment, often based on comparisons. Style: Formal, controlled, impersonal, in broad sense. Information distribution: Deep and narrow, available to those who want it, systems dependent.

Figure 9.5 ◆

Communications style in a Rational subculture

Source: Gattorna Alignment research

· 295 ·

M09_GATT6818_03_SE_C09.indd 295

2/24/15 3:48 PM

Dynamic Supply Chains

Training and development: Training and development programmes should emphasize resource management. Staff should study rational models of subculture and undertake challenging assignments on problem-solving and resource allocation. The aim is to develop competences in areas such as time optimization, communications and influencing skills. Staff will not just be participating in the process – the backbone of this culture is results, results, results. See Figure 9.6 for the training and development needs in a rational subculture. Recruitment: Your business should be eagerly seeking personnel with a ‘driven’ personality and a desire to achieve results. Decisive, analytical, ­energetic and objective are words to describe the people who are most appropriate and indeed essential to shaping a rational subculture. The ideal recruits will have a pragmatic mix of operational and strategic mind-sets, be very customer-focused and prepared to take measured risks. The role model in this cluster is the ‘company baron’ who sets objectives and drives him or herself and his or her subordinates relentlessly to achieve the same. Sometimes these people drive their people too hard and cause physical and mental exhaustion – this behaviour is not condoned.

1. Action • Development of aggressive, achieving, behaviour • Ability to coordinate and systematically carry out actions 2. Investigative • Ability to analyze and understand 3. Social • Interpersonal skills for dealing with marketplace 4. Conventional • Ability to sublimate personal needs to those of organization 5. Influencing • Ability to influence customers 6. Artistic • Limited creative and ‘expressive’ skills

Figure 9.6 ◆

Training and development needs in a Rational subculture

Source: Gattorna Alignment research

· 296 ·

M09_GATT6818_03_SE_C09.indd 296

2/24/15 3:48 PM

Agile supply chains: demand-side

Leadership style: Members of your top management team should exhibit the leadership styles that mirror the subcultures you need to drive your c­ ompany strategies into the marketplace. A ‘company baron’ l­eadership style is the most appropriate for shaping a rational subculture and realizing value in an agile supply chain. Company barons lead by objectives; they ­enthusiastically embrace change, go for growth and focus only on what is important. They are challenging individuals, practical, analytical and seek fact-based commercial solutions. Above all they get their way through force of personality; they are a typical ESTP (Extrovert-Sensing-Thinking-­ Perceiving) profile in the MBTI® or Pa (Producer-administrator) in my P-A-D-I code.

Unilever at its best in emerging markets In 2011 we had the pleasure of working in Asia generally, and Indonesia in particular. Most of our work was with Unilever to try out some of our alignment ideas in the field. For some years, Unilever had been struggling to answer the question: is one supply chain design sufficient for all our products and customers? The company had a sense the answer was ‘no’, but were unclear what path to follow. In delving deeper into this question it realized that it had products in its FMCG portfolio that were must haves in terms of their availability, with some or all of their customers. It also recognized that other products, albeit with lower margins, where ‘cost efficiency’ was mandatory, were also in demand by customers who expected smooth, regular supply. And there was yet a further group of products and customers where there was significant volatility in the portfolio, not necessarily driven by shopper/ consumers, but by Unilever’s own behaviours as well as the behaviour of its intermediary customers, especially in the Modern Trade. According to Alfons van Woerkom, Supply Chain Director for ­Unilever Asia, the company devised a solution using my dynamic a ­ lignment ­concepts, including a vision of the future that went like this: ‘to drive higher growth, margin, and customer satisfaction through a portfolio of four supply ­chain-to-shelf models that align business strategies with the needs of different shopper and customer segments’.24 One of these ­models (the agile supply chain) was implemented in a test project in ­Indonesia, with the goal to find a better, more responsive way to service small ­cosmetic stores, which had traditionally been supplied through a distributor. Its experience, described below, is an instructive case study on dynamic alignment in action.25

· 297 ·

M09_GATT6818_03_SE_C09.indd 297

2/24/15 3:48 PM

Dynamic Supply Chains

Unilever – the agile supply chain: Cosmetics stores ­supplied via distributors Traditionally Unilever sold its ‘beauty products’ category to small ­cosmetic stores via distributors. In this supply chain, salesmen for the distributors visited the stores every week to take orders. However, the model presented several challenges: ◆

Demand: The distributors tended to sell high-volume products (such as single-use shampoo sachets, bar soaps, etc.) every week, and in full cases, when customer demand was relatively flat. Selling products to the beauty stores, as they are known in Indonesia, should have involved selling small volumes – ideally a single unit – to stores on a high-­frequency basis.

◆

Value: Small traders, mostly women, operated the beauty stores and ­typically had limited access to cash. They could not afford the full ­portfolio of Unilever products because of the way the distributors sold their products, asking them to stock-up both in time (weekly) and in volume (full case/shrink wrap).

◆

Space: The beauty stores typically operated in small physical spaces, which had limited shelving and storage. This meant the owners had to make a trade-off when they were forced to buy multiples of the same products every week.

Based on the needs of this cosmetics channel and the ‘beauty product’ category, Unilever developed the following solution: ◆

The cosmetics channel customers could order more frequently, ­throughout the week, via the distributor.

◆

The customer could order products per piece, thus moving away from the case/shrink minimum order quantity.

◆

The distributor would pass on each order separately to the Unilever head office.

◆

A new distribution centre was set up (within the larger DC), which allowed for product picking per piece (moving away from case picking).

◆

The orders, which had been picked at distributor-order level, would now be picked at store level for each purchase order.

◆

Picked orders would be dispatched the same day, for next day delivery, using domestic parcel delivery where necessary.

· 298 ·

M09_GATT6818_03_SE_C09.indd 298

2/24/15 3:48 PM

Agile supply chains: demand-side

◆

Shipment would be to the relevant distributor, who now did not need to pick the order again, but simply deliver the parcel to the local store.

◆

The store operator received the product within 24 hours of ordering, and at exactly the volume that was necessary to offer full shelves to her customers.

◆

People #1: Internally Unilever delved into the shopper behaviour of the store customers. The Customer Management Insight team was able to show that there was typically a strong relationship between the store operator and her customers. The operator was considered a ­confidant for providing advice on what products to use for face and hair ­treatments. For this reason, this channel had to have Unilever’s key SKU’s available at all times, to both satisfy the customer and ­protect the customer-owner relationship.

◆

People #2: A second important relationship was between the distributors and the owners. Unilever didn’t want to take business away from the distributors, far from it. It aimed to provide a supply chain that would help the distributors to meet the owners’ needs, without having to make significant investments.

◆

Systems #1: The Unilever IT team had to change the ERP and order management system, to allow for ordering per piece. This meant the ordering and pricing processes allowed the cosmetics stores to order their desired products with the distributor, and likewise the distributor with Unilever.

◆

Organization #1: The Unilever team dealing with the sales, demand planning and delivery to this channel had to be transformed in order to get an agile mind-set. This required change management through different tools and target setting.

Unilever initially piloted this segmented supply chain model with 69 cosmetics stores, which were supplied through six distributors. The results were so good that after a few months this model was implemented across Indonesia. The business case for this model is built on the acceptance that ­Unilever was prepared to put at risk some of its margin, to drive higher penetration and availability into the cosmetic store institutional segment. The higher penetration and availability delivered significant incremental turnover for the relevant beauty products in the cosmetics channel.

▼

Unilever underpinned the solution through important changes at three levels: people, systems and organization.

· 299 ·

M09_GATT6818_03_SE_C09.indd 299

2/24/15 3:48 PM

Dynamic Supply Chains

The transition required cross-functional leadership at Board level with a heavy focus on: ◆

Marketing – to get the portfolio right for this channel.

◆

Finance – to prepare the business case that balanced margin and growth.

◆

Supply chain – to deliver the agility needed to supply demand.

◆

IT – to deliver the infrastructure that made the agile model work in practice.

◆

Human resources – to get the right agile skills at the right place in the organization.

The result of Unilever’s substantial supply chain reconfiguration was a win-win for all concerned. Unilever learnt how to design a particular supply chain for a particular group of customers with demanding needs, and in the process also discovered a formula to guide them through the design of the other parallel supply chain configurations. Unilever is now rolling out this model across its markets around the world; it is a testimony to dynamic alignment in practice.

Shades of things to come Like Unilever, there are quite a few companies around the world doing some remarkable things – it’s easier to recognize them when you know what you’re looking for. Do you find examples of what the future may look like inspiring? I certainly do. Igus, a Cologne-based company, is a hive of constant innovation. It makes 28,000 different industrial products, most of them customized. The plant layout is flexible and can be rapidly changed as demand shifts across the product range. And the workforce has a culture that embraces change, every working day. This is the ultimate agile factory where everything is designed for speed and responsiveness.26 It is being smart and fast in how it delivers to customers. A bit like a Formula One pit stop team, only better! The competitive edge used to be about superior product, now it’s about the quality product together with the capacity to customize and deliver. All we need now is to re-create the same formula in the rest of our supply chains. The other development coming through the pipeline is the phenomenon of rapid manufacturing (RM), which ‘involves the economic manufacture

· 300 ·

M09_GATT6818_03_SE_C09.indd 300

2/24/15 3:48 PM

Agile supply chains: demand-side

of low-volume products on demand at multiple locations near the point of consumption’.27 This agile production strategy enables a truly distributed supply chain, where manufacturing can take place concurrently at multiple locations close to the consumer.28 Leading companies already using RM include Boeing, Airbus, BAE Systems, Renault and Honda. It seems that the best will just get better! 3-D manufacturing is an extreme example of agility, and is emerging fast in various industries; we will look into it in more detail in Chapter 16.

Changing times From inspiration, to the reality of the pressures we face – I want to draw your attention before we head into Chapter 10, to the trap that is very easy to fall into in our ‘new normal’ environment. With the very difficult trading environment of the past seven years, companies are being told to be lean: the mantra is cut costs, at all cost. But therein lies the paradox. We do need leanness in challenging times, but most importantly we need the capacity that can help us navigate through the volatility. We’re running two races: we’re keeping lean – to a degree – but we’re also running the systems and structures that can remain operational during turbulence. Our ‘best of both worlds’ strategy’, as mentioned earlier, is to embed some predictability, but be fast, very fast. This is an important point to remember. You have to resist the pressure to blindly pursue leanness and cost reduction, to the detriment of agility. Maybe you could handle 60 per cent of your market with a lean ­structure, but you would fail to capture the remaining 40 per cent. Marks and ­Spencer provides a leading example of the pitfalls of excessive leanness: it fell from grace in the late 1990s because of its cost-cutting philosophy. McKinsey & Company looked closely at the pros and cons of pursuing leanness, and pointed to two key dangers inherent in the practice: . . . while many companies benefit from sending work to places where labour is cheap, manufacturers [and retailers] often over-rate the value of wage savings and underestimate the inventory, obsolescence, intellectual-property, and currency risks of off-shoring. Some also overlook the benefits of producing goods close to their markets so that customers can get them in days instead of months’s29

· 301 ·

M09_GATT6818_03_SE_C09.indd 301

2/24/15 3:48 PM

Dynamic Supply Chains

The phenomenon is called re-shoring. Both points raised by McKinsey are relevant in today’s turbulent global trading environment. One wonders if Australian apparel supplier Pacific Brands factored in any of this thinking when CEO Sue Morphet decided in 2009 to move manufacturing operations offshore.30 Sales and profits continued to fall significantly for the next three years. Ms Morphet has since been replaced and the company finally returned to profit in 2013. The question of where it makes its products is being reviewed. McKinsey found that Californian manufacturers that had adopted lean practices would only realize marginal savings if they moved to Asia: 13 per cent for apparel, 6 per cent for plastics, and less than 1 per cent for high technology products.31 Given the declining importance of direct labour, which according to McKinsey may now only represent 7 to 15 per cent of cost of goods sold,32 some manufacturers are questioning the logic of going offshore. Consider the case of a US fashion apparel company. Based in Los ­Angeles, the manufacturer had 1,500 workers making casual wear in a dilapidated multi-storey building in Los Angeles. The workers were paid above-award labour rates. However, labour costs only represented 3 per cent of retail price, and were on the decline. If production was moved offshore, the additional logistics costs would certainly overshadow any savings in labour. But just as importantly, responsiveness, and therefore sales, would suffer as the lead-time blew out from days to weeks because of the greater distance from consumer markets.33 This is exactly why appliance and electronics manufacturer Haier is expanding its manufacturing base to the United States and elsewhere, and forsaking the lower production costs in China. In the words of CEO Zhang Ruimin, ‘our strategy is to satisfy consumers as quickly as possible’.34 The world is full of contradictions. While many manufacturers are racing to source their manufactured goods in China, a Chinese company is going in the opposite direction! At least it is doing so for part of its production. Those companies moving their production to China are also changing the nature of their business at the same time. Consider the case of Redan, a ­Polish textiles and apparel company.35 It has moved from producing and selling its own goods, to creating its own brands at the retail level and ­leaving the sewing to others. This is the early phase of Redan’s defence against Chinese manufacturers flooding its home markets in Poland with low-priced apparel. These companies – the Haiers, the Igus’s and those

· 302 ·

M09_GATT6818_03_SE_C09.indd 302

2/24/15 3:48 PM

Agile supply chains: demand-side

using rapid manufacturing and 3-D manufacturing – they’re lean, but they’re also agile, shifting their strategy and getting closer to their markets. It’s the best place you want to be!

The epitome of agility and speed Perhaps the image that I can leave you with that best epitomizes agility and speed is that provided by the Italian mountain climber, Reinhold ­Messner.36 He climbed all 14 of the world’s highest peaks using a radically new ­climbing technique – the ‘direct alpine’ approach, which uses minimum equipment and no oxygen support to reach the top. Conventional mountaineering practice is based on massive amounts of support, including the extra oxygen thought essential when climbing higher than 25,000 feet. Men like Sir Edmund Hillary and Sir C ­ hristopher ­Bonington relied on hundreds of helpers to carry food, oxygen and other supplies. Messner, however, believed this approach simply added massive ­complexity to an already difficult task. Consider the time ­management, ­supplies, and logistics involved in 900 porters carrying 300 tons of e­ quipment to assist Hillary and Bonington’s ascent. The result of this approach, M ­ essner argued, was ‘the slowest man sets the pace’. Messner’s goal was speed of execution – using less complexity, not more. Sound familiar? Although assisted by guides up to base camp, Messner’s typical strategy was to make the final assault by himself, or with one other person, in a single day. In 1978, he scaled the north face of Mt. Everest solo, without oxygen, the first person to do so. That’s speed and a­ gility ­personified. Let’s hope many of today’s businesses find their own agile ­formula; there are a lot of Everests out there!

Key ideas 1 Forget about forecasting at the product/SKU level – just forecast the capacity you require at different points along your supply chain network, and lock it in with your key suppliers/3PLs. 2 Accept that you will almost always need to add ‘redundant capacity’ in the form of inventory/labour/factory capacity/DC capacity/transport capacity when operating in a volatile environment.

· 303 ·

M09_GATT6818_03_SE_C09.indd 303

2/24/15 3:48 PM

Dynamic Supply Chains

3 You can only participate successfully in a fast unpredictable market if you have developed a rational subculture in your business. If this is not possible, forget it – you won’t succeed. 4 It is essential to understand and apply OODA loop principles in order to get inside your competitors’ decision cycle-times, just as Zara continues to do so successfully.

Your challenge Do you have the capacity to be ‘agile’ at the times you need it most?

· 304 ·

M09_GATT6818_03_SE_C09.indd 304

2/24/15 3:48 PM

Chapter 10

Campaign supply chains: demand-side How to deliver-in-full-on-time, every time, to project sites

O

ne type of supply chain that has so far escaped formal attention is that which services the construction of major capital projects. I’ve called it campaign because we’re talking big: big in scale, big in complexity, big in dollars. And long in timeframe. To top it off, each one is unique. Capital projects can be Greenfield industrial sites or Brownfield projects, involving major overhauls of existing industrial facilities. It’s surprising that for such a rich industry – where an estimated $1 trillion is spent in any one year – the construction industry has been relatively stagnant in its innovation compared with the strides made by other industries. To be brutal, ‘construction has historically been a slow, no-learning industry’.1 Why this is so, and most importantly, what we can do about it, is what we’re investigating in this chapter. We’ll be explaining how to design a campaign supply chain to meet the specific requirements of these large-scale and unique projects. Typically capital projects differ from other supply chains because they have long timeframes, different supply chain demands at each stage of the project life cycle, and involve both onsite and off-site construction, with different sets of suppliers, customers and, sometimes, owners. The challenge for capital construction is how to accumulate products and materials, as they’re needed at each stage of the project, and do so with complete accuracy so that tight schedules and budgets are met.

· 305 ·

M10_GATT6818_03_SE_C10.indd 305

2/24/15 3:49 PM

Dynamic Supply Chains

Why oh why The campaign supply chain is where the foolhardy should not dare to tread. Imagine for a moment the scale of the buy and supply when we’re talking about oil and gas platforms, nuclear power stations, power generators and airports. It can make your head hurt! But servicing these projects we do. The relatively slow rate of innovation in this area and the poor learning is the result of several factors. On the buy-side of construction, we have procurement professionals that vary widely in their practices, ranging from ad hoc purchasing and supply in the building and construction industry, to finely tuned engineering procurement on large-scale capital projects. One reason for this is that the ‘sourcing process for most construction firms is fragmented and not well documented’.2 ‘Most firms just emphasize minimizing the cost of labour. The focus on labour was logical because, by definition, the construction process is labour intensive’.3 Another reason is that major projects in particular are usually spread over a long time period, often measured in years. This usually starts with the front-end engineering design (FEED) planning phases, which then leads into the engineering, procurement and construction (EPC) works. Products and engineered-to-order (ETO) equipment can have a correspondingly long planning horizon, but the difficulty lies in how to marshal the complete kit in one place, ready for single or staged delivery to the project site according to the project schedule. In some cases construction is ‘stick-built’, where the majority of materials are moved to the final site and built piece-by-piece on-site; in others, construction occurs remotely through modularization, where components are built off-site to reduce construction time in what are often remote areas. Overall, modularization helps minimize the risk of increased project cost due to volatility in labour resources, weather, rates and productivity. This means that costs and scheduling risks are assessed less regularly for modular builds than for stick-built projects.4 An added complication is that supplier ERP systems such as SAP have difficulty in handling this atypical sequence of accumulation, staging and delivery, which in turn leads to unwanted side-effects. Personnel are often forced into finding a temporary work-around solution to bypass existing system limitations, and in the process they lose the visibility of products and equipment. Occasionally, site personnel feel the need to ‘borrow’ materials, and hoard them for future use, which makes inventory management

· 306 ·

M10_GATT6818_03_SE_C10.indd 306

2/24/15 3:49 PM

Campaign supply chains: demand-side

extremely difficult. It seems ‘squirrel stores’ are not only found in the animal world! More complications arise the further you proceed in the construction. When engineered equipment and products are actually required in a particular timeslot on a particular date, and some items are found to be missing at the last minute, the site project management team immediately goes into expedite mode as replacements are ordered. The agile or fully flexible supply chains have to get into full swing. Despite the quick-response activity, delays to the project will inevitably occur. It was once common for project construction teams to try and solve these problems by throwing money at them. Sometimes this would work; however, regardless, today’s ever-increasing vigilance around costs means this can no longer be the default approach. With all these challenges squeezed into one project, I decided to name the supply chains for capital construction campaign.5 Essentially, the physical logistics of the materials, products, components and engineered-to-order assemblies being moved is different for every individual project, which is unlike the typical logistics of products being moved through standard channels. It is large-scale and has a long timeframe. It really is like one big campaign. Of course capital construction projects have been with us for some time, but their supply chains have not been previously identified in supply chain research and practice. Learning more about the characteristics of the campaign supply chain will assist us to drive the change this industry so dearly needs.

Starting behind the eight ball Stephen Robbins and Andrew Thomas sum it up when it comes to poor innovation in construction supply chains: ‘Bizarrely, logistics skills in construction have not been developed sufficiently or utilized as they have in other industries.’6 This may be because projects have a finite life, and once completed the particular construction team is disbanded and reconstituted elsewhere, probably involving different people. Under such disjointed conditions, any lessons learned are difficult to transfer, and any relationships with the supply base difficult to retain. Also, many of the people working in the EPC companies are really in procurement, and see the world through

· 307 ·

M10_GATT6818_03_SE_C10.indd 307

2/24/15 3:49 PM

Dynamic Supply Chains

that narrow lens. The Logistics Group for Britain’s Strategic Forum for Construction7 believes that, other industry sectors, especially manufacturing and retail, have made huge advances in improving logistics, whereas the construction industry does not seem to be taking advantage of these opportunities. Furthermore, ‘each [construction] site is unique, e.g., the size of the project, the type of building, the construction methodology, the project team, the amount of available storage space and the road network leading to the site differ considerably between projects’.8 A construction site also places different demands on the logistics function at different times in the project life cycle. Mossman asserts that, in the case of ground works and civil engineering phases which are predominantly located at the start of the project, materials tend to be in high volumes and low variety, such as demolition/excavated material, steel reinforcement and ready-mix concrete. This means that more storage space needs to be found on-site than at other times. At the fit-out stage, however, which typically starts approximately a third of the way into the project, material stocks tend to revert to high variety and low volume, which needs sensitive handling and protection of the stock and often necessitates a different storage and retrieval system to be employed.9 But in-bound logistics of equipment does not always recognize these changed conditions.

Focus on serving construction projects Hyounseung Jang10 and his colleagues make the distinction between the logistics functions involved in supplying a construction site, and the actual logistics that takes place within the site itself. They describe supply logistics as including ‘specification of supply resources (materials, equipment, and person-power) supply planning, acquisition of resources, transport to site and delivery, and storage control’.11 On the other hand, ‘site logistics is related to planning, organizing, directing and controlling on-site processes,’12 as well as a host of other activities such as materials handling, safety and site layout. We will leave the actual on-site logistics to the construction engineers, and instead focus our attention in this chapter to

· 308 ·

M10_GATT6818_03_SE_C10.indd 308

2/24/15 3:49 PM

Campaign supply chains: demand-side

everything that is involved in getting materials to the site in the first place, and the a­ ssociated m ­ anagement controls required along the way. This is the ­perspective as seen from an industrial enterprise such as S ­ chneider Electric, which s­ upplies p ­ roducts, sub-assemblies and engineered-to-order e­ quipment to major ­projects around the world. It is working to ­professionalize this part of the supply chain and satisfy construction customers at reduced risk to both sides. Before we get too far into the operational aspects, however, we must first try to understand the mind-set and expectations of the engineersin-charge of major (and minor) projects as they look back upstream towards their materials suppliers, which are the very life-blood of any successful construction project.

Let’s meet the project accumulation customers The unique nature of large-scale industrial projects might lead us to expect that the customers are all as different as their projects. Far from it. Our behavioural segmentation regime, introduced in Chapter 2, shows just what type of behaviours we can expect from our customers in these construction sites. Let’s consider who the buyer on this demand-side of the campaign supply chain actually is. The customer could be the main contractors on site, who are responsible for the build actually happening. They want to get it done, on time, and as specified. Or the customer could be regarded as the owner of the development. Then again, the customer could be the parties who will be the ultimate users or customers of the facility itself. Costs can grow astronomically and the consequences can be of a similar scale if any mistakes are made. Typically, the customers are longerterm in their thinking. You can’t just say, let’s change that, we’ll do it different now. Too late! We want costs and scheduling to be of the precision of a space flight. So the customers in the campaign configuration demand the opposite of unpredictability. We need precision in the staged delivery over time of our products; essentially, its tight accumulation rather than rapid response. Hence, I’ve called the dominant buying behaviour for this supply chain project accumulation. Meeting the demands of this segment is critical to the campaign supply chain’s configuration.

· 309 ·

M10_GATT6818_03_SE_C10.indd 309

2/24/15 3:49 PM

Dynamic Supply Chains

Fortunately experience can help here: key demand-side characteristics have been identified on several industrial sites, and these are listed below. Products, components, sub-assemblies, and engineered-to-order capital equipment designed for a specific project have to be gradually accumulated over time, in a specified location. This complete package of equipment must be fully visible to individual suppliers involved in the project, and the project manager in charge of the project itself, and controlled along the supply chain with all the usual disciplines inherent in good inventory management. It may be necessary to phase the delivery of the equipment according to a predetermined schedule, in which case accuracy in inventory management on the supply-side becomes even more paramount. Typically, apart from clever support systems, this type of supply chain requires a ‘hands-on’ management style along the full length of the chain. In logic terms, we would code this segment (and corresponding supply chain), as ‘AP’ using our P-A-D-I coding regime. There may also be a secondary behaviour associated with the campaign supply chain, and that is ‘Ia’, which implies a certain degree of collaboration between buyer and supplier during the project. If this does not exist, then completion of the project on time and on budget becomes even more difficult, if not impossible. If collaboration does exist there is a good chance that VMI practices will work as well, with suppliers proactively delivering goods to site as needed, but this could also lead to confusion. In the case of many projects where designs are changed during construction, no matter how good the front-end engineering design, equipment often needs to be redesigned. This involves a ‘reverse loop’ of information to help re-assess the corresponding logistics needs to move re-designed equipment, units, or modules. The two possible buying behaviour logic variants are depicted in Figure 10.1. We are focusing mainly on the inbound or buy-side as seen from the customers’ perspective (or demand-side seen from the suppliers’ perspective), because that is the critical one for successful on-time delivery of projects. Accurate lead-times are essential, and hitting project-specific schedules on time with the required materials is mandatory. If not, the customer’s production post-project on the demand-side can be negatively impacted, with serious financial repercussions. Due to this, suppliers often have to sign

· 310 ·

M10_GATT6818_03_SE_C10.indd 310

2/24/15 3:49 PM

CAMPAIGN SuppLY ChaiNS: DeMaND-SiDe

Figure 10.1 ◆

the two possible project accumulation customer segments

Source: Gattorna Alignment research

up to liquidated damages clauses to win contracts and take on some of the risk. For example, Bechtel was hit with a $27 million liquidated damages bill when it ran eight months over on the construction of a power station for the Athens Generating Company in 2004.13 It can even happen to the best construction contractors. At this point, it is worthwhile making what is perhaps a fine distinction between the logistics serving new construction such as large Greenfield capital projects, and that serving overhaul or maintenance of an existing Brownfield installation. Very often, big plants undergo annual ‘turnaround’ projects, shutting down part of a plant to upgrade or re-engineer a re-build, and then turned back on. An example of the former is the way Toshiba Logistics works with Toshiba Corporation and Westinghouse Electric Company when constructing new nuclear power stations. Four such facilities are currently under construction in the USA. Ray Ledford of Toshiba Logistics says that as a logistics service provider of the engineer-procure-construct contractor, Toshiba Logistics likes to reach back upstream to the various suppliers and sub-suppliers and take over the logistics responsibility at the earliest possible opportunity. It does this by requesting materials are ordered ex-works in the case of domestic suppliers. While in the case of global suppliers, components, materials and assemblies are delivered to the nearest port of export on a free on board (FOB) or free alongside ship (FAS) basis at which point responsibility is transferred to them. This is a case of the ‘owner’, Toshiba, taking over part of the inbound process on behalf of the contractor.

· 311 ·

M10_GATT6818_03_SE_C10.indd 311

2/24/15 3:49 PM

Dynamic Supply Chains

An example of the latter situation is provided by Woodside Petroleum, an Australian-based oil and gas producer that operates Australia’s North-West Shelf project. When it undertakes maintenance of one of its liquefied natural gas (LNG) trains, Woodside does not want to see materials delivered to site early, as this leads to poor cash management, and unnecessary storage and handling risks. On the other hand, if materials are delivered late and the train comes back on stream late due to delayed delivery of maintenance materials, production is lost, the value of which far outweighs the actual cost of the materials involved. For example, a two-day delay in a 40-day shutdown programme adds up to a 5 per cent cost overrun (and corresponding revenue losses) – enough to throw the whole programme into negative cash flow. There are some very good examples of project delays due to scheduling problems in the Gorgon Project, one of the world’s largest natural gas developments, which is currently being constructed within the same region off the coast of Western Australia, in the North-West Shelf. Costs have blown out by more than 50 per cent to $70 billion, and poor planning, including logistics, are partially to blame. According to Peter Williams, of The West Australian newspaper, ‘Gorgon has suffered from cost overruns and delays as contractors struggle to move materials and equipment from the Australian Marine Complex in Henderson to Barrow Island in the Pilbara, in a timely manner.’14 Industrial companies such as Schneider Electric find themselves caught between two worlds, i.e., between the supply of products and components for day-to-day sales and usage via distributors and end-users, and engineered-to-order equipment for capital projects. Consequently, they have not honed their project skills to the degree necessary to supply the major capital project market. This is now changing as the project accumulation ­customer segment grows faster than the conventional product business, and consequently more focus is being placed on handling this type of business. Indeed Schneider Electric in Australia is in the process of designing and building a distribution centre that is dedicated solely to servicing its project customers. It has started mapping, for the first time, the end-to-end processes involved in projects, and identified the issues that must be addressed to execute the new projects facility; this will become the centrepiece of their campaign supply chain. It is likely Schneider Electric will follow a similar path for their business in China and elsewhere in the world where it services project customers.

· 312 ·

M10_GATT6818_03_SE_C10.indd 312

2/24/15 3:49 PM

Campaign supply chains: demand-side

In the process Schneider is developing completely new customer logistics offerings, because none previously existed for this type of business. In addition, it is cleaning up the internal procurement of products from business units across their entire business, because until now this has posed many problems. It is also introducing new forecasting processes that will ensure material is ordered from internal and external sources well ahead of potential usage. A priority for the IT systems currently being installed is that they have high visibility of project components at all times. The proposed new projects distribution centre will have cross-dock and merge-in-transit capabilities to ensure deliveries are consolidated for delivery according to a previously agreed schedule.

The engineered-to-order (ETO) environment Before we talk more about Distribution Centres, we need to look at the types of products that are being sourced through these centres, and hence the challenges that are involved in supplying the capital projects. Guang and Thomson15 draw attention to the fact that the manufacture of standard products and ETO products is very different, specifically, they highlight ‘the need for engineering functions to determine system configurations, to produce original designs, and to plan production processes on an order by order basis’.16 In addition to design considerations, parts and components with long lead-times must be ordered virtually as soon as a contract is won, sometimes even before, in anticipation. Rough-cut capacity planning should be undertaken during the bid stage to verify that sufficient production capacity is available, either in-house or outsourced, should the bid be successful. This can be followed up later with a more precise finite capacity plan. Overall, a great deal of flexibility is required in production to meet ever changing schedules imposed by customer projects. This is all before the products and equipment emerge from the end of the line and enter the out-bound logistics system. Clearly, production and logistics have to be very closely coordinated, and the best way to do this is with dedicated project teams. As indicated earlier, there is often re-design work as-you-go on projects so there is a constant need to review logistics requirements to move designchanged materials. Essentially, the conflict of interest in many projects is between the engineers, who love to design big and difficult-to-move equipment.

· 313 ·

M10_GATT6818_03_SE_C10.indd 313

2/24/15 3:49 PM

Dynamic Supply Chains

But ‘big’ can often mean expensive in terms of complex logistics, and the associated handling equipment. This can possibly be offset by stick-built structures on site, so superior planning is the key to getting the right mix.

From distribution centres to logistics centres Superior, however, is not what we’ve seen in the supply of products and materials in the mining, utilities, and oil and gas sectors. Often the suppliers will simply try to fit the project element of their business into the normal run of day-to-day supply of standard products. We know from experience that this approach simply does not work. What is sorely needed is a dedicated distribution centre with specific capabilities for a particular construction project. Generally, the volume of business for a dedicated distribution centre must be sufficient to sustain a sole-use facility; if the project business is relatively small, the centre instead could be a dedicated zone inside another distribution centre, but clearly the former is preferred. Distribution centres are set up as all-purpose facilities for the short-term storage of products, and they’re most commonly seen in the manufacturing and retail sectors. They’re something of a launching pad for final distribution of stock to customers, or distribution via an inter-facility transfer to move stock to where it is needed most. For the purposes of distinction from common distribution centres, we will call our preferred specialist and dedicated facility for construction projects a ‘logistics centre’, a term borrowed from Hamzeh et al.17 Logistics centres can be configured in various ways depending on the usual scope of supply contracts that have been entered into. Hamzeh and his colleagues have comprehensively detailed the specific capabilities commonly found in this type of facility servicing the construction industry.18 These are summarized below. ◆

Storage: The storage of stock can be aggregated to achieve overall reduction in stock levels, and can produce corresponding economies-of-scale. Variations in demand can also be better managed through this type of aggregation.

◆

Transport: Depending on the location, in-bound and out-bound transportation can be reduced or increased. The aim is to shorten lead-times to the customer’s site and/or to facilitate customer pick-ups from the facility.

· 314 ·

M10_GATT6818_03_SE_C10.indd 314

2/24/15 3:49 PM

Campaign supply chains: demand-side

◆

Distribution: The method of distribution or shipment that is selected depends on the location vis-à-vis the project site. It can be a combination of direct shipment (all modes) and/or ‘milk runs’ if the material is delivered to a phased timetable. Materials can be assigned to particular vehicles and routes for subsequent delivery.

◆

Assembly and kitting: Often it is very cost-effective to combine madeto-stock products with engineered-to-order products into a package prior to shipment.

◆

Consolidation, sorting, and breaking bulk: Materials gathered from multiple sources of supply can be sorted, and re-consolidated for ­shipment to particular sites.

◆

Delivery and package tracking: Using techniques such as RFID, ­material deliveries can be tracked and customers kept informed.

◆

Stock management: Physical paper handling is replaced by electronic processing wherever possible, particularly during in-bound purchasing and use of vendor-managed inventory.

The two important properties of any temporary storage facilities built o ­ n-site are: ◆

identification: the ability to quickly identify critical vs. non-critical ­components; and

◆

preservation: the storage of equipment and components in suitable ­environments to protect against degradation.

Some contractors are overcoming this problem by building more ­permanent, higher-grade storage facilities in the area. These then serve as a dispersal point for several projects within say a 100 kilometre range of the facility, and have a longer useful life because of the time-span of the projects being served. It is also important to understand the impact of customs, compliance, and quarantine requirements, which is especially relevant to ­Australian ­projects. Equipment and components that are imported from Asian ­countries are subjected to the most rigid inspection, which can cause delays if not planned properly. Companies such as Clough, the Perth-based ­engineering and ­projects contractor, send their own quarantine specialists to overseas supply points and do much of the inspection work to achieve compliance, before the materials are even loaded at the port of origin. This

· 315 ·

M10_GATT6818_03_SE_C10.indd 315

2/24/15 3:49 PM

Dynamic Supply Chains

is especially important when the destination projects are in environmentally sensitive areas. Import procedures, including clearance by customs agencies, ­production sharing agreements (PSAs)19 and duty exemptions, potentially can cause ­high-profile choke points in many inbound supply chains.

. . . and to consolidation centres Another distribution facility that is emerging to serve the construction customer is the construction logistics consolidation centre (CLCC). The centre is similar in principle to a traditional distribution centre, but as its name suggests, its focus is on meeting the unique consolidation, or accumulation, needs of a major construction site. It is normally located remotely from the construction site, and acts as a buffer between materials suppliers and the construction site itself. As a specialist facility, it has many advantages. The level of congestion on-site is reduced, security is increased, and it is easier to establish and maintain health, safety and environmental standards. The CLCC also gives the ability to respond rapidly to changes in the construction programme, as well as provide the reverse logistics to dispose of obsolete or waste materials. The Department for Business, Innovation and Skills in the United Kingdom provides a useful summary of a CLCC, which is outlined below.20

How a CLCC works A CLCC is like a retail regional distribution centre and is so named because it ‘consolidates’ many different loads on to one site-delivery vehicle. With the exception of some equipment and materials that are more conveniently delivered direct to sites, it is the one-stop point of delivery for virtually all supplies. It does not hold stock for any appreciable length of time but it is a useful distribution buffer. It is responsible for all items in its care. There are six steps in dealing with materials (see Figure 10.2): 1 The trade contractor places orders for supplies, specifying delivery to the CLCC. 2 The consolidation centre agrees an inward delivery time and takes delivery. Everything is checked and labelled to simplify distribution.

· 316 ·

M10_GATT6818_03_SE_C10.indd 316

2/24/15 3:49 PM

Campaign supply chains: demand-side

3 About 24 hours before supplies are needed, the trade contractor requests delivery, stating exactly what, where and when. 4 The centre makes up ‘day packs’ for each task. 5 The centre delivers the day packs just in time for each gang to undertake that day’s tasks. 6 The centre removes excess materials from the site every day.

Component and sub-assembly suppliers

Orders

JIT Manufacturers Specialist subcontractors Wholesalers and agents JIT Consolidation centre

Orders Call delivery

JIT Trade contractors

Orders and deliveries via a construction logistics ­consolidation centre (CLCC) F i g u r e 1 0 .2 ◆

Source: UK Department of Trade and Industry (2004), p. 8

This simple process alone has five immediate benefits: 1 Proper management of distribution reduces the number of vehicles and consequent congestion and pollution.

· 317 ·

M10_GATT6818_03_SE_C10.indd 317

2/24/15 3:49 PM

Dynamic Supply Chains

2 Skilled operatives can get on with what they are being paid to do without the disruption of unloading supplies. 3 Over-ordering is reduced because the system enforces planning. 4 Trained personnel (using appropriate equipment) place materials where they are needed, thus reducing manual handling risks and damage to material. 5 The site is tidier, leading to better productivity and fewer accidents. Once established, this process opens up many possibilities. Using the CLCC makes the whole distribution process simpler and more transparent. ­Logistics specialists at the centre can work with trade contractors to help them understand and improve their distribution. The centre can also help trade contractors to collaborate in purchasing. If dedicated to one project a consolidation centre is likely to be at or near the site. But it can work equally well some distance from the site. One centre can also serve many sites. The benefits of using CLCCs, including how they address the eight principles of logistics, are summarized in Figure 10.3. A CLCC similar to that described was used in the construction of Terminal 5 at Heathrow Airport in the UK, which served some 40 projects in three years, and won the Sustainability Award in the UK’s Business Achievement Awards for 2001. One other factor that needs to be mentioned, as it affects the operation of the CLCC, is the level of regulatory controls that governments can impose on sensitive projects. Airport terminals of the scale of Heathrow can raise community concerns from the day of announcement through the entire life cycle of the project’s construction, and on to its eventual operation. Issues are many and for project construction can range from land use impacts, air pollution, congestion and planning to containing aircraft noise. Governments respond accordingly to such issues through checks, oversights and interactions with suppliers and owners. Energy generation projects too – and think particularly of a nuclear power station – are of extreme sensitivity and attract strict government controls. According to Ray Ledford of Toshiba Logistics, ‘this type of interaction is difficult to measure, comprehend, and plan for. It does not easily allow for forecasting in advance.’21

· 318 ·

M10_GATT6818_03_SE_C10.indd 318

2/24/15 3:49 PM

M10_GATT6818_03_SE_C10.indd 319

Investment can now be justified The Consolidation Centre arranges this Logistics IT systems are the tools for trade contractors to use

Information technology

Data management

Control material and information

Source: UK Department of Trade and Industry (2004), p. 9

The benefits of using CLCCs

The Consolidation Centre is a JIT concept – geared to quick response

Reducing lead times – agility

F igu re 10. 3 ◆

Less material is consumed Productivity rises

Eliminating waste – getting lean

There are only two channels to the point of use, instead of four

Collaboration is essential

Supplier partnerships

Supply and delivery channels

Contractors learn to understand their own needs in logistical teams

Understanding customers’ needs

Consolidation Centre Point of use

Subcontractor

Wholesaler/Agent

Manufacturer

Delivery channels simplified via a Consolidation Centre Campaign supply chains: demand-side

· 319 ·

2/24/15 3:49 PM

Dynamic Supply Chains

The importance of WMS systems When it comes to serving the construction customer, the varying types of dedicated distribution centres are just one part of the equation. The IT systems are the other. They’re a similarly complex game. The dedicated nature of the distribution centres must be matched by the appropriate inventory and tracking systems, because even with project-specific facilities, keeping track of where products and equipment are stored can become murky. This is because in-bound elements for a given project can come from several unrelated sources, both inside and outside a company’s own supply systems: ◆

products and components sourced from outside suppliers;

◆

products, components, and engineered assemblies from different ­factories and distribution centres within the company’s global network;

◆

deliveries made directly to the site, often without passing through the network;

◆

other products and equipment merged in-transit by 3PLs en route to the site; or

◆

any combination of the above.

The biggest problem is that products, which are mostly sold to customers from standard stock-lists, can also become part of a larger project, such as by being engineered into a sub-assembly. When this happens, the ‘consumption’ of products becomes ‘invisible’ to the standard in-house sales and stock management systems. This turns into a data nightmare when attempting to build a model of the network, because some of the product flows are invisible as their destination is a project rather than a location or company. Using a combination of GPS, RFID (radio frequency identification) chips and construction materials management systems helps greatly in resolving this problem. For example, when BP Oil used RFID and GPS to move materials from Europe to Korea, it did not lose one item. Quite an achievement!22 However, information technology in the construction industry, unlike oil and gas, is still a mixed bag. Fortunately, Oracle appears to provide a better suite of modules than SAP at this stage. While both companies offer secure Internet-based portals for suppliers to connect to, these are designed primarily for the exchange of information on outstanding

· 320 ·

M10_GATT6818_03_SE_C10.indd 320

2/24/15 3:49 PM

Campaign supply chains: demand-side

orders, and do not necessarily assist in the physical reservation, transfer and staging of materials, from suppliers to project sites. We eagerly await more refinements in this regard. In any event, engineering, procurement and construction (EPC) contractors and EPC management (EPCM) firms that undertake major construction projects generally do not use standard ERP systems similar to those installed in discrete products companies. Instead, they use specialized software, provided by such companies as Intergraph and IFF, to tie their engineering into the supply chain. The software can provide everything from design graphics through to the placement of purchase orders, and track and trace capabilities through to the delivery of materials to the site. Other companies, such as Woodside, have designed in-house maintenance shut-down systems that tie into SAP and add the functionality that is missing from these standard ERP systems.

Outsourcing to specialists Depending on the volume of business that is in your ‘project accumulation’ customer segment, or indeed if it is a strongly growing segment of your business, it might be worthwhile considering using a 3PL that has strengths in aspects of project management work. Several of these companies have a global reach, including Agility, DHL Industrial Projects, Kuehne + Nagel, DB Schenker, and TransGlobal. Specialist companies not only manage the flow of materials to the project, they also offer a wide range of associated services to the project owner, making them an attractive proposition. The services include: ◆

camp establishment and catering services;

◆

procurement and expediting;

◆

co-ordination of in-bound sea, air, and road transport;

◆

customs clearance;

◆

heavy lift of oversized equipment;

◆

country-specific import and export compliance;

◆

distribution centre network, inventory management, and associated ­staging facilities;

· 321 ·

M10_GATT6818_03_SE_C10.indd 321

2/24/15 3:49 PM

Dynamic Supply Chains

◆

advanced sustainability solutions; and

◆

dedicated teams to manage each project; this is important because managing projects requires quite a different subculture to the straight supply of products and components ex factory or ex DC.

Clough4PL Clough, the EPC contractor, is launching a new fourth party logistics (4PL) service to assist its suppliers on Australian resources projects. Clough4PL is using a combination of its own experienced project personnel and a partnership with the Seattle-based Expeditors to provide the necessary ‘track-and-trace’ systems capabilities. In addition, Clough is changing its organization design to establish a core team of logistics specialists who are engaged in every project, rather than the old system where new personnel were employed each time a new contract was won.

Strategy recipe for campaign supply chains As explained earlier, we’re only now recognizing the campaign supply chain and through this chapter I’m placing it within the existing framework of supply chain types. What we need is a new ‘strategy recipe’ for this supply chain, taking the perspective of the industrial equipment supplier trying to find better ways to win and fulfil project contracts. The ideal recipe combines all the essential operational strategies for serving our time-specific, risk-averse customers. It is summarized in Figure 10.4 and the dimensions are explained briefly below. Remember our value proposition in this segment is ‘delivery to project site on time and complete’. 1 Product mix. We must have a strong focus on make-to-order solutions, or be able to combine make-to-stock products in a package to meet requirements. Meeting specifications and quality expectations is more important than the price. The product is usually design-intensive and complex. Choice is not a requirement – the priority is to get the right product to meet specifications. The materials and equipment could be so specific that there are no or only few alternatives. 2 Innovation emphasis. Innovation also must have a customer specific focus. Extensive R&D may be needed to meet customization requirements. Continuous improvement is essential. The customer is often

· 322 ·

M10_GATT6818_03_SE_C10.indd 322

2/24/15 3:49 PM

CAMPAIGN SuppLY ChaiNS: DeMaND-SiDe

Strategic dimension

Ideal strategy

1

Product mix

Combination of standard products and ETO

2

Innovation emphasis

Embedded in project design

3

Marketing emphasis

On-time and on-budget performance

4 5

Channels of distribution Direct to project constructors or via distributors Pricing regime Project costing

6

Promotional activity

7

Service emphasis/theme Service parts back-up

8

Procurement/sourcing

Source and assemble at Logistics Centre

9

Production/ manufacturing

MTO/ETO capabilities

10

Capacity considerations Can flex capacity as project demands vary

11

Fulfilment

Consistently delivered on-time and in-full

12

Relationship intensity

Performance is tops; relationship secondary

13

Systems/IT support

Ability to accumulate/manage/ deliver

14

Resource allocation priority

Major construction customers get priority

15

Strategic risk profile

Medium-high risk of liquidated damages

16

Financial considerations Tight project cost monitoring. Review cash management, foreign exchange, and tax

Figure 10.4 ◆

Project capability

Campaign supply chain strategy – projects

willing to pay a premium for a specific solution to meet its needs. Innovation is also necessary early in the project life cycle, and after that reliability becomes more important. 3 Marketing emphasis. You must sell the idea that the company is able to produce what the customer requires, to specification. Product, production

· 323 ·

M10_GATT6818_03_SE_C10.indd 323

2/24/15 3:49 PM

Dynamic Supply Chains

and marketing are secondary. Sell the message of reliability, timeliness, within budget and reduced risk. 4 Channels of distribution. There should be a broad choice of ­distribution channels to serve customers’ needs, but it is most likely that direct-tocustomer will be preferred. Time and product availability is a ­decisive factor for the customer, and the ability to hit very specific delivery windows. 5 Pricing regime. Stay within the agreed project cost. Expect budget ­restrictions and limited influence to change these due to interrelated ­project functions/areas. The purchaser might not be the decision-maker on the budget. The more specified the product solution, the more ­flexibility in price due to restricted alternatives. Pricing does not have to be the ­lowest, just competitive with other equivalent products and services. 6 Promotional activity. You are selling to a generally conservative ­clientele, so extensive promotions are not required. At best, use ­targeted promotional activities, directed at corporate clients, not a consumer ­segment. Customers know well what they need. ‘Promotion’ is more about ‘information’ and sending customers updates on project developments and latest trends. The goal is achieving trusted partner status, and avoiding the ‘commodity’ space. 7 Service emphasis/theme. Immediate attention must be given to extreme problems. The reliability of the supplier counts; service must be timely and high quality. Maintain close contact with these customers to build trust and coordinate scheduling. Consider using ‘implants’ on site if this is appropriate. 8 Procurement/sourcing. This is the central aspect of the customer relationship. Timing is pivotal for the customer, so much so that additional costs will be accepted to ensure flexibility and reliability. The priority is reliability and consistency in procurement throughout the entire project. This requires suppliers to be adaptable to changing customer needs. A high level of coordination and networking are needed to manage storage, transport, and sourcing. Usually demand is forecasted and planned; no major unexpected changes are tolerated. However, due to project interrelations, spontaneous changes can occur to harmonize overall project procurement. Demand levels are very dependent on the project’s phases and their progress, leading to high demand fluctuations and complex sourcing. Usually each project has a product mix of standard and newly

· 324 ·

M10_GATT6818_03_SE_C10.indd 324

2/24/15 3:49 PM

Campaign supply chains: demand-side

designed components that need to be purchased, produced and tracked (in-house and outsourced). Above all, try to get into the customer’s decision loop as early as possible.   9 Production/manufacturing. Your strategy should be a combination of in-house production and outsourcing, the latter to mainly handle demand spikes. Close coordination is required between production and out-bound logistics to the customer to meet the need for timeliness on the project. Spontaneous changes of requirements are possible, however, this leads to uncertainty in production schedules. Different production methods are required to meet the mix of standard and customized components. 10 Capacity considerations. Capacity will fluctuate during different phases of the project, swinging from stable, forecasted and reliable demand to unexpected extreme phases when plans and schedules are not met. Your best strategy is to put buffers in place, in the form of ­additional ­inventories and additional capacity via a reliable transport partner. Close consultation is needed with the customer to update project progress r­egularly. H ­ armonization is needed between regular business and ­campaign business in terms of material planning and ­scheduling. The project team should feed requirements into a general business plan/schedule (BoMs in MRP). 11 Fulfilment. Expect a quick response to orders. Postponement techniques combined with buffers are essential. One aspect is problematic: the customer can cause unexpected delivery problems and ‘surprises’, as well as suppliers. 12 Relationship intensity. A close relationship is required on a ­coordination-level, as project success depends so strongly on supplier and delivery-on-time performance. A close relationship should be both ­parties’ goal, as this is in both their interests, and for their mutual ­business success. 13 Systems/IT support. Particular IT systems are necessary to meet project requirements. Systems must be capable of actively managing the entire business, in terms of sourcing, procurement and production, and provide tracking capability throughout, and visibility to project managers. 14 Resource allocation priority. You should also establish project specific teams on large projects to stay close to their needs. Use customer account profitability techniques to determine priorities in servicing customers.

· 325 ·

M10_GATT6818_03_SE_C10.indd 325

2/24/15 3:49 PM

Dynamic Supply Chains

15 Strategic risk profile. Stable and predictable demand as it is ­forecasted during the entire project. Liquidated damages for delays are a ­possibility, and could be immense. The financial significance of single projects is major. Contingency plans are necessary. Mostly corporate ­customers. Spontaneous request to change production or delivery can cause ­unpredictable, unquantifiable risks. This is potentially the most high risk supply chain type. 16 Financial considerations. Given the size of the financial transactions involved in a construction project, tight cost management is mandatory, as is cash-flow management. If e­ quipment is imported, foreign exchange and excise considerations loom large. Now we must turn to exploring the capabilities that must be in place to ­ ropel the above operational strategies. p

Capabilities These eight key capability areas are necessary to underpin the successful deployment of the campaign supply chain. The full list of areas, together with their corresponding capabilities, are detailed in Figure 10.5.

1. Customer interaction There are two capabilities under this category, and both are common to all types of supply chain configurations, i.e., customer call centres and annual CSI surveys. Many companies are missing out by not making the customer call centre a joint responsibility of sales and supply chain functions, thus significantly improving internal productivity and responsiveness to customer queries. This is especially true of this construction project business. The other capability in this category is the rolling survey of customers, although it is less relevant in the one-off project situation. A by-product of using the CSI methodology is that it can also be used to check on the behavioural segments previously identified in primary market research. Overall, the focus should be on planning for supply chain involvement, right from the earliest design phase.

· 326 ·

M10_GATT6818_03_SE_C10.indd 326

2/24/15 3:49 PM

CAMPAIGN SuppLY ChaiNS: DeMaND-SiDe

Capability

Capability area 1

Customer interaction

• Customer Call Centre (CCC) – joint responsibility* • Rolling annual CSI/NPS surveys*

2

Transformation

• Translate strategy into working models*

3

Organization

• Risk mitigation/contingencies • OD: Multi-disciplinary cluster with PA bias

for delivery of materials to site in full on time

• People selection and positioning ensure bias

towards timing, cost, reliability

• Analytics • Project management/critical path planning

4

Processes (standard)

• Engineered-to-order • Project control tools • Stock reservation system

5

Planning

• S&OP

6

Systems/IT

• • • • •

Inventory visibility Stock security Network optimization modelling Inventory management Track and trace

7

Operations

• • • • • • • • • • • • • •

Absolute reliability/DIFOT On-site storage and security Expedite Make to order at shorter lead times Time-specific delivery Digitization Merge-in-transit Less than truck load (LTL) Accumulation off-site Direct-to-site from factory Staging Special transport Special packaging Pick-up at factory gate

8

Culture

• Individual decision making • Individual KPIs aimed at delivering on time

and to budget/DIFOT

• Incentives: cash and in-kind bonuses • Job design: authority established within

clear guidelines

• Internal communications: formal, regular,

scheduled T&D: teaming; cost/time management Role modelling: combination of ISTJ (A) and ENTJ (P) MBTI profile is ideal Recruitment: detail-conscious and resultsdriven personnel • Leadership style: Project Baron: focuses on meeting delivery schedules; meeting cost budgets; does not accept sloppy practices; manages a tight ship; uses PM tools; analytical, fact-based engineer • • • •

* Common across all supply chain types

Figure 10.5 ◆

internal capabilities required to propel campaign supply chains · 327 ·

M10_GATT6818_03_SE_C10.indd 327

2/24/15 3:49 PM

Dynamic Supply Chains

2. Transformation Once the new network strategy design and corresponding footprint has been completed, the next big task is to translate this into an implementation plan, project by project. Significant analytical skills are required, overlaid by experience, and an understanding of the new behavioural segments. In the case of our work at Schneider Electric, we were able to visualize the need for a dedicated projects distribution centre in the aggregate product flow numbers.

3. Organization We have seen from our previous customer segmentation work that buyers in a project mode wish to be serviced in a very ‘AP’ way, which means delivering product and ETO equipment to site in full and on time, with a high degree of reliability, to specified quality specifications. It is a demanding, relentless buying behaviour, with potentially large liquidated damages payable if the project is delayed through non-performance. For this reason, it is essential to embed inside the business, a campaign subculture that mirrors customers’ buying behaviours, and a big part of this will be the organization design that is deployed. Figure 10.6 below depicts what these dedicated internal groups might look like, and how they might be organized in a ‘cluster’ format, much as we’ve suggested for the other types of supply chains in earlier chapters. Unfortunately, the only work to date on organization structure relating to construction projects has been largely confined to the project site itself, and does not address the logistics of getting materials to the site.23 Ideally, the organization design for the inbound logistics component of the supply chains should be thought through and planned at the front-end engineering design stage. As Figure 10.6 shows, the multi-disciplinary clusters dedicated to driving campaign supply chains should have representatives drawn from procurement, engineering, logistics, manufacturing, and commercial (sales and marketing). In addition to the mix of disciplines, the required bias in this group should be one of cost, consistency, time-specific delivery and risk mitigation, typified by the ESTJ profile in the MBTI, or AP in the P-A-D-I code. Due to the complexity and constraints involved in campaign supply chains, project managers must have direct control over their functional areas in terms of personnel, finances and inventory. To meet changing working

· 328 ·

M10_GATT6818_03_SE_C10.indd 328

2/24/15 3:49 PM

M10_GATT6818_03_SE_C10.indd 329

S/M

L/P

S/M

L/P

S/M

M

M

P

Log./Proc.

‘Project’ clusters

Fi gur e 10.6 ◆

Sales

CEO Marketing

Shared services: HR/IT/F&A

Production

Campaign supply chain organization clusters

Note: PMO = Project Management Office

Project clusters driving Campaign supply chains

PMO

PMO

PMO

L/P

Projects

Proj. Cust. B

Proj. Cust. A

Project accumulation buying behaviour

Proj. Cust. Segment (smaller customers)

PMO CAMPAIGN SuppLY ChaiNS: DeMaND-SiDe

· 329 ·

2/24/15 3:49 PM

Dynamic Supply Chains

conditions caused by different projects in progress, the team structure must be fundamentally flexible and capable of immediately adjusting to the new client’s project situation.

4. Processes The processes in this type of supply chain configuration are a combination of what we see in the lean and agile configurations. In other words, a mix of standard processes to achieve a high DIFOT (delivered in full, on time), combined with an increased emphasis on meeting a time-specific deadline. The ETO process is very important, as is the stock reservation system being used. Project control tools of various types can be used to manage the staging and flow of materials to site as required.

5. Planning Sales and operations planning regimes, suitably modified, can also be applied to campaign supply chains. The S&OP process will be fairly standard, with a lot of focus on reaching internal consensus among the different functions involved, from production through to finished product logistics. Key features of an S&OP plan include: ◆

Being able to show the aggregate campaign demand versus day sales.

◆

Articulating any uncertainty in campaign demand (upside/downside risks for volumes and if applicable aggregate planning materials).

◆

If demand requires stock builds due to capacity constraints, then showing this in the inventory plans and the campaign driving it – similarly for warehousing or freight capacity requirements.

Overall, while S&OP is fairly standard, if the campaign and day sales ­components of the overall plan are not captured, visible and articulated, it is difficult to have a meaningful internal discussion and sign-off.

6. Systems/IT Inventory visibility is essential in serving large projects, so systems that help maintain this visibility at all times, plus ensure stock security at all times, are the main requirement. Reliance on standard ERP transactional systems

· 330 ·

M10_GATT6818_03_SE_C10.indd 330

2/24/15 3:49 PM

Campaign supply chains: demand-side

is not sufficient. To date, suppliers have found the tight accumulation and staging requirement of projects difficult because of the shortcomings of their current ERP systems. These often make it difficult to trace product usage on equipment assemblies that are sold as part of the project. Suppliers that service continuous demand as well as project demand do not have the extra IT application systems necessary to maintain the high levels of inventory visibility and security required. Some major construction companies have developed their own customized software, as mentioned, but most suppliers still lag in this department. Our approach to tailoring the IT systems for the campaign supply chain is illustrated in Figure 10.7. In essence IT systems are needed that provide: ◆

Project specific inventory control and visibility for project teams.

◆

A tracking system on the inbound side, from the time an order is placed on production or externally through global and local transport channels on to staging prior to site delivery.

◆

A system that can track the progress of logistics service providers (and their sub-contractors), and create alerts for contingency plan activation should schedules be in danger of slipping.

◆

Integrated campaign supply chain planning and scheduling with the rest of the business operations, and where stock and facilities are shared.

◆

Integrated project planning horizons with production planning, scheduling, and sourcing activities.

BP Oil is a good example of that precision and visibility that is made possible through IT systems. As mentioned earlier,24 the company was building a $10 billion offshore platform (Clair Ridge) in the North Sea, while the upper part of the new platform was being built in South Korea. BP Oil wanted to ensure that materials from its two consolidation centres in Antwerp and Milan respectively in Europe, were delivered as needed and on time to the contractor in Korea, Hyundai Heavy Industries (HHI). The company ordered parts as needed from vendors worldwide. It then received those components at one of two consolidation centres in Europe, and shipped them to its warehouse near the manufacturing site in South Korea, for staging until each part was required for construction. The components amounted to billions of dollars’ worth of equipment. The solution adopted involved using a Mojix STAR 3000 RFID system to track goods within its two consolidation centres, and CrossTalk GPS

· 331 ·

M10_GATT6818_03_SE_C10.indd 331

2/24/15 3:49 PM

M10_GATT6818_03_SE_C10.indd 332

Different combinations of IT applications sitting on top of ERP*

Fi gur e 10 .7 ◆

Agile supply chain

Demanding/ dynamic

REPORTING DATABASE

PORTFOLIO MGT

GATEWAY

RISK ANALYSIS

CONTRACT MGT

PRIMAVERA P6 EPPM

Campaign supply chain

Project accumulation

ERP transaction system and database (or can be SAP or legacy systems)

Lean supply chain

Transactional

requisite technology for campaign supply chains

* Using Oracle Suite a sample to demonstrate

e.g. Oracle Suite • JD Edwards • PeopleSoft (HR) • E-Business Suite (EBS)

Collaborative supply chain

Collaborative

Customer buyer behaviour segments

Fully flexible supply chain

Innovative solutions

DYNaMiC SuppLY ChaiNS

· 332 ·

2/24/15 3:49 PM

Campaign supply chains: demand-side

software to track every component shipped from Europe to South Korea. This is how it works: when the company orders new equipment and parts from suppliers, it sends RFID tags to the vendor, for attachment to both large items and equipment loaded in crates. The crates are received at one of their two consolidation centres, and the tags are again interrogated while being prepared for dispatch via containers to South Korea. The CrossTalk software platform reads data collected from both the RFID tags and the GPS units. The containers are then shipped to South Korea. At BP Oil’s warehouse in South Korea, the location of items is tracked to within onemetre accuracy. Allocation data is forwarded to the CrossTalk software, where BP Oil can view where everything is located via colour-coded icons on a map of the world. The results have been outstanding. At the half-way point of construction, HHI had not lost any parts or equipment.

7. Operations The key feature of this supply chain type is absolute reliability or DIFOT. Members of the campaign cluster must have in place the following operational procedures: ◆

ensure secure on-site storage;

◆

expedite materials as required;

◆

ensure ever-shorter MTO lead-times;

◆

accumulate materials off-site, if necessary;

◆

move equipment directly from factory to site, where appropriate;

◆

organize special transport as required; and

◆

organize special packing as required.

The specialized transportation mentioned is worth exploring further: and the construction of the Canary Wharf Crossrail Station in London Docklands is a good example.25  The project started in May 2009, and rather than use road transport to shift excavated materials the project managers opted to use river barges instead. This saved 20,000 lorry trips from travelling through what is already a heavily congested part of London. One project headache avoided!

· 333 ·

M10_GATT6818_03_SE_C10.indd 333

2/24/15 3:49 PM

Dynamic Supply Chains

8. Culture The internal culture of the business needs to be shaped and reshaped to power the campaign supply chain, just as it needs to do so for our other four supply chain configurations. Construction projects, however, offer a particular challenge because of the fact that people finish one project then quickly move to another; they do not stay together as they do in other supply chains. As a supplier to this market it’s critical then that the teams of people in the multi-disciplinary clusters driving our supply chain are comfortable with continuous disruption. Individuals will come and go, and they will need to regularly engage with new counterpart customer teams, and adapt to ­changing expectations and relationships. Key Performance Indicators: People who take ownership and make decisions are essential to drive the dedicated campaign supply chain. Indeed, there is really only one KPI for the project team, and that is getting as close as possible to a 100 per cent DIFOT to the agreed project schedule. All team members should be focused on this result no matter how long their actual lead-times. They also should be using Six Sigma and lean techniques to improve processes over time so the learnings can be applied to future projects. It is not a matter of just throwing money at the problem. One other useful KPI is to require other business functions to cooperate with the campaign team. Now that would be an incentive. Incentives: Here again, the over-riding incentive will be a team reward for achieving the delivery times and project costs that have been agreed with c­ ustomers. Individual team members could also be recognized for ­outstanding efforts in achieving the required delivery objectives. Research confirms that contracts awarded on factors such as time provide an ­incentive for accelerated completion; one such case involved the California D ­ epartment of Transportation for highway projects completed during 2003 to 2008.26 Job design: Each job design will have two components. First, the ­requirement to contribute individually by coordinating with one’s ‘home’ functional area, and second, the ability to work as part of the c­ ross-departmental or functional team to achieve the overall result s­ pecified by the customer. Internal communications: For the team to successfully deliver the desired high DIFOT for projects, they will need to be skilful c­ ommunicators internally, in a way not dissimilar to the collaborative supply chain. But whereas more stable, long-standing processes underpin collaborative, the

· 334 ·

M10_GATT6818_03_SE_C10.indd 334

2/24/15 3:49 PM

Campaign supply chains: demand-side

campaign supply chain usually has teething problems and a higher risk of failure. Training and development: Training for project managers should cover several dimensions. First, each team member should receive training in the particular expertise or functional role he or she is performing. Secondly, each team member should be trained and educated in sophisticated project management techniques such as time and cost management. They can be seen as all-rounders, with a diverse skill set of specific functional ­knowledge, combined with interpersonal competences. In addition, collaboration skills and team skills are essential. DIFOT is king, but if a team member has no inter-personal skills, then the campaign will quickly start to pick up resistance. Recruitment: Experienced project managers who have worked for the customer or similar organizations would be a great asset, as they would know what is required on the customer side, and how customer ­expectations (AP) can be met. For industrial companies, it would also be desirable to have a few engineers sprinkled throughout the project logistics o ­ rganization. ­Campaign team members should generally be detail-conscious due to the high level of interrelations and complex nature of the projects as well as result-driven to meet the customer’s expectations in time and quality. Role model: The perfect role model is a manager with the ESTJ MBTI profile, i.e., AP in our P-A-D-I code. Such managers are able to balance the dual requirements of reliable delivery at a cost, with the need to hit target delivery dates. For this reason, they will generally be strong planners. Leadership style: The type of leadership required is a combination of the traditional risk-averse style, combined with a relentless focus on ­meeting delivery commitments. Leadership should encourage and facilitate open communication within the team, the customer and all other business ­functions that are involved in project execution.

Going green On top of all the issues facing the construction industry, a formidable new challenge is achieving sustainability throughout the project life cycle. The question I often hear is ‘How can I deliver sustainability while also ­maintaining my competitiveness?’ In the campaign supply chain, this issue

· 335 ·

M10_GATT6818_03_SE_C10.indd 335

2/24/15 3:49 PM

Dynamic Supply Chains

can be particularly acute because the projects are so long term. Shifting to new ‘green’ requirements during construction could add substantially to time or costs, which normally for campaign projects means both. Many construction projects already have to meet stringent government regulations due to environmental concerns. Despite cost and regulatory concerns, sustainability must be embraced in the future. The question I’d like to start hearing from companies is ‘How can I use sustainability to give me a competitive edge: to give me new projects and customers?’ One potential area is the proliferation of renewable energy projects across the world, which requires large-scale construction. These vary from solar PV farms to wave-to-energy projects, from offshore wind farms to concentrated solar thermal plants, which include storage facilities. The development of carbon capture and storage plants to lower the emissions of fossil-fuel energy generation will also see ageing power plants and new industrial sites transformed. Most of these projects are in the early stages of development, and require much government support, but all forecasts by world energy agencies show that increasing levels of energy globally will be supplied in this way (not to mention government climate change policies driving this change). These new, low emissions-intensive energy facilities will truly be the green end of our campaign Greenfield projects! To become greener in the supply chains of today’s more common capital projects, smarter companies are already moving on sustainability. The company that stands out is the Swedish giant, Skanska, which aims to be the greenest and most socially responsible contractor in the world. That’s no small goal! It has formulated what it calls its ‘Five Zeros Vision’, i.e., 1. Zero accidents; 2. Zero ethical breaches; 3. Zero defects; 4. Zero loss-making projects; and 5. Zero environmental incidents.27 Some of Skanska’s sustainability practices with logistics implications include producing materials close to the site (especially where over-dimensional loads are involved); only using materials that can be easily recycled; reducing packaging; and using RFID to track all materials. Alternatively, Skanska specifies the delivery of machinery and equipment to site, without packaging, or where feasible, shipping in reusable crates that can be shuttled from supplier to site in order to reduce waste. Sounds like lean practices being invoked here!

· 336 ·

M10_GATT6818_03_SE_C10.indd 336

2/24/15 3:49 PM

Campaign supply chains: demand-side

In order to effectively manage materials across the entire supply chain for JIT delivery, Skanska bought Tekla’s BIM (Building Information Modelling) solution with Vela Systems software and RFID.28 Perhaps this is a sign of things to come. Construction companies taking the lead in sustainable practices and fit-for-purpose IT!

Key ideas 1 We have identified a new supply chain called campaign to explain the way products and equipment are supplied to large capital construction projects. 2 Capital construction requires special consideration because each project is unique. With long timeframes, and specific requirements, you must carefully tailor strategies to each project. 3 Time lost in capital projects can not only cost thousands, perhaps millions of dollars in lost revenue because of delays, but also attract liquidated damages. Getting it right is that important! 4 The key to the campaign is to focus on tight accumulation, staging and delivery practices for every stage of construction. Demand levels for products and ETO equipment will vary, and so must your operational strategies. 5 We’ve called the corresponding customer segment project accumulation, because accumulation is the priority of the site engineers running the construction. They have large – but tight – budgets and hence carefully planned stages of construction. 6 Project customers demand precision. They must have perfect timing and reliable delivery at each stage of the project. DIFOT is king. 7 To outperform in campaign projects, you will need high visibility IT systems, sometimes dedicated consolidation and/or distribution centres, an organizational structure designed at an early stage, and personnel who can perform in often-disruptive environments. 8 Getting into campaign mode means seeing the horizon, and carefully planning supply at each stage of the journey.

· 337 ·

M10_GATT6818_03_SE_C10.indd 337

2/24/15 3:49 PM

Dynamic Supply Chains

Your challenge Is project demand treated differently in your enterprise, or does it just get lost in standard transactions and standard processes? Have you considered the top-line opportunity if project supply became a separate supply chain, with correspondingly tailored processes, systems, and outcomes?

· 338 ·

M10_GATT6818_03_SE_C10.indd 338

2/24/15 3:49 PM

Chapter 11

Fully flexible supply chains: demand-side How to design for major unexpected disruptions

H

ere come ‘extreme’ supply chains in the form of the fully ­flexible configuration. This is a relatively new category of supply chain type, and while it has always existed, it is now attracting more attention as we search for solutions in our increasingly crisis-­ridden world. There are two distinct sub-types. The ‘business event’ fully ­flexible supply chain occurs in industry and commerce when enterprises are faced with completely unexpected disruptions or major departures from ‘business as usual’. Such is the scope and impact of the disruptions to this supply chain, we almost need to embrace catastrophe theory to understand it. And then there’s the ‘humanitarian’ fully flexible ­supply chain; it comes into play when natural disasters occur and human lives and property are at stake. In both cases an enormous effort is involved, with abundant personnel and financial resources needed to devise and deliver creative solutions, extremely quickly. Speed, speed, and more speed is the name of the game. The military and NGOs (­non-­government organizations) are familiar with this type of supply chain. With new-breed companies leading the pack in winning difficult customers in fast-moving environments, we all thought the ultimate had been achieved: agility to match the unpredictability! But there’s always a new Everest to conquer when we are tackling the supply chain, and today it’s the ­emerging phenomenon of ‘emergency supply chains’. Increasingly,

· 339 ·

M11_GATT6818_03_SE_C11.indd 339

2/24/15 3:50 PM

Dynamic Supply Chains

organizations are finding themselves at the centre of unforeseen, indeed, ‘unplannable’ events – crises, disasters, breakdowns and other critical events that interrupt and threaten their global supply chains. We thought we had it all figured out when we mastered the conventional logistics systems, making it lean and mean and delivered straight to the customer. But such systems are not good at coping with unpredictable crises, on any scale. The post-9/11 era, including such incidents as the Iraq war, the London bombings, SARS and swine flu, the Japanese tsunami/earthquake, Ebola crisis and Arab Spring has focused attention on the need to develop new capabilities that can be rapidly deployed when necessary. Can you envisage times in the future when your business might need a fast, flexible response to unexpected conditions? The fully flexible ­supply chain is pursuing the ultimate quest for a creative solution to an unusual, and seemingly low-probability event, happening somewhere along one of your supply chains. Often this occurs when non-government and ­government organizations are coping with a disaster on a massive scale. But there are also times when businesses like yours might need the capability to m ­ anage an unexpected event, and avoid serious disruption and damage to your competitiveness. We will say more about the negative impact of major disruptions in Chapter 16. You can incorporate some of the strategies you use during a crisis into your supply chain in the long term, or adopt the strategies you learn from other agencies as they find solutions to incredibly complex problems. Fully flexible supply chains – wherever they occur – are designed to find a ­solution, and find it very quickly. If this requires creative thinking, innovative ­behaviour, intense flexibility, high costs, and risk-taking, then so be it. The final result is paramount. In general, this is a costly supply chain to configure for just routine business, but you will need the capability at some time, to mitigate risk and ensure business continuity. This capability could be regarded as a required competence and positioned within the business development function. The entrepreneurial subculture that underpins this type of supply chain is ideal for start-ups and incubation of fledgling businesses. Indeed, it is essential for any activity that is at the edge of the core business, or is subject to imminent market discontinuities through competitive, regulatory or other external forces – with unpredictable outcomes.

· 340 ·

M11_GATT6818_03_SE_C11.indd 340

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

Two types of dynamic flexibility In our dynamic alignment model, fully flexible supply chains share common features, but they also fall into two distinct categories: the ‘business event’ and ‘emergency response/humanitarian’ supply chains.1 Important features such as the purpose of the supply chain, its life cycle, and where and how funds are sourced can vary; this means the organizations managing them need to approach these two types of fully flexible supply chain in different ways.

The ‘business event’ fully flexible supply chain Have you ever had to contend with a situation that demanded full-­frontal flexibility in your supply chain? Did you have the money to do it? The ­‘business event’ supply chain is normally found in the business sector, as its name suggests, but unlike most business projects the supply chain is not overly cost-sensitive. Managers in this supply chain already have ­adequate ­supply chain options for everyday business. But when an unexpected ­problem arises, and an innovative solution is needed, they will make available substantial – almost unlimited – funds. The attitude is often ‘just do it’, the implication being, ‘to heck with the cost’. Funds are normally provided by the customer, who has a clearly defined focus and pre-determined timeline. An example comes from an oil company mentioned in Chapter 9, which sought to have 1,000 PCs replaced urgently in the aftermath of Hurricane Katrina. The ‘business event’ supply chain is necessary to solve a transient rather than on-going business problem. So we are looking at a solution to a one-off ‘event’ that is supported by substantial funds and people resources. According to the Swiss re-insurance company, Swiss Re Sigma, ‘the combined property and business interruption losses [for the Tohoku e arthquake and tsunami and the Thai floods in 2011] reached a ­ ­record-breaking $240 billion, with $47 billion of the losses covered by insurance’.2 In a­ ddition to the devastation caused, the cost of interruption to everyday business was felt worldwide. It highlighted once again the dangers of thinning down enterprise supply chains too much in the relentless pursuit of lower costs. In many companies, it has led to a review of the communications between global procurement and risk-management.

· 341 ·

M11_GATT6818_03_SE_C11.indd 341

2/24/15 3:50 PM

Dynamic Supply Chains

There is no universal answer; every company must do their own assessment of risk based on their own particular situation. A similar plea for greater embedded resilience in supply chains is made by Paul Snell.3 The combined calls for more resilience and redundancy (read spare capacity), in contemporary supply chains are reaching a crescendo. Let’s hope management teams everywhere heed the call. A large-scale example of a ‘business event’ disruption is that involving the missing Malaysian flight MH370 that disappeared in the southern Indian Ocean in March 2014. The effort to find the plane has involved hitherto unheard of levels of collaboration between 14 countries in the region, and the deployment of a staggering array of assets (43 ships and 58 aircraft) and other specialized equipment.4

The ‘emergency response/humanitarian’ fully flexible supply chain Unfortunately we all recognize the large-scale emergencies that prompt the need for an ‘emergency/humanitarian response’ supply chain. The 9/11 terrorist strikes in 2001 and the Bali bombings of 2002 called for an ­immediate, crisis response on a large scale, as did the natural d ­ isasters such as the Indian Ocean tsunami of 2004, the Pakistan–Afghanistan earthquake of 2005,5 the 2008 Cyclone Nargis crisis in Myanmar, and relatively recent disasters in Japan, Haiti, and the Philippines . The ‘emergency/humanitarian response’ supply chain differs from the ‘business event’ supply chain largely because of the source of its funding and its sensitivity to cost. Funds are typically available, and limited only by the time it takes to collect via donations from a wide mix of third parties: national governments, the United Nations, individual donors and NGOs such as charities, and community and aid organizations. The groups who build this type of supply chain also have an extra factor to consider – governance. They need to be highly accountable for the funds they collect and apply to disaster operations. This supply chain is not only price sensitive, but is accountability sensitive too. In his Blackett Memorial Lecture,6 LN Van Wassenhove presented a useful framework for categorizing disasters; it outlines their cause – natural or man-made – and the speed with which they occur – suddenly or slowly. These are important distinctions. A summary is shown in Figure 11.1.

· 342 ·

M11_GATT6818_03_SE_C11.indd 342

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

Onset Sudden

Slow

Natural

Man-made

• Volcanic

eruption Earthquake • Hurricane • Tornado • Floods/tsunami

• Terrorist

•

•

attack Coup dˇétat • Chemical leak • Nuclear meltdown

• Famine

•

• Drought

•

Political crisis Refugee crisis

• Poverty

Figure 11.1 ◆

Disaster framework

Source: Adapted from Van Wassenhove (2006), p. 476

In many emergencies, the normal supply chains that underpin business and community activities are completely disrupted or destroyed. Urgent help is required to save lives or, in environmental cases, to protect the natural environment. After the initial critical response period, the ‘emergency response/humanitarian’ supply chain usually develops into longer-term humanitarian aid and/or environmental ‘restoration’. Examples include ongoing aid in war-torn areas (e.g., United Nations aid in Afghanistan 2001– 02; Niger in mid-2005) or rebuilding communities after a natural disaster, such as the Iranian earthquake of 2002, the Indian Ocean tsunami in 2004, Hurricane Katrina in the USA in 2005, and Typhoon Haiyan in the Philippines in November 2013, to mention just a few. In each of these situations there is an initial event (or series of events) that dictates the requirement for a fully flexible supply chain, although the characteristics of the supply chain can evolve dramatically as the situation develops from the critical response phase into the on-going rebuilding phase.7

Following the earthquake in Haiti in 2010, McKinsey & Co worked pro bono in the country, helping with the immediate response and longterm reconstruction. From this field experience, McKinsey & Co listed seven lessons that could be learned from responding to the disaster,

▼

Lessons from Haiti

· 343 ·

M11_GATT6818_03_SE_C11.indd 343

2/24/15 3:50 PM

Dynamic Supply Chains

which are instructive for future approaches to emergency situations. These are:8 1 Set-up a ‘war room’ with a clear command and control structure. 2 Focus relentlessly on reducing complexity. 3 Invest heavily in ‘last-mile’ logistics. 4 Establish structured processes to synchronize supply and demand. 5 Carefully manage offers and donations. (During a humanitarian crisis it is difficult to manage donations.) 6 Establish a system to gather and disseminate intelligence. 7 Keep an eye on emerging talent. (Typically, overseas volunteers with significant experience are brought into the affected country, and this often means local talent is pushed aside.) In addition to the above list, we would suggest a big effort be made to understand what other parties are doing, to avoid duplication, and ensure maximum leverage. This can only occur as a result of good ­communications between the volunteer organizations on the ground. This prescription is close to my thinking on managing emergency response supply chains, except I would place more emphasis on ­individual creativity. During the same crisis in Haiti, the US Department of Defense employed RFID (radio frequency identification) and its in-transit ­visibility (ITV) network to track containers sent to the island from Jacksonville in the USA. This helped military planners obtain a big-picture view of the type and number of shipments that were moving.9 Clearly, the RFID ­capability also helped satisfy point 3 in the above McKinsey list. But then again, most of these containers don’t get to the last mile. They are typically de-stuffed at an entry port and shipments distributed in smaller loads to facilities and villages. Another example from Haiti is the speed with which global computer company Dell responded to requests for help following the earthquake. The first call came in on Saturday 16 January 2010, just four days after the earthquake. The Dell team worked through the weekend to ­process orders and to assure readiness for production on the Monday. The ­computers were delivered to Miami, as planned, the next day on Tuesday 19 ­January, for immediate trans-shipment to Haiti. This was an example of ­super-agility in the face of a crisis.

· 344 ·

M11_GATT6818_03_SE_C11.indd 344

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

Life-critical variant of ‘humanitarian’ supply chains; the ‘global health’ supply chains Another variation on the supply chain types needed in extreme (life-­saving) situations is emerging from studies of diabetes patients in developing ­countries.10 In this situation the supply of a core product, such as insulin, and the complementary products and services to enable its effective use, such as syringes, test strips and accompanying training, are so life-critical that an interruption to availability for even a few days can mean the death of a patient. Unlike the supply chains needed in emergency relief situations, this supply chain does not need to re-configure itself and respond differently to each new event. Instead this steady state supply chain needs to be built around absolute reliability. How to achieve this level of reliability, particularly in a resource-poor setting, is a complex question. The levers for high availability are usually spare capacity (such as very high inventory levels), but in these settings more creative cross-channel solutions such as the centralized multi-country holding of back-up stock may be more cost-effective and sustainable. This is essentially an agile or fully flexible supply chain being used in a contingency role for day-to-day lean operations. A similar situation exists in the treatment for HIV/AIDS. In 2005 the US President’s Emergency Plan for AIDS Relief (PEPFAR), partnered with ­leaders in the international supply chain field to establish the ­PEPFAR Supply Chain Management system to deliver uninterrupted supply of ­high-quality, low-cost products. This system leveraged concepts such as pooled procurement and regional warehousing and distribution.11 Indeed, organizations including the Clinton Foundation, the Bill & Melinda Gates Foundation and PEPFAR have launched multiple initiatives to expand access to life-saving medicines and help developing countries to systematically treat HIV/AIDS victims, especially in Africa. The objective in many of these initiatives was to shift from high-cost, one-off strategies of the emergency supply chain (fully flexible), into low-cost sustainable flows of drugs and services (lean). Key supply chain strategies used to achieve this included: identifying ‘true demand’ (that included the vast number of patients that were not receiving treatment), and using this to give suppliers long-term forecasts; pooling of purchases across geographies and with

· 345 ·

M11_GATT6818_03_SE_C11.indd 345

2/24/15 3:50 PM

Dynamic Supply Chains

suppliers to achieve economies of scale; strategic positioning of inventory to minimize safety stock and improve availability; and development of logistics and health capability including the use of 3PL providers to lift reliability, especially in warehouse management.12

When the customers say ‘it’s urgent’, they mean it I can hear you asking, ‘So who is the customer?’ Fully flexible supply chains are unlike most supply chain types because ‘the customer’ varies. The customers in the ‘business event’ supply chain are the everyday customers of the enterprise who start behaving in a radically new way, generally under pressure. They seek innovative solutions to rare and seemingly intractable problems; they are trying to avoid the problem taking on crisis proportions – unless it’s a crisis already! Customers in the ‘emergency response/humanitarian’ supply chain are not only the end-consumer – the survivor or victim of a tragedy or natural disaster – they are also the many organizations within the supply chain demanding emergency services and assistance for the affected population. They could be local authorities, domestic national governments, community groups, emergency service organizations or the local arms of NGOs.

‘Business event’ customers The customer in this supply chain will normally display one or more of the other three buying behaviours: collaborative, transactional or d­ emanding/ dynamic response. But they will move into an innovative solutions ­behaviour for short periods when a crisis occurs. They are likely to return to their ­preferred or natural buying behaviour when the crisis subsides, as shown in Figure 11.2. In September 1992 the international airline Qantas, then owned by the Australian Government, acquired the domestic airline Australian Airlines. To ensure the merger of the two airlines was successful, Qantas urgently needed to integrate the Australian Airlines’ legacy IT systems with its own, within 90 days. Up until that point Qantas had been very price sensitive in its dealings with systems integration providers. But the airline quickly shifted to a ‘fix at any cost’ mind-set because the task was so vital. Suddenly it demanded a

· 346 ·

M11_GATT6818_03_SE_C11.indd 346

2/24/15 3:50 PM

FULLY FLEXIBLE SuppLY ChaiNS: DeMaND-SiDe

Collaborative customers

Transactional/price sensitive customers

Dynamic customers

Innovative solutions customers

Fully flexible supply chain aligned with customers

Figure 11.2 ◆

Dynamic movement of customers’ buying behaviours due to major

disruptions Source: Adapted from Figure 8.1 in Gattorna (2006), p. 183

fully flexible response to its problem. Once the task was completed, Qantas returned to its former lean buying behaviour for subsequent transactions involving systems technology. Occasionally, due to extreme external pressures, this innovative solution becomes a new innovative solutions supply chain incorporated into the on-going operations of the company. The government bus authority in Israel, Egged, operates about 70 per cent of public bus services. This company operates under incredibly difficult conditions – as a target of terrorism. Company chairman Arik Feldman sums up the resilient attitude of the company’s culture when he says: ‘Drivers and managers have learned to adapt to the realities of the situation . . . if a bus blows up, it doesn’t stop us from running public transportation . . . it gives us more courage to continue.’13 Such an ongoing flexible type of supply chain as that developed by Egged is extremely rare. So too is the ongoing demand from customers in dangerous, unpredictable circumstances. How often do you hear of a company continuing to offer its customers service under such extreme conditions? They are still operating the bus service today. DHL has made an art-form of handling extreme challenges on an almost daily basis. Requests for replacement equipment following a breakdown at a remote mine site, or moving important exhibitions for galleries

· 347 ·

M11_GATT6818_03_SE_C11.indd 347

2/24/15 3:50 PM

Dynamic Supply Chains

and museums according to an impossible time schedule, or even handling ­dangerous goods, all fall within the company’s capabilities, albeit requiring the intensive focus of those creative personnel skilled in finding ultra-fast, innovative solutions for customers. In the 1980s DHL was already demonstrating its expertise in delivering fast, creative solutions to unusual customer demands. The Australian team in the America’s Cup yacht race asked DHL to urgently transport a replacement mast from Sydney to Newport, Rhode Island, as the main mast on its lead boat had broken. DHL took on the challenge and managed to load the 100-foot mast by removing the front cockpit window of a B727 aircraft, threading it down the aisle, and replacing the window for the trip. The reverse process was performed at the destination end. This is a living example of looking after your ‘business event’ customer!

‘Emergency response/humanitarian’ customers Humanitarian crises demand two essential ingredients – good leadership and the right people on the ground to direct and co-ordinate disaster relief operations. Yet, we are seeing a distinct lack in both. Despite an increase in reported disasters of over 60 per cent in the past10 years, the humanitarian response is simply not keeping pace.14 Emergency or humanitarian situations usually involve both customers/ buyers of services on the ground and the consumers/survivors who are caught up in a disaster; natural or man-made. The immediate aim is to quickly provide life-saving essentials to the survivors, who often have no choice of buyer behaviour. Instead, the buying behaviour in the initial phase following a crisis is a response to ‘whatever is provided’; this is required initially by individuals who rapidly move into community clusters as people try to re-establish what was familiar. In the next stage, when basic living requirements are restored, and as the community is rebuilt, survivors will exhibit a greater range of buyer behaviours as the situation permits. This situation occurs when an entire complex of supply chains need to be created from scratch because of a major disruption to normal living and business operations due to extreme situations such as war, terrorist attacks, famine and natural disasters like earthquakes or tsunamis. The third parties providing the funding are also customers in these situations, and they have distinct behaviours and demands. Multiple parties are commonly involved

· 348 ·

M11_GATT6818_03_SE_C11.indd 348

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

and they can have conflicting objectives. These groups may become temporary partners at best, or competitors at worst, all working in a situation where there are no straightforward answers to the short- and longer-term issues involved. Sarah Murray outlined some of the difficulties faced by humanitarian agencies in her article in the Financial Times, including the many lessons learned on the ground from having to bring essential supplies to people in the worst-hit regions of the world.15 In recent years, both UNICEF and the Red Cross have started to position stores of equipment and supplies in different locations around the world to improve their responsiveness when disasters strike.

DHL DHL is a familiar face in the ‘business event’ supply chain globally, and is extending its crisis expertise to emergency events. It has established an Asia Pacific Quality Control Centre in Singapore and one of its roles is to act as a Crisis Centre, which attempts to anticipate and/or respond to ­dramatic and destructive events in the region. In 2005, DHL also established Disaster Response Teams, in partnership with the United Nations Office for the Coordination of Humanitarian Affairs, UNOCHA, so it could more readily respond to crises around the world. The teams have been deployed to more than 20 disasters, including the tsunami in Sri Lanka in 2004; earthquakes in Peru (2007), Chile and Haiti (2010) and New Zealand (2011); and flooding in Guatemala and Pakistan (2010) and in El Salvador (2011).

The London bombings in July 2005 were a good example of what can be achieved in terms of providing fast response to the victims and m ­ aintaining and restoring service during a crisis. Interestingly, the British G ­ overnment and its agencies conducted a thorough review of the original plans to see what lessons could be learned for the future.16 One improvement made ­following the London bombings was the installation of a new digital radio s­ ystem that ­connected staff working in subway stations. Also, the o ­ utmoded Access Overload Control system that restricted mobile telephone usage in ­emergencies, and which hampered rescue efforts during the L ­ ondon b ­ ombings, was replaced by the MTPAS, Mobile Telecommunication ­Privileged Access Scheme, designed to remove communications issues in future emergencies.17

· 349 ·

M11_GATT6818_03_SE_C11.indd 349

2/24/15 3:50 PM

Dynamic Supply Chains

Demands will change as the crisis evolves The singular focus in the ‘emergency response/humanitarian’ configuration is on finding a solution to the problem, and in the initial stages particularly, the customer very often has no idea what that solution might look like. Indeed, it is one of those rare occasions where customers look to their suppliers for a supplier-led solution involving an abundance of innovation and creativity. There is a corresponding risk involved, but customers are usually quite prepared to take risks – including in the case of the ‘business event’ supply chain – to get to a solution. They might also have no choice but to take whatever is offered, as in the case of survivors at the end of ‘emergency/ humanitarian response’ supply chains. So, the demand characteristics in this market are very unpredictable, much more so than in the demanding/dynamic customer segment. There is relatively higher risk involved for all parties and a desire for an ­innovative, flexible response by customers/consumers. A genuine ‘solutions m ­ ind-set’ is prevalent for the time that the crisis lasts, and price sensitivity is nowhere to be seen. As such, this type of buying behaviour represents a real ­opportunity for suppliers with the capacity to respond appropriately. Sometimes a ­solution in this situation can be the breakthrough to a new longer-term relationship with the customer involved. The complex sequence of events that occurs in a humanitarian disaster was first proposed by Kate Hughes as part of her doctoral research, with each phase overlapping in time and space.18 Figure 11.3 is a slight adaption of her original diagram. In the prequel phase,19 before any catastrophic event, governments, aid agencies and private donors are increasingly trying to hedge and deploy by prepositioning supplies at strategic locations around the world. This strategy is designed to speed up the subsequent response to any disaster. In the search and rescue phase,20 the demand for food, water, and life-saving essentials is extreme, so the supply chain has to ramp up very quickly, with participating aid organizations responding at short notice. This is the fully flexible supply chain at work. This soon transitions into the emergency phase21 as the full extent of the disaster becomes evident and aid organizations on site seek to deliver creative solutions to save lives in very fast time. This is the agile supply chain operating in the face of extreme disruption. Finally, there is the re-building and

· 350 ·

M11_GATT6818_03_SE_C11.indd 350

2/24/15 3:50 PM

M11_GATT6818_03_SE_C11.indd 351

rescue, medical, food, water, shelter

Cluster ‘Survivor’

medical, food, water, shelter, reunite families, identify needs, distribution

‘Beneficiary’

Cluster

Surge

agile

goods and services as required with development and participation of community to re-establish daily life

‘Participant’

Clusters

Base + Semi-wave + Surge

collaborative + lean + agile

‘Developing more systematic activities and gradual return of marketplace: increasing variety of supply chains’

Phase 3

Rebuilding and restoration

the phases of humanitarian disasters and their corresponding supply chain configurations

‘Business and community’

Cluster

Cavitation

fully flexible

‘Execute quick response’

‘Creative and extremely quick response’

Phase 2

Emergency response

Phase 1

Survival response

Source: Adapted from Figure 5.1, in Hughes (2008) in Gattorna (2009)

Fi gur e 11.3 ◆

(and primary requirements)

Population

(predominant)

Organizational designs

Flow types

(predominant)

Customer segments

Base + Semi-wave

lean and collaborative

Supply chain types

(predominant)

Prequel –

before events (hedge and deploy) ‘Stockpile goods and build resources in strategic locations’

Phases and activities

FULLY FLEXIBLE SuppLY ChaiNS: DeMaND-SiDe

· 351 ·

2/24/15 3:50 PM

Dynamic Supply Chains

restoration phase designed to help re-establish the affected ­communities, and this may stretch over months and years.22 The different phases of a disaster of the scale Kate Hughes describes might not directly apply to the crises that could disrupt enterprises in the ‘business event’ supply chain, at least not to the same degree. They do, ­however, still occur. Your task will be to consider how a crisis might unfold in your market, and how you would manage each phase. What strategies and capabilities will you need? More on this point to follow later in the chapter.

‘Collaborative individualism’ – rare but essential The unfolding nature of crises also reveals another point we should r­ emember before investigating strategic solutions, and that is the type of people we need each step of the way. Our ‘emergency’ and ‘business event’ supply chains will be best served by individuals who display both ­autonomous ­independence and the ability to work in cohesive teams. This is a rare ­combination. ­Typically these are individuals with a strong team ­commitment, and can be epitomized by the descriptor ‘­collaborative ­individualism’. They can either be individuals with the ability to move from one extreme to the other on the I–P axis of the P-A-D-I framework, as ­outlined in Chapter 5, or they are in balance and are able to select ‘appropriate’ ways to respond along the axis given the requirements of any particular situation. The preferred mode of behaviour would be Dp (Developer-Producer) in the P-A-D-I code for individuals working with ‘business event’ supply chains and more towards Di (Developer-Integrator) for the ‘emergency/humanitarian response’ supply chain. If a Myers-Briggs assessment was to be undertaken on individuals working in fully flexible supply chains this group would probably yield widely divergent personalities. However, we could expect a high degree of similar characteristics in the individuals who are leading both emergency variants of this supply chain configuration. In an ‘emergency response’ supply chain, the first thought is a rapid response to save lives and help stabilize the situation – Phase One that we described earlier. This will evolve over time into a more scheduled rebuilding programme as routine is restored (Phase Three). And underneath this, you are receiving cooperation from NGOs and the government(s) involved – the collaborative subculture. As normality is restored, this will morph into an

· 352 ·

M11_GATT6818_03_SE_C11.indd 352

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

array of supply chains that reflect natural buying behaviours in the affected community. There are some differences in the types of individuals best suited to work in our two types of crisis supply chain, which we discuss further in the ‘Culture capability’ section below. More individuality and autonomy might be most needed in the ‘business event’ supply chain, while teamwork might be of a higher value in emergency and disaster settings. These are a matter of degree, however, rather than hard-set definitions. Overall, it takes special people to work under crisis conditions, business or emergency.

Fulfilling your value proposition – in the extreme Now this is where it gets really difficult. How do you respond to c­ ustomers in such extreme, changeable conditions? We must provide maximum responsiveness on a selective basis, for short periods. Our value p ­ roposition for fully flexible supply chains is aimed at meeting unplanned and unexpected demand with fast, effective, customer-centric solutions that are usually u ­ navailable under normal operating conditions. It’s not an easy promise to keep. The ‘emergency response/humanitarian’ supply chains, for instance, are activated to meet sudden humanitarian crises anywhere in the world. In the same way, the ‘business event’ supply chain is activated quickly and demands urgent attention from suppliers to unforeseen and unexpected events. Emergency supply chains, whether in response to a natural disaster or the outcome of war, are extreme examples where the fully flexible supply chain configuration comes into its own. It has to be created quickly, often from a zero base, often under extremely difficult conditions to service thousands, sometimes millions, of people, who are subsisting under extremely poor conditions. Whether for reasons of distribution of food and clothing, medical aid and treatment, or security and safety, these supply chains are generally highly complex. Coincidentally, they face huge impediments such as substandard or zero infrastructure, limited capital, multiple partners, language difficulties and usually the involvement of more than one political group. Beyond this initial mission there are always added demands for assistance that can cut across the original task of distributing food, aid and evacuation services as has been the case in Afghanistan.23 And, of course, political complexities

· 353 ·

M11_GATT6818_03_SE_C11.indd 353

2/24/15 3:50 PM

Dynamic Supply Chains

are involved in dealing with the host and donor nations, who often place divergent demands on the supply chain network and so stretch human and financial resources to the limit. The people who work in extreme situations are often highly motivated; some will volunteer their services, work for lower salaries than normal, or work for extended periods without recompense.

Strategy recipe for fully flexible supply chains And it takes the right strategies! The only way you will be able to meet the demands of this extreme environment is to have the operational strategies in place, even if they are not called upon on a routine basis. The 16 strategic dimensions listed below can be tailored to meet the demands of the emergency and crisis circumstances, when and as needed. This is our unique ‘strategy recipe’ for fully flexible supply chains. How else can we deliver our customer promise? Figures 11.4 and 11.5 show the individual elements of the strategy package for each supply chain variant. First, the ‘business event’ supply chain.   1 Product mix. Draw on any and all products and services to get a ­successful solution to the problem being faced.   2 Innovation emphasis. We are looking for extreme innovation to help a particular customer in a particular predicament. And it is generally only the supplier that possesses the capabilities to help the customer and lead them to a solution. The customers can’t help themselves, because they are not aware of all the available options.   3 Marketing emphasis. Customers should be made aware that we can help them in these extreme situations.   4 Channels of distribution. Channels should be kept very narrow and specialized.   5 Pricing regime. Price is not an issue – customers simply want solutions at any price, because the alternative is costing more.   6 Promotional activity. No promotional activity is needed or indeed relevant.   7 Service emphasis. This segment is looking for immediate attention to their extreme problem.

· 354 ·

M11_GATT6818_03_SE_C11.indd 354

2/24/15 3:50 PM

FULLY FLEXIBLE SuppLY ChaiNS: DeMaND-SiDe

Strategic dimension

Ideal strategy

1

Product mix

Broad changing product line

2

Innovation emphasis

Extensive R&D; aim to be first to market

3

Marketing emphasis

Creative problem-solving

4

Channels of distribution Limited

5

Pricing regime

Price appropriately for a creative solution; no price sensitivity

6

Promotional activity

Target early adopters

7

Service emphasis

Novel solutions

8

Procurement/sourcing arrangements

Product; technology; innovation

9

Production

Prototypes; customization

10

Capacity considerations Low. Hedge and deploy resources

11

Fulfilment approach

Speed is vital

12

Relationship intensity

Intense but short term while problem exists

13

Systems/IT support

Whatever is required to solve the problem

14

Resource allocation priorities

Hedge and deploy resources; sometimes ineffectively

15

Strategic risk profile

High

16

Financial considerations Conduct cost/benefit analysis for different contingencies

Figure 11.4 ◆

‘Business event’ fully flexible supply chain strategy – entrepreneurial

8 Procurement/sourcing arrangements. Seek alliances with external parties who can help with innovative solutions in extreme situations. 9 Production. Prototypes must be designed and developed, fast. 10 Capacity considerations. This is a world of ‘hedge and deploy’. So, lack of capacity should never get in the way of finding a solution to the problem at hand. Draw on in-house and external parties for resources. And expect it to be costly!

· 355 ·

M11_GATT6818_03_SE_C11.indd 355

2/24/15 3:50 PM

DYNaMiC SuppLY ChaiNS

Strategic dimension

Ideal strategy

1

Product mix

New innovative approaches as required by the problems faced

2

Innovation emphasis

Solutions are developed 'in situ', very fast

3

Marketing emphasis

Some media activity seeking donors

4

Channels of distribution As many as needed in a given situation

5

Pricing regime

6

Promotional activity

Low

7

Service emphasis

Welfare of the humans involved is paramount

8

Procurement/sourcing arrangements

Seek alliances with suppliers with major innovation capabilities

9

Production

The supply chain is the product itself – delivering services

10

Capacity considerations Very high. Hedge and deploy resources

11

Fulfilment approach

Somewhat haphazard depending on conditions on the ground

12

Relationship intensity

High

13

Systems/IT support

Use whatever is available – beg/borrow/steal

14

Resource allocation priority

Reactive to events; somewhat inefficient

15

Strategic risk profile

High

16

Financial considerations Fundraising among donor governments for humanitarian activities

Some price sensitivity; stewardship of funds important

F i g u r e 1 1 . 5 ◆ ‘emergency response/humanitarian’ fully flexible supply chain strategy – emergency response

· 356 ·

M11_GATT6818_03_SE_C11.indd 356

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

11 Fulfilment approach. Do anything for speed. 12 Relationship intensity. No real on-going relationship is needed in the usual sense, but at the time of the crisis, fleetingly, there is an extreme relationship, with both the company’s fortunes seemingly tied together. 13 Systems/IT support. Whatever systems and technology are needed to solve the crisis will be used; nothing is left to chance. 14 Resource allocation priorities. A crisis in the customer gets top priority in terms of resources, all types. 15 Strategic risk profile. Extreme business events create high risk for both parties, but the downside of failure is even worse. Sometimes new and untested solutions have to be tried. 16 Financial considerations. If there is time before, otherwise following the crisis, a cost/benefit analysis would be useful for the lessons it would provide. For the ‘humanitarian’ supply chain, there are different strategies required as summarized in Figure 11.5.   1 Product mix. Use any combination of products and services required to ‘solve’ the problems faced on the ground.   2 Innovation emphasis. Solutions are developed ‘in situ’ to stay ahead of an unfolding emergency situation, very fast.   3 Marketing emphasis. Engage in some media activity to keep ­stakeholders informed and to attract new donors to fund operations.   4 Channels of distribution. Nothing is fixed, so use whatever channels that can provide help and assistance in the critical situation – in the form of funds and in-kind assistance.   5 Pricing regime. Some sensitivity is needed because these o ­ perations ­usually work to a budget from the UN. There is also a sense of ‘­stewardship’ of the UN funds and other funds given by donors to ­support the relief operation. But as previously indicated, there is mostly no shortage of funds, and indeed, agencies at times have difficulties spending their budgets.   6 Promotional activity. Keep promotional activity low, other than ­providing news to the outside world, and to the affected populations, letting them know what is available and where to go.

· 357 ·

M11_GATT6818_03_SE_C11.indd 357

2/24/15 3:50 PM

Dynamic Supply Chains

  7 Service emphasis. Service intensity is high because the welfare of the victims is paramount.   8 Procurement/sourcing arrangements. Seek alliances with suppliers of products and services, especially those that have significant capacity and also innovation capability. Some agencies have agreements in place with their key suppliers that enable them to respond quickly when a disaster strikes.   9 Production. The supply chain network at the disaster scene is the ­‘product’ itself – delivering services to the needy in a life-saving ­situation. Depending on the type of disaster, many products are required, i­ ncluding food, shelter, water, medicines, and sanitation kits. 10 Capacity considerations. Capacity must be very high. Hedge and deploy resources ahead of potential disasters as much as possible. Then seek additional sources with available capacity during the actual disaster. 11 Fulfilment approach. This can be somewhat haphazard, depending on the conditions on the ground at the time. It is influenced a lot by ­prevailing weather conditions, infrastructure, and product availability. 12 Relationship intensity. This is high, between all stakeholders. 13 Systems/IT support. Use whatever technology that can be seconded to relieve the disaster situation. Of course, local utilities may have been knocked out, and phone lines may also be down, so other options need to be considered. 14 Resource allocation priorities. By definition setting priorities is fairly reactive because the exact location of the next emergency is unknown. Some advanced deployment may help if lucky. Also, creation of logistics ‘clusters’ enables better resource availability and allocation. 15 Strategic risk profile. The risk is very high in these operations, and a lot is at stake, not the least being human life. 16 Financial considerations. Here the emphasis is more on fund-raising, from governments and NGOs, because operations in the field have to be financed one way or another. But further financing requirements come into play in the next phases, leading into reconstruction. So having laid out all the dimensions that we have to work with in f­ ormulating our strategy package for both fully flexible supply chain types, we can now turn our attention to shaping or acquiring the underlying capabilities that must be in place to propel the above operational strategies. · 358 ·

M11_GATT6818_03_SE_C11.indd 358

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

Capabilities Strategies of course are not enough. You must develop the capabilities to ­propel your ‘business event’ and ‘emergency response’ supply chains. The full list of capability areas and corresponding capabilities are detailed in Figure 11.6.

1. Customer interaction We’ve discussed in earlier chapters that there are two capabilities under this category, and both are common to all types of supply chain configurations. For our ‘business event’ and ‘emergency/humanitarian response’ supply chain variants, we have specific factors that affect our customer interaction, e.g. the life and death nature of the disasters, and the emergency timeframes in which our services are being delivered. Our customers in the two variants also vary, from the disaster victims themselves to the agencies that deliver support, such as government and non-government organizations, private donors or the armed forces. They have their own demands and ways of operating; they are not your average customer. Some of the tools of our customer interaction capabilities, therefore, are useful; others, not so. The first capability for all supply chain types comprises customer call centres (CCC) and annual customer satisfaction index (CSI) surveys, as well as the net promoter score (NPS) and net satisfaction score (NSS) surveys. The latter two are quite unsuitable as inputs to supply chain design for the crisis supply chains, just as they are for other supply chain configurations. The other capability in this category is the rolling survey of customers’ expectations and perceptions. Overall, this capability is useful post-event in getting feedback from agencies or businesses along the supply chain that have been most affected by a particular disaster, using this to improve performance for future crisis management. Clearly, these tools are not to be used as a routine annual exercise.

2. Transformation Once a contingency network strategy design and corresponding footprint has been completed, the next big task is to translate this into working models on the ground. This involves taking the aggregate flows from the network optimization models, and breaking these down to the SKU level, deciding where to store each SKU, and in what quantities. Significant analytical · 359 ·

M11_GATT6818_03_SE_C11.indd 359

2/24/15 3:50 PM

DYNaMiC SuppLY ChaiNS

Capability area

1

Customer interaction

Capability • Customer Call Centres (CCC)

– joint responsibility*

• Rolling annual CSI/NPS surveys*

2

Transformation

• Translate strategy into working

3

Organization

• Extreme risk taking • OD: part-time emergency

models*

cluster

• People selection and

positioning: ensure bias of creativity at speed (Dp) in cluster • Analytics • Project management There are no processes – just local initiative, real-time Stock availability by Smartphone

4

Processes (standard)

• • • •

5

Planning

• S&OP – aggregate capacity

6

Systems/IT

• Low systems requirement;

planning

mainly event management

• EDI • Network optimization

modelling

• Inventory management • Track and trace

7

Operations

• • • • • • •

8

Culture

• Individual decision-making • Individual KPIs aimed at

Finding creative solutions, fast MTO at shorter lead times Special deliveries Digitization Merge-in-transit Less than truck load (LTL) KPIs: creativity

encouraging creativity

• Incentives: reward

individualism and risk-taking behaviour • Job design: autonomy through empowerment • Internal communications: spontaneous and informed • T&D: lateral thinking; brainstorming • Role modelling: managers with • ENFP (D) MBTI profile are ideal • Recruitment: enterprising, resourceful personnel; self-starting • Leadership style: Visionary: leads by inspiration; is authentic; informal; decisive; cares about ideas; values innovation * Common across all supply chain types

Figure 11.6 ◆

internal capabilities required to propel fully flexible supply chains

· 360 ·

M11_GATT6818_03_SE_C11.indd 360

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

skills are required, overlaid by experience, and an understanding of the new behavioural segments. In the case of extreme emergencies, the ‘network’ may actually be comprised of a number of alliances with associated networks and resources available to assist when called upon.

3. Organization The classic organization for the entrepreneurial subculture is a loose s­ tructure that involves small clusters or project teams. Unlike the c­ lusters formed for the other generic supply chain types, this cluster can be either temporary or semi-permanent, and involve volunteers, as depicted in F ­ igure  11.7. There are few, if any, hierarchical elements to the cluster structure, with most emphasis placed on innovation and self-reliance. People will work in a highly cooperative manner either as individuals or in teams of different ­combinations. It is a place where extreme risk-taking occurs as needed. The Special Air Services (SAS) in the armed forces of several Western nations is the ultimate example of this type of cluster organization. The team comes together for a specific mission, and is composed of individuals who each have specialist skills and competences. Despite this accent on individual skills and flair, the team functions as a unit and under pressure has the capability to adapt to changing conditions with the individuals concerned taking on other roles as required. Indeed, multi-tasking is mandatory for individuals in this type of cluster. It is no accident that modern armies have adopted an array of d ­ ifferent organization structures to fight under varying battlefield conditions. The ­large-scale, slow-moving standing army takes time to position and build up for the main battle. For example, it took the coalition forces six months to ­prepare for the first Gulf War. The smaller ‘quick reaction’ force adopted by the ­European Union moves faster and can be rapidly deployed to regional ­trouble spots at relatively short notice. This is an agile type of response. The SAS ­(Britain and Australia) or the Green Berets (USA) and the Brigade des Forces Spéciales Terre – BFST (France), can deploy in small groups within 24 hours to ­undertake key missions practically anywhere in the world; these were used extensively during the second Gulf War, and continue to operate in ­Afghanistan today. This is the fully flexible supply chain organization par excellence. We are likely to see more of this organizational configuration in the ­commercial world as operating environments become even more turbulent

· 361 ·

M11_GATT6818_03_SE_C11.indd 361

2/24/15 3:50 PM

M11_GATT6818_03_SE_C11.indd 362

Innovation cluster

S/M

F

P

Production

FUNCTIONS

Finance

Sales/Mktg

Logistics

Fully flexible supply chain organization cluster (semi-permanent)

Source: Adapted from Figure 9.5 in Gattorna (2009), p.141

Fi gure 11 .7 ◆

Note 1: This ‘innovation’ cluster may be composed of part-time members who only convene in an emergency Note 2: Individual team members return to their respective functions for training and other specialist matters

L

P

Procurement

COO

CEO

Innovative solutions segment

DYNaMiC SuppLY ChaiNS

· 362 ·

2/24/15 3:50 PM

Fully flexible supply chains: demand-side

and unpredictable following the 2008/09 recession imposed by the global financial crisis. The downside is that they are, by definition, costly to develop and ­maintain. This is a primary example where extreme flexibility comes at extremely high cost. But as you’ve heard before, ‘You get what you pay for.’ The classic hedge and deploy strategy, where capabilities and ­especially ­capacity is held in reserve for unforeseeable situations, is only worthwhile if the stakes are high enough to warrant the cost. In the c­ ommercial world this means having customers who will pay for such a high-­powered response. And they do exist. Indeed, the major international courier ­companies such as DHL, UPS and FedEx all have customers who demand this type of ‘express’ response from time to time, and each of these p ­ roviders has d ­ eveloped ­internal capabilities to meet their customers’ exceptional demands. Other businesses that foster innovation and high responsiveness using a c­ luster-type of ­organization are Apple, 3M and Google – on many occasions offering ­solutions before the customer knows they need them. The most commonly recognized enterprises that have this type of s­ upply chain organization structure are usually government-supported emergency services, such as ambulance services, fire brigades and search and rescue teams. Another group comprises the voluntary (yet highly trained and ­organized) organizations such as surf lifesaving clubs and bushfire brigade services in Australia. They raise funds through a combination of donations, government grants and industry partners to support their operations. A third group are the global cluster organizations such as the United Nations Joint Logistics Centre (JLC) that is a consortium of the World Food Programme (WFP), UNICEF and the World Health Organization (WHO). In this cluster as we have stated, it is vital to have an embedded bias towards creativity at speed, which is signified by P (Perceiving) in the ­Myers-Briggs Type Indicator (MBTI®) profile or D (Developer) in our P-AD-I code. Again, it’s only the bias we are talking about; other individuals with less entrepreneurial profiles will be present, but in a minority.

4. Processes Processes? How can these sudden events be planned for? Perhaps not ­surprisingly, there are practically no standard processes in the fully flexible supply chain. But there are some processes – the most basic and the most complex. The point to remember is that you are in uncharted waters and

· 363 ·

M11_GATT6818_03_SE_C11.indd 363

2/24/15 3:50 PM

Dynamic Supply Chains

you step in where others fear to tread. There are no road maps; you are ‘making it up as you go along’. The trail blazer, however, may reap huge benefits and could uncover new approaches to business problems in the future. Or, you could devise a one-off solution. Organizations will embrace the processes that work best locally in the midst of an emergency. The teams can operate either virtually or in physical proximity to each other. Autonomy is paramount and the ability to operate as separate unconnected ‘cells’ for extended periods is mandatory. Australia’s SAS uses ‘scenario dreaming’ to achieve high flexibility and reduce reaction time to events that may happen sometime in the future. Unfortunately, due to the constraints placed on resources in businesses today, there is little opportunity to invest time, money, or labour in scenario development. The potential here is huge, though the benefits are unpredictable. Despite the challenges, process design is not impossible in this type of supply chain. I am indebted to the late Chris Morgan of Cranfield University (UK) for providing the following insights into process design:24 ◆

Establish clear overarching goals (and update in real time consistent with emerging situation).

◆

Break goals into manageable sub-goals (and update in real time).

◆

Establish a communications framework (robust technology for remote communications; internal and external structures).

◆

Establish key milestones and collective review (international vectors and review in line with goal variations).

◆

Recruit people who can cope with evolutionary project iteration and risk evaluation.

5. Planning Again, in these extreme situations, we can only rely on futuristic concepts as ‘scenario planning’ and simulations, augmented by contingency p ­ lanning and the more conventional aggregate capacity planning. The idea is to ­prepare as best you can for unexpected disruption, wherever and whenever it comes. For instance, the UN opts to locate food and emergency supplies in various regions of the world in multiple locations, in anticipation of future disasters happening in the vicinity. The objective in the case of both types of disaster is speed to the sight to mitigate damage to life and property.

· 364 ·

M11_GATT6818_03_SE_C11.indd 364

2/24/15 3:51 PM

Fully flexible supply chains: demand-side

6. Systems/IT The requirement for high-cost transactional systems/IT in the fully ­flexible environment is relatively low, and consequently there is an equivalent lower requirement for capital investment. However, contrary to ­practices in ­collaborative and lean supply chains, there is a heavy emphasis on ­management intervention, coupled with the presence of highly skilled and experienced permanent staff. Web technology is embraced as required, and some form of enterprise profit optimization (EPO) system is used to gauge the ­‘profitability’ of any innovative solutions that are applied to c­ ustomer problem situations. Investment in high-technology applications may be ­necessary from time to time. Figure  11.8 provides an insight into how ­applications in this supply chain may be configured. Overall, the main systems used in fully flexible supply chains can, and do, vary across the full spectrum, from those required for financially and time-limited humanitarian supply chains, to those needed to deliver highcost creative solutions, such as in the search for flight MH370. The key is to apply the appropriate degree of systems sophistication and avoid unnecessary over-engineering. Indeed, it is not unusual for manual systems such as Gantt charts to be used at one extreme and online rules-based ordering systems of the type developed by Cisco Systems at the other. Originally, Cisco, which produces complex modular products and components to meet its high-tech customers’ specifications, found it was reworking many of its products because it failed to meet customers’ demanding specifications. Now customers order for themselves through an online ordering system that provides parameters around what they are likely to want. So Cisco, working with its partners on this novel solution, has become a world leader in this particular technological space. Scenario analyses, using say Monte Carlo methodologies, are also likely to be a required business modelling capability.

7. Operations The operations in this supply chain are special; the emphasis is on ­finding and executing creative solutions, fast. And doing whatever it takes to get the job done. If made to order (MTO) is involved, then lead-times have to be extremely short. To achieve this, the resources applied in the s­ hort-term are practically unlimited. Perhaps, the normally cost-efficient Japanese

· 365 ·

M11_GATT6818_03_SE_C11.indd 365

2/24/15 3:51 PM

M11_GATT6818_03_SE_C11.indd 366

Different combinations of IT applications sitting on top of ERP*

Campaign supply chain

Project accumulation

Agile – PLC

Rapid planning

Fully flexible supply chain

Innovative solutions

requisite technology for the fully flexible supply chain configuration

Source: Adapted from Figure 1.5 in Gattorna (2009), p. 55

F ig ure 11. 8 ◆

Agile supply chain

Demanding/ unpredictable

ERP transaction system and database (or can be SAP or legacy systems)

Lean supply chain

Transactional

*Using the Oracle Suite as a sample to demonstrate

• JD Edwards • PeopleSoft (HR) • E-Business Suite (EBS)

e.g. Oracle Suite

Collaborative supply chain

Collaborative

Customer Buyer behaviour segments

DYNaMiC SuppLY ChaiNS

· 366 ·

2/24/15 3:51 PM

Fully flexible supply chains: demand-side

will have to move to a new mind-set in Thailand as the billions of dollars invested in the country to establish it ‘as a vital hub and supply chain centre, ­especially in the auto and electronics industries’, comes under threat.25 And this is exactly what they have done. To avoid a purchase war over scarce car parts following the earthquake in Japan, automakers Toyota, Nissan and Honda agreed a sharing arrangement for microcontrollers from Renesas, the ­Japanese-based global supplier.26

8. Culture The subculture needed to underpin the fully flexible supply chain is ­seldom found in commercial enterprises. The design-thinking c­ ompany, IDEO is the exception. There they actively promote what they call a ­‘prototype-friendly’ culture, which is based on what they call ‘.  .  .  the Tube: a distinctive ­knowledge-sharing platform’. 27 It’s built around ­‘collaborating’, and in our P-A-D-I coding could be categorized as ‘ID’. It is an ­entrepreneurial ­subculture: entrepreneurial in the sense that it is a place for ­unpredictability, opportunity, and corresponding high levels of risk. ­Entrepreneurial ­individuals who are attracted to working in fully ­flexible ­supply chains are highly creative and innovative; they embrace risk and change like no other behavioural group in the quest for satisfactory ­solutions, and deliver these at speed. Entrepreneurial leaders have a ­proactive leadership style. If you have a ‘business event’ supply chain, you will need to encourage the ­entrepreneurial subculture while also protecting it against other opposing subcultures in your enterprise. You need to protect the subculture so that it will be available if and when the need arises. In the initial stage of setting up an ‘emergency/humanitarian response’ supply chain the ­entrepreneurial ­subculture is often the only one present, and the issue is not so much ­protecting this subculture, but being able to phase in other types of ­subcultures as the situation stabilizes and more stable processes evolve. There are, however, some important cultural differences between the two types of fully flexible supply chains. The ‘business event’ supply chain tends to foster individualism and autonomy. In contrast, the success of the ‘emergency/humanitarian response’ supply chain relies on cohesion of the team, and the ability of the individuals within the team to work with widely divergent groups – who often have very different or conflicting ideologies – for the purpose of the greater good. We will again examine the capability levers

· 367 ·

M11_GATT6818_03_SE_C11.indd 367

2/24/15 3:51 PM

Dynamic Supply Chains

for change that must be present and used appropriately if the required subculture is to be successfully instilled and the necessary actions taken without hesitation. KPIs: In this area of the business, you should emphasize finding creative solutions in the very short lead-times demanded, and in the case of ­‘business event’ supply chains, measure customer satisfaction with the solutions. The ‘emergency/humanitarian response’ supply chain can be more complex because of the number of parties involved – normal business style measures may not suffice when issues such as governance and political expectations, not to mention saving lives, can all be part of the mix of ‘performance’ in this critical supply chain. Suffice to say that little else is important in the heat of this operating environment save for getting results. Risk-taking is encouraged and mistakes are not punished, unless of course they are repeated. Basically the standard KPIs for an aid organization are to ‘get there fast and save lives’ with an eye on expenditure of funds due to increased ­accountability and greater expectations of responsible behaviour in this arena. Incentives: Rewards for individuals who lead or contribute to the ­development of creative solutions and new ideas that meet the required KPIs can be tailored to the particular individuals and teams involved; ­whatever they prefer is what they are given. Usually, the rewards are ‘in kind’ rather than monetary, e.g., research grants, industrial sabbaticals, ­further ­education and overseas travel to investigate advanced practices or the satisfaction of achieving more altruistic goals. In the ‘business event’ supply chain, ­personal development and personal challenge is uppermost in the minds of the ­individuals involved, and this is one of their main motivators. In the ‘emergency/humanitarian response’ supply chain, self-development and challenge can be overtaken by the personal and emotional benefits of supporting a humanitarian cause and helping people, animals or the environment. Job design: Do you like job descriptions? That’s going to be difficult. To foster an entrepreneurial subculture you need to have loosely defined roles rather than tight job descriptions. Your focus should be squarely on ­encouraging flexibility and rapid response – nothing should be allowed to get in the way of achieving your objective. The vision of the organization, to which everyone agrees, provides the broad boundaries for individual and team action. You can empower people to perform various roles within those boundaries. Control is achieved through adherence to this vision and an agreed set of values. This is a very self-regulating subculture, but it is

· 368 ·

M11_GATT6818_03_SE_C11.indd 368

2/24/15 3:51 PM

Fully flexible supply chains: demand-side

important to have boundaries in place. Empowerment without boundaries is a recipe for chaos at worst – and inaction at best. Internal communications: The style of internal communications is spontaneous and ad hoc. If you are not around, you will not hear what is going on inside the organization. The underlying message is that ‘we p ­ articipate in the search for creative solutions’. The method of ­communications is mostly face-to-face, and is usually very open and informal. The next best thing is video conferencing and Skype meetings. This is not a place for hidden agendas. However, there are downsides; including the haphazard nature of internal communications leading to confusion and a lack of information reaching the right people at times. This is the ‘business event’ situation. In the ‘emergency/humanitarian response’ situation, where armed forces or emergency response teams are involved, the level of communications is necessarily much better because of the life and death situations usually involved. See Figure 11.9 for a summary of communications style in an entrepreneurial subculture. Training and development: You can expand and reinforce the skills of individuals who work in the entrepreneurial subculture by providing training in lateral thinking and problem solving, and by enabling them to gain crossindustry experience. This is a very cerebral if not conceptual world, where techniques such as brainstorming are used to draw out ideas. Individuals

Core need: Expression Systems: Very informal, open networks, usually one-to-one, social Content: Ideas focused, ‘what ifs’, sometimes vague, goal oriented, emphasizes the future outlook, external orientation Style: Spontaneous, irregular, personal interaction sought, ‘hit and miss’, brief and direct, often emotional Information distribution: Shotgun-wide and deep but must be discovered; dependent on individuals

Figure 11.9 ◆

Communications style in an Entrepreneurial subculture

Source: Gattorna Alignment research

· 369 ·

M11_GATT6818_03_SE_C11.indd 369

2/24/15 3:51 PM

Dynamic Supply Chains

have their communication skills developed through training and are taught how to build rapport in team environments. The reason for risk-taking is explained and risk-management skills are further developed and refined. See Figure 11.10 for a summary of the training and development needs in an entrepreneurial subculture. Role modelling: Managers with the ENFP (Extrovert-Intuition-­FeelingPerceiving) Myers-Briggs profile are ideal; or ‘D’ (Developer) in my P-A-D-I code. They generally display the type of behaviours that you want the rest of the cluster to adopt. These are self-starting people who are prepared to take risks and back themselves in critical situations. Recruitment: People with special qualities are required to work in fully flexible supply chains; there are our ‘collaborative individualists’ that we ­discussed earlier.You should be looking for recruits who are c­ omfortable with taking risks and are highly intuitive and flexible in their working style. This category of employee needs to have an almost contradictory c­ ombination of independent thought coupled with a team-orientation. They also need to be self-confident, passionate, have good listening skills, be good n ­ etworkers and resilient in order to maintain their ability to ­function in extreme ­‘business’ environments that would challenge most other human beings.

1. Action • Limited emphasis on aggressive behaviour • Focus on writing and presentation skills 2. Investigative • Ability to learn and explore 3. Social • Well-developed interpersonal skills among wide range of stakeholders 4. Conventional • Personal needs in line with organizational goals 5. Influencing • High ability to influence colleagues and stakeholders 6. Artistic • High ability to express emotion, creativity and vision

Figure 11.10 ◆

Training and development needs in an Entrepreneurial subculture

Source: Gattorna Alignment research

· 370 ·

M11_GATT6818_03_SE_C11.indd 370

2/24/15 3:51 PM

Fully flexible supply chains: demand-side

Your recruits should be the type to challenge the status quo, be s­ trategic in their o ­ rientation, resourceful and original. These are rare and talented individuals indeed. Generating and retaining an entrepreneurial subculture in the appropriate locations in an enterprise is not easy. Some enterprises have found it impossible to do so as they seem inevitably to become dominated by a more operational mind-set. They are not alone. This mind-set pervades too many businesses today. However, an operational focus will only take the enterprise as far as operational excellence – the first level in the performance and ­capability continuum. Going to higher levels of performance requires entirely different capabilities and competences, some of which require the more risk-taking entrepreneurial subculture. But for this to occur, a ­necessary pre-condition is to already have in place leaders in the executive who are naturally visionary. Leadership style: Visionary leaders lead their enterprises by inspiration. They tend to be informal yet decisive, and they genuinely care about ideas ­generated by others as well as themselves.They are not people who feel ­threatened by subordinates, and they certainly don’t curtail talent that has the potential eventually to challenge their position. Such leaders are inherently s­ trategic, and they ooze innovation and creativity: leaders such as Richard ­Branson (Virgin) and perhaps even Carly Fiorina (former H ­ ewlett-Packard CEO). Their Myers-Briggs Type Indicator (MBTI®) style is usually INTP (Introvert-Intuition-Thinking-Perceiving), ENFJ (­Extrovert-Intuition-Feeling -Judging), or ­thereabouts. ­Branson, in ­particular, stands out. He has a very unconventional leadership style ­nurtured since he was young; he invariably challenges conventional wisdom. For instance, Branson believes strongly that employees matter most, and if you create an exciting workplace environment for staff, this will motivate them to serve their ­customers. As a result, shareholders also do well. I can vouch for this approach having flown Virgin Atlantic a number of times. In particular I recall one flight from Shanghai to London; it was a much more enjoyable experience than flights I have ­previously taken on many other international airlines. Branson is a living example of alignment. He has been quick to see opportunities and understand exactly what customers want in all sorts of diverse markets. But that’s not the end of the story. He has been able to develop value propositions that match customer buying behaviours and find ways to breed appropriate subcultures in these businesses to drive his

· 371 ·

M11_GATT6818_03_SE_C11.indd 371

2/24/15 3:51 PM

Dynamic Supply Chains

strategies into the marketplace. The results are there for all to see, as the ­Virgin Group, established only 30 years ago, is now one of the world’s biggest brands; the Group boasts more than 270 branded companies, all doing well in their respective markets. Branson exemplifies what can be achieved when the natural energy inside the enterprise is harnessed to serve customers.

Signs of things to come Everything we have said about fully flexible supply chains in this chapter could be summed up in one acronym – DARPA – the Pentagon’s Defense Advanced Research Projects Agency, which has produced a long list of unparalleled breakthroughs. I first became aware of the work of DARPA through a meeting with Michael Belfiore in Singapore in 2012, and subsequently reading his book on DARPA.28 What an extraordinary story it tells of risk-taking and breakthrough innovation. More recently, two of DARPA’s previous leaders (2009 to 2012), who have since moved to Motorola Mobility to set up the Advanced Technology and Projects (ATAP) group, have written an insightful article in Harvard Business Review.29 Essentially, they are trying to re-create in private organizations, the success of DARPA in the public sector. Many previous attempts have failed, but they wanted to prove that if the right ingredients are brought together, success is possible in private organizations. The three elements of success of the DARPA model are: ambitious goals, temporary project teams, and independence. DARPA and ATAP work in what the political scientist Donald E. Stokes described as ‘Pasteur’s Quadrant’– defined as the zone of ‘use-inspired basic research’.30 There are no road maps for this type of work, just as there are no road maps to solve one-off major disruptions and natural disasters. Temporary teams are set up, to pursue whatever lines of investigation that others may think of as crazy. These teams are led by exceptionally talented people, and above all, ‘decisions are not made by committee. Breakthroughs do not lend themselves to consensus.’31 In effect, it is a modified form of the ‘special forces’ model already referred to above, but this time operating in a pseudo-commercial context. And it gets results, achieving ‘. . . ­breakthrough innovations . . . consistently, in remarkably short timeframes, with a small, flexible and agile organization’.32 Surely this is a proven blueprint for future fully flexible supply chains in both the business and disaster emergency worlds.

· 372 ·

M11_GATT6818_03_SE_C11.indd 372

2/24/15 3:51 PM

Fully flexible supply chains: demand-side

However, a potential failing of teams as evidenced by past ­experience, is the lack of an end game or exit strategy worked out in advance. Yet, despite everything said in this chapter, the biggest disruption to our lives may still be to come. Environmentalist and author Paul Gilding ­certainly thinks so, and articulates the dangers that lie ahead in his book The Great Disruption. His focus is on the coming global climate change disaster, which he predicts will affect every human on the planet, and change the very way we live our lives. After the great disruption caused by climate change, we’ll measure ‘growth’ in a new way: in terms of quality of life rather than quantity of stuff, Gilding argues. In his view, ‘there is life after shopping’.33 Gilding stores great faith in our capacity to adapt, however, offering the optimistic view of how we will adapt and create a new future. He says, ‘We will change at a scale and speed we can barely imagine today, completely transforming our economy, including our energy and transport industries, in just a few short decades.’ Andrew Winston continues this theme of resilience in his Harvard ­Business Review article, ‘Resilience in a Hotter World’.34 According to ­Winston, ‘to be resilient, companies must transform their strategies in three ways, they must: rethink their vision, embracing radical innovation and a long-term mind-set; redefine their valuation methods to account for unpriced costs and benefits; and pursue new kinds of partnerships to achieve goals beyond the reach of individual firms’.35 These are all themes we have ­promoted throughout this book, and the best-of-the-best global companies are already leading the way. Time, however, is not on our side. Let’s hope that the types of innovation, creativity and speed we can see in crisis supply chains will provide us with learnings to deal with a longer-term crisis of far-greater proportions.

Key ideas 1 Emergencies and crises are unforeseen and hence ‘unplannable’, but ­prepared we must be. Start assessing your risk and building your ­capability to respond. 2 There are two types of fully flexible supply chains – ‘business event’ and ‘emergency response/ humanitarian’. They require creativity, innovation, intense flexibility, and risk-taking. Above all, they must deliver.

· 373 ·

M11_GATT6818_03_SE_C11.indd 373

2/24/15 3:51 PM

Dynamic Supply Chains

3 Customers and their behaviours may vary in fully flexible supply chains, but they share one thing in common. When they say ‘it’s urgent’, they mean it! 4 These are costly supply chains to configure and they create r­ edundant capacity. They’re not for routine business. But you will need the ­capability at some time, to mitigate risk and ensure business continuity. 5 Keep watch early. Global procurement and risk management must start talking in a way they have never done so before. Resilience, via proper planning and risk assessments, must be embedded – preferably before the disaster! 6 Embrace the DARPA style of working: set ambitious goals, establish ‘special forces’ style teams, and let them work unfettered by bureaucracy. 7 You can build capacity through external alliances that can be tapped almost instantly when a crisis arises.

Your challenge Has your enterprise experienced an extreme emergency? Did you have the capability to respond: the speed, innovation, flexibility and passion?

· 374 ·

M11_GATT6818_03_SE_C11.indd 374

2/24/15 3:51 PM

Chapter 12

Supplier conversations: supply-side How to give the supply-side better customer visibility

T

his chapter is about reconnecting the supply-side to the demand-side of enterprise supply chains. Each is vital to the other as we seek an uninterrupted view of what is going on in our complex networks. As we are customers of the supply base in this situation, it’s even more important to listen to our suppliers. Mostly because we could benefit handsomely! In this chapter, we look at aligning with our supply base in much the same way as we do with our customer base. Our goal is to translate many of the lessons learnt on the demandside directly to the supply-side. Not surprisingly, it’s all about buyer behaviours, only this time, from the supplier’s perspective. The cluster organizational designs we introduced in Chapter 6, bring supply and demand together; they are the pivotal points of our enterprise supply chains. With these insights, we are also able to see the possibilities for improved ‘reverse’ supply chain pathways, a topic that deserves more attention given the growing concerns of consumers about environmental sustainability. The whole area of supply-side sourcing is coming back into focus again as enterprises recover from the global financial crisis and seek to reduce its impact on the real economy. Since the start of the 21st century, multinational corporations in particular have been pursuing global sourcing ­strategies in the relentless search for ever-lower cost inputs to m ­ anufacturing. Research by Martin Christopher and his colleagues at the Cranfield School

· 375 ·

M12_GATT6818_03_SE_C12.indd 375

2/24/15 3:52 PM

Dynamic Supply Chains

of Management found this has had the effect of ‘making supply chains longer and more fragmented, and this is exposing firms to greater costs and risks’.1 The same research also found that most firms were still largely basing their ­procurement decisions on a minimum price approach rather than the more sophisticated ‘total cost of ownership’ concept.2 Finally, global trade appears to be significantly contributing to world climate change because of the greenhouse gas emissions generated by the increased use of transportation; this flies in the face of the growing global effort to reduce carbon dioxide ­emissions. We could perhaps see a change back to regional and local ­sourcing as a result of the community’s growing concern about the impact on climate change. There is already a growing chorus of consumers asking ‘Where is this coming from?’ when they purchase some products. Indeed, from our own work we see a clear trend towards a sub-segment within the overall ‘collaborative’ customer segment emerging, which appears to be very empathetic towards sustaining the natural environment and ­consequently is demanding more attention to corporate social responsibility. This ­sub-segment will surely penalize suppliers along the supply chain who do not take sufficient measures to minimize their carbon footprint. The task ahead in this chapter is to re-connect the supply-side to the demand-side. I hear some of you say, ‘But it’s never been connected!’ And you’re right. The disconnect is part of the problem. It is hard to imagine how an enterprise can successfully procure the raw materials, components, sub-assemblies, packaging and other inputs for its business if there is not a live connection with the customer-facing side of the business. But that is what has been going on for generations and, sadly, continues today in many enterprises.

Aligning procurement to business strategy There is a glimmer of hope, however. A survey of CPOs and CFOs in 2012 found that, ‘Aligning procurement to overall business strategy has emerged as the top priority of procurement leaders in 2012, overtaking cost and risk reduction.’3 What a relief this is; someone is listening inside the enterprise. Now we must lock this movement into the end-to-end supply chain. At the same time we have to seek to better understand our suppliers and the opportunities they present to us if managed well.

· 376 ·

M12_GATT6818_03_SE_C12.indd 376

2/24/15 3:52 PM

Supplier conversations: supply-side

News alert! It’s time to listen to your suppliers Just as we set out in Chapter 2 to understand customers’ dominant buying behaviours, we must do something very similar at the supply-end. This means listening to our suppliers and engaging them on their terms, not ours. This may seem strange given that we are arguing the case from the customer’s point-of-view, but we must reverse this convention if we are to achieve genuine dynamic alignment. Before you protest, rest assured there is an immediate benefit from listening closely to your suppliers: you will become their preferred ­customer. Research by Alan Day reveals that ‘…the way suppliers value their priority accounts depends only in part on the revenue they ­generate – and there are other levers you can pull to make your organization a more attractive customer’.4 Benefits that flow to ‘customers of choice’ include senior management commitment; preferential pricing; ­proactive ideas for continuous improvement; better market knowledge; and access to best people and resources.5 Sounds very much like our trusted and reliable partners segment to me. In any event, we cannot afford to neglect, or at worse ignore, this category of supplier. They could be our best business partners. Indeed, if we want a model to develop deep and lasting supplier relationships, we need go no further than the way two Japanese automakers – Toyota and Honda – have built relationships with their North American suppliers, and achieved outstanding success.6 Suppliers are the largely ignored element in the human system that ­propels contemporary supply chains, along with customers at the frontend and employees and management inside the business. According to A.T. Kearney,7 Companies that take the time to listen to their suppliers can eventually realize rewards beyond cost savings. Often, they can generate new ideas and concepts, determine how their performance stacks up against their best-practice competitors, and identify areas and processes on which to focus attention. In short, they are well positioned to embark on major supply chain management initiatives. But how do you categorize your suppliers? That is the key question. We believe that you must start by segmenting them along behavioural lines.

· 377 ·

M12_GATT6818_03_SE_C12.indd 377

2/24/15 3:52 PM

Dynamic Supply Chains

Segmenting your suppliers You rarely hear of this methodology being used these days, and the few attempts at segmenting suppliers have revealed the same flaws as similar attempts at customer segmentation revealed at the consumption end of the supply chain. In 2006, Diane Bueler presented a paper on segmenting suppliers, but she used the characteristics of the product/service being purchased as the basis of her segmentation framework.8 The four categories she identified – commodity, strategic, standard and key – provide useful statistical data, but contribute little to our understanding of the way suppliers prefer to supply, or their ‘selling behaviour’ as I call it. See Figure 12.1 for details of the characteristics in each quadrant of Bueler’s framework. Jeffrey Dyer and his colleagues9 see strategic supplier segmentation as a necessary precursor to achieving best practice in supply chain management; and they are spot on. Their work identified two very different supplier

COMMODITY ◆ High spend ◆ Low switching costs ◆ Multiple sources of supply ◆ Short-lead times ◆ Low complexity/items on shelf ◆ Low item costs ◆ High volume

STRATEGIC ◆ High spend ◆ High switching costs ◆ Few sources of supply ◆ Typically long-lead times ◆ Critical performance characteristics ◆ High item costs ◆ Variable volumes

STANDARD ◆ Low spend ◆ Low switching costs ◆ Multiple sources of supply ◆ Short-lead times ◆ Standard, on shelf items ◆ Low item costs ◆ Volumes vary

KEY ◆ Low/medium spend ◆ High switching costs ◆ Few sources of supply ◆ Typically long-lead times ◆ Critical performance characteristics ◆ High item costs ◆ Variable volumes

Supplier segmentation based on a combination of product and supplier characteristics

Figure 12.1 ◆

Source: Adapted from Diane Bueler (May 2006)

· 378 ·

M12_GATT6818_03_SE_C12.indd 378

2/24/15 3:52 PM

Supplier conversations: supply-side

management models; the first is the traditional ‘arm’s length’ approach, which deliberately sets out to avoid any kind of commitment or interdependence. This view is consistent with my ‘transactional’ buying behaviour at the customer end. The second approach is a far different species. They wrote, ‘In contrast, the success of Japanese firms has often been attributed to their close supplier relationships, or ‘partner model’ of supplier management.’10 Clearly, to get close to their suppliers, the Japanese automakers had to develop trust over time; and it’s very likely they carefully selected their suppliers based on their collaborative values. This is the equivalent segment to collaborative customers on the demand-side, and we will label the equivalent segment on the supply-side as trusted and reliable partners, which we describe below. Examples of both types of segments can be seen in the automotive industry, where General Motors has traditionally applied the ‘arm’s length’ and largely transactional methods with their suppliers, while Toyota (and more latterly, Chrysler) has employed the partner or ‘trusted and reliable partners’ model. You can decide which has been the more successful! Dyer and his team conducted extensive research into supplierautomaker relationships in the USA, Japan and Korea, and they found that ‘firms should not have a one-size-fits-all strategy for supplier ­management’.11 Sound familiar? However, it should be said that while Dyer and his colleagues were on the right track by favouring multiple supplier segments; they were mainly thinking about how each ‘supplier’s product might contribute to the core competence and competitive advantage of the buying firm’.12 They were not thinking of behavioural segmentation per se. In summary, it appears that most buyers in the market have been focusing on finding suppliers who have the required array of supply capabilities, and then adopted one or two of the relationship approaches described above. That is not a very sophisticated way of doing business; it’s too one-dimensional. We have seen enough evidence in our field work to suggest that ­supply-side alignment is generally the mirror image of the demand-side; see Figure 12.8 later in this chapter. This means we have 16 potential ­behavioural segments on the supply-side as depicted in Figure  12.2.

· 379 ·

M12_GATT6818_03_SE_C12.indd 379

2/24/15 3:52 PM

dynaMiC Supply ChainS

‘Process driven’

‘Commercial’

‘Fair deal’

‘Relationship at a price’

‘Visionaries’

‘Innovation with a human face’

‘Opportunistic’

‘Vision to reality’

‘Partners’

‘Trusted and reliable partners’

‘Let’s go places together’

‘Sharing the vision’

‘Demanding’

‘Planned creativity’

‘Solutions at speed’

'Ever reliable'

Figure 12.2 ◆

the 16 possible selling behaviours in source markets

Of these, we can be confident that in practice, there will be five dominant customer segments, in the same way as we found five dominant customer segments on the demand-side. See Figure  12.3. The five dominant supplier segments are: trusted and reliable partners; process driven; planned creativity; ever reliable; and opportunistic.

· 380 ·

M12_GATT6818_03_SE_C12.indd 380

2/24/15 3:52 PM

M12_GATT6818_03_SE_C12.indd 381

◆

◆

◆

◆

◆

◆

◆

◆

◆

Prefer tight contracts Regular order/delivery schedule Offer lowest cost-to-serve Don’t wish to share information Adversarial at times Adopt standard processes Impose power where possible Very transactional mind-set Sensitive to low-price demands ◆

◆

◆

◆

◆

◆

◆

Have capacity to meet volatile demand Prefer not to enter close relationships Can respond to urgent demands Use as few processes as possible Outcome oriented Very commercial Require price premium

Capability to provide rapid response in irregular demand situations

Planned creativity

Supply-side behavioural segmentation characteristics

Like predictability Prefer regular orders Prefer producing natural products Like to be treated as an exclusive source Seek trusting long-term relationships Enjoy partnership/ teamwork Prepared to share information Engage in joint development Expect fair margin

Consistent low-cost response to largely predictable demands

Close working relationships for mutual gain

F i gur e 12 .3 ◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

Process driven

Trusted & reliable partners

Capabilities to accumulate products and ETO equipment ◆ Capability to stage or deliver direct to site ◆ Have appropriate IT systems ◆ Can track project deliveries ◆ Have capability to expedite if required ◆ Aim to deliver in full and on time, every time ◆ Will meet specific delivery time-slots ◆ Use lean processes ◆

Reliable and timely response to project requirements

Ever reliable

◆

◆

◆

◆

◆

Have the capacity to cope with unexpected situations Can provide creative solutions as required Innovation mind-set embedded Very solutions oriented Prefer to charge a significant premium

Capability to create innovative solutions, very fast

Opportunistic

Supplier ConverSationS: Supply-Side

· 381 ·

2/24/15 3:52 PM

Dynamic Supply Chains

Aligning multiple supply chains – reverse alignment Our segmentation of the supply base leads to the supply-side (or reverse) alignment of multiple supply chains looking as depicted in Figure 12.4. Clearly, we will need up to five different procurement strategy packages to achieve full coverage in support of the demand-side supply chains discussed in Chapter 2. By undertaking this segmentation, you will be able to reveal any gaps that exist between the behaviours of supplier and buyers, and the respective relationships they prefer to use to do business. A misalignment can cause problems down the line, and should be identified as early as ­possible. A good example is the procurement of diesel engines by the Royal Australian Navy and its logistics agency, the Defence Materiel Organization; their alignment diagnostic was revealing.

Royal Australian Navy/Defence Materiel Organization The Royal Australian Navy (RAN) and the Logistics Support AgencyNavy within the Defence Materiel Organization (DMO) have been testing the use of alignment principles to guide the procurement of diesel engines (and sub-categories) for a component of its destroyer fleet. A pilot project was undertaken with a major international supplier and produced promising results. Not unexpectedly, the buying behaviours exhibited by the Navy/DMO for main engines/rotatables, component and service spares, and routine maintenance were quite different to the selling behaviours of the supplier, in each of the three sub-categories examined. This highlighted the need for different procurement strategies and correspondingly aligned responses from the supplier. So much for the old one-dimensional tender process! The overall alignment diagnostic we conducted between the RAN/ DMO as a customer of the major international supplier identified a similar misalignment in all of the diesel engine sub-categories tested. This amounted to the supplier endeavouring to sell and service its RAN/DMO client using trusted and reliable partner values, but facing a customer that was mostly driven by what I would call a pragmatic buying behaviour, with little room for relationships. This misalignment led to on-going issues between the supplier and the customers as clearly evidenced in Figure 12.5.

· 382 ·

M12_GATT6818_03_SE_C12.indd 382

2/24/15 3:52 PM

M12_GATT6818_03_SE_C12.indd 383

Process Driven

Trusted and Reliable Partners Planned Creativity

Procurement Strategy 3

Subculture 3

Leadership Style 3

Procurement Strategy 5

Subculture 5

Leadership Style 5

Fully Flexible supply chain

Opportunistic Opportunistic

Procurement Strategy 4

Subculture 4

Leadership Style 4

Campaign supply chain

Supply-side (reverse) multiple supply chain alignment

Procurement Strategy 2

Subculture 2

Subculture 1

Procurement Strategy 1

Leadership Style 2

Leadership Style 1

Agile supply chain

Source: Adapted from Figure 2.12 in Living Supply Chains (2006), p.62

Fi gu re 12. 4 ◆

Looking upstream to source markets

Lean supply chain

Collaborative supply chain

Source markets ‘Supplier segmentation’

The identified dominant selling behaviours in the supply base

The portfolio of different procurement strategies used in the supply marketplace

The distinctly different cultures required to drive the corresponding procurement strategies

Cultural capability ‘Internal capabilities’

Strategy ‘Buying propositions’

The different leadership styles that are required to shape the corresponding subcultures

Leadership styles ‘Shape and create’

Supplier conversations: supply-side

· 383 ·

2/24/15 3:52 PM

dynaMiC Supply ChainS

Primary ‘buying behaviour’ of RAN/DMO customer (Pragmatic)

Misalignment in values

Primary ‘selling behaviour’ of engine supplier (Trusted and Reliable Partners)

Figure 12.5 ◆ alignment diagnostic between the royal australian navy and the defence Materiel organization and a major supplier Source: Primary research by Gattorna Alignment (2005); unpublished report

Another interesting case arose in the bovine meat industry in Brazil.

JBS S.A. As one of the major processors in the Brazilian market, JBS set out to secure a greater share of the available live cattle for slaughter. The company investigated how it could align more closely with the selling expectations and corresponding behaviours of its suppliers – ranchers. The conventional wisdom espoused by the procurement department in the particular processor was they should simply pay more for live cattle and this would automatically attract a greater share of available head. The subsequent research of selling behaviour conducted among a large sample of ranchers across a region of Brazil delivered a completely different answer, as depicted in Figure  12.6. It found that 81 per cent of the sample had a relationship (or I logic) element in their selling logics, and only the residual 19 per cent were primarily driven by yield and price. This finding allowed the processor to fine-tune its offerings to the various rancher segments, and include significant non-price relationship components. This simultaneously satisfied the ranchers and delivered more head of live cattle at cost-effective market prices to the processor.

· 384 ·

M12_GATT6818_03_SE_C12.indd 384

2/24/15 3:52 PM

M12_GATT6818_03_SE_C12.indd 385 ◆

◆

◆

Focus on yield Requires assistance in reducing costs Requires assistance to increase yield from animals ◆

◆

◆

Capable of fast response Will seek out best opportunity at a point in time Only interested if a premium price

19%

Opportunistic. Sell to who pays the best

Suspicious

Source: Adapted from information supplied by Axia Consulting, Brazil (2008)

Cattle suppliers (ranchers) segmentation at JBS in Brazil

Partnerships Long-term contracts Special treatment Transparency Closeness Reliability

Fi gu re 1 2.6 ◆

◆

◆

◆

◆

◆

◆

35%

Interested in yield, and price is a pre-requisite to negotiate

Partnership, intense relationship, and friendship

37%

Traditionalist

Talkative

◆

◆

◆

◆

Interested in any new technologies Electronic communications Computer savvy Seek market information

9%

Interested in technology mixed with personal contact

e-ranchers

Supplier ConverSationS: Supply-Side

· 385 ·

2/24/15 3:52 PM

Dynamic Supply Chains

Global sporting goods retailer Adidas is another great example of a company that changed its business model as a result of a detailed analysis of its suppliers. It did this on two occasions to take advantage of two major commercial opportunities – the 2004 UEFA European Football Championship in Greece and the 2006 FIFA World Cup in Germany. The challenge was to supply the soccer shirts of the teams that were winning matches throughout the competition, and in the final match, supply the apparel of the winner as rapidly as possible – virtually as soon as the winning goal was scored! Adidas aligned its global procurement and logistics operations and used the alignment as the basis of its business model for the operation. (You’ll find details of the organizational design aspects of Adidas’s approach in a case study in Chapter 6.) A study by Rudy Puryear and his colleagues found that Adidas matched the supply- and demand-sides of its business and succeeded in far superior sales than would have otherwise been possible. Now that’s a winning goal! By synchronizing orders through scores of contract manufacturers, subcontractors and suppliers in more than a dozen countries around the world, Adidas managed to get the top team’s gear on retailers’ shelves – duplicating those sales triumphs in every other country as their national teams advanced through the series. What’s more, Adidas’s flexible supply chains (I would call them agile), delivered these sales without pre-investment in materials or finished product.13

The five generic supply-side supply chains As with the case of demand-side supply chains (discussed in Chapters 7 to 11), we must have the right capabilities in place to have successful ­supply-side supply chains. Supplier segmentation is the first step, now we have to ­carefully analyze the capabilities we need. We will focus mainly on a modified version of the capability areas used in previous chapters; these determine if the intended procurement strategies are to be fully ­implemented or not. The five generic supply-side supply chains are depicted in Figure 12.7, and we set out the characteristics of each in more detail below. The two axes of the figure are instructive – the predictability of demand and relationships with the suppliers. Once again, these are about customer buyer

· 386 ·

M12_GATT6818_03_SE_C12.indd 386

2/24/15 3:52 PM

M12_GATT6818_03_SE_C12.indd 387

Tight

High

Agile

Reliability of supply

Campaign

Low

Fully flexible

Five generic supply chains: supply-side (customer perspective)

Loose

Lean

Collaborative

Agile Unplanned or unforeseen demand, and a sometimes loose relationship with those suppliers who have excess capacity – agile response will be at higher cost-to-serve. Focus on the service-cost equation.

Campaign Elements of lean and agile supply chains in particular, plus expediting capability via fully flexible supply chains. Focus on delivery of products and equipment to site in full and on time, every time.

Source: Adapted from Figure 2.3 in Gattorna (2006), p. 43; supplemented by ideas contributed by Marc Van der Veen of Dow Corning

F igu re 12.7 ◆

Lean Demand predictable, but the loose relationship does not necessitate an extreme service level. Focus on efficiency and low cost for large volume of product.

Collaborative Predictable demand, easily managed through tight collaboration with loyal suppliers. Focus on retention of supplier relationships. Relationship with supplier

Fully flexible Requires opportunistic response. Focus on supplier capability to provide creative solutions albeit at a premium price.

Supplier conversations: supply-side

· 387 ·

2/24/15 3:52 PM

Dynamic Supply Chains

behaviours influencing relationships which in turn influence demand. The key, as before, is in getting the right subculture in place.

Collaborative supply chains: supply-side The suppliers in the collaborative supply chain are the trusted and reliable partners. They are typically predictable in their business dealings, and seek out trusting, long-term relationships; they also like working in teams. Their demand-side equivalent is the collaborative customer segment. The required capabilities are outlined below.

Capabilities ◆

Organization design: Procurement specialists will be part of the ­collaborative cluster (already shown in Chapter 7). We will show the two components, demand and supply-side, together in the same diagram in Figure 12.8.

◆

People positioning: As with all clusters, while not every member will have the same preferred operating style, it is important to engineer the selection of personnel so that the bias is appropriate, in this case a r­elationship bias, or F (feeling) in terms of the Myers-Briggs Type ­Indicator (MBTI®) profiles and I (Integrator) in P-A-D-I language.

◆

Processes: Stable processes are important where you want to faithfully replicate the same behaviour each time, every time. And everyone should know what these are. In this case we expect that supplier management will be one of the key processes deployed.

◆

Systems/IT: The automatic choice here is the SAS supplier r­ elationship management (SRM) system, with its different modules. The key is to choose who you want to be among your strategic suppliers, and then manage them on a sensitive, systematic basis.

◆

Key performance indicators (KPIs): As we have said before, forget about measuring a long list of performance attributes, and select one or two that are the deal-breakers, those that ‘move the needle’ and are what we call ‘biased’ in the desired direction. In the case of procuring from loyal suppliers, we might choose to measure retention time as a de facto measure of loyalty, as well as monitor the share of the supplier’s business that we represent.

· 388 ·

M12_GATT6818_03_SE_C12.indd 388

2/24/15 3:52 PM

M12_GATT6818_03_SE_C12.indd 389

F igur e 12.8 ◆

Collaborative

Lean

Agile

Campaign

Fully flexible

Supply-side network

S

S

S

S

S I

P

I

P

I

P

I

P

I

P

MK

F

HR

MK

F

HR

MK

F

HR

MK

F

HR

MK

F

HR

CULTURE–LEADERSHIP

L

MF

L

MF

L

MF

L

MF

L

MF

Internal organizational clusters

P = Procurement MF = Manufacturing L = Logistics S = Sales

Key:

Collaborative

Lean

Agile

Campaign

Fully flexible

Demand-side network

a new dynamic business model for supply chains of the future

TRUSTED AND RELIABLE PARTNERS

PROCESS DRIVEN

PLANNED CREATIVITY

EVER RELIABLE

OPPORTUNISTIC

Supplier (segments)

MK = Marketing F = Finance HR = Human resources I = IT

COLLABORATIVE

TRANSACTIONAL

DYNAMIC

PROJECT a ACCUMULATION

INNOVATIVE

Customer expectations (segments)

Supplier ConverSationS: Supply-Side

· 389 ·

2/24/15 3:52 PM

Dynamic Supply Chains

◆

Incentives: Once the KPIs are clear to members of this cluster, everyone will tend to work together to achieve them, encouraged by schemes that share the rewards fairly among the team.

◆

Job design: For this cluster the name of the game is consensus. No one goes out on a limb and takes risks with strategic suppliers. Everything is fully discussed and agreed, with little individual autonomy allowed.

◆

Internal communications: Everything is discussed face-to-face, and the meetings are frequent and sometimes long. Our trusted and reliable partners like to share information.

◆

Training and development: No rash brainstorming required with this group – well-planned, team-building exercises are needed to develop trust between the individuals in the cluster.

◆

Role modelling: If there is a particular profile of behaviour to be admired and replicated by individuals in this particular cluster it is the ISFT (introvert-sensing-feeling-thinking) in the MBTI profile, or I in our ­P-A-D-I code.

◆

Recruitment: If you want a certain behaviour, a sure way of getting it is to recruit personnel with both the appropriate mind-set and the t­ echnical competence. This is a refinement on what companies like Li & Fung have been doing, and represents a logical progression as they search for even higher levels of performance from their people.

◆

Leadership style: The natural leaders that emerge from the multidisciplinary clusters will be very much a coach in this environment, where day-to-day dealings are with loyal suppliers and loyal customers. It is reassuring when team members see the same values as they hold being exhibited by leaders inside their business and within their external stakeholders.

Lean supply chains: supply-side For our process driven suppliers in the lean supply chain, cost is the name of the game. They are highly price-sensitive and do not respond well to p ­ ressure to lower their prices. In fact, they can be adversarial and ­unwilling to share information. Their mind-set is transactional; not ­surprisingly, they are the transactional suppliers in supply-side supply chain configurations.

· 390 ·

M12_GATT6818_03_SE_C12.indd 390

2/24/15 3:52 PM

Supplier conversations: supply-side

Capabilities ◆

Organization design: The cluster in this case is as described for ­customer segments in Chapter 8; it is designed around core processes to achieve high reliability at lowest possible cost.

◆

People positioning: It is important to engineer the selection of personnel so that the bias is right, in this case a cost bias or S (sensing) in MBTI terms, or A (Administrator) in our P-A-D-I code.

◆

Processes: This particular supply chain places a lot of emphasis on ­re-engineered processes, so Six Sigma techniques will be very applicable.

◆

Systems/IT: For best results it’s essential to have an ERP system installed and functioning well. The alternative of a mix of legacy systems held together with middleware is a possible alternative, but is usually not as effective as having the one unified system.

◆

Key performance indicators (KPIs): For this configuration, the ­emphasis moves away from relationships, to pure cost control and ­reliability, hence the measurement of unit cost, DIFOTEF (­Delivery-in -Full-on-Time-Error-Free); and a particular focus on forecast accuracy.

◆

Incentives: For members of this cluster conformity is mandatory, and no member of the teams should try to do his or her own thing.

◆

Job design: In this supply chain, nothing is left to chance in the desire for consistency and reliability. The specific duties of every member of the cluster are spelled out in detail, and are known and understood by all other members.

◆

Internal communications: Communications are very formal and ­structured, albeit quite detailed. This is a fact-based subculture, and because of the sheer volume of data floating around, personnel are often included on a need-to-know basis only.

◆

Training and development: This cluster thrives on analysis and measurement of supplier performance, in an objective non-emotional way. Relationships with suppliers are not encouraged in any way. Business is business.

◆

Role modelling: The ideal role model is the detailed, conscious ­cost-controller type, and this is reflected in an ISTJ (introvert-sensingthinking-judging) MBTI profile or A (Administrator) in our P-A-D-I coding system.

· 391 ·

M12_GATT6818_03_SE_C12.indd 391

2/24/15 3:52 PM

Dynamic Supply Chains

◆

Recruitment: Clearly, team members with highly tuned analytical ­capabilities are highly valued, although not every member of the cluster has to be equally hot on the numbers.

◆

Leadership style: The natural leader to emerge in this cluster will be the hard-nosed, fact-based, cost-controller type who uses information cunningly and, above all, avoids any form of risk in transactions with suppliers or indeed customers.

Agile supply chains: supply-side Our planned creativity suppliers must be fast on their feet. In the agile supply chain, our suppliers must have the capacity to meet volatile demand, when and where required. How else can you have the procurement strategies that will respond to the demanding customers on the demand-side of the supply chain? Of course you pay for the suppliers’ creative, agile responses – they command a high price premium. But then again, having a supplier who can match the desires of the high-demand customer segment can be fruitful!

Capabilities ◆

Organization design: The cluster in this case is as described in ­Chapter 9, and is designed around satisfying demanding customers who come and go from our customer list. We therefore need to encourage suppliers to build capacity to help us satisfy sudden changes in demand.

◆

People positioning: It is important to engineer the selection of personnel so that the bias is right, in this case a speed bias or N (intuition) in MBTI terms or P (Producer) in our P-A-D-I code.

◆

Processes: Here the emphasis is on re-engineering processes to reduce their number and complexity.

◆

Systems/IT: For best results we should install software applications that help us to test various supply scenarios, and at what cost.

◆

Key performance indicators (KPIs): For this configuration, the ­emphasis moves away from relationships and cost to pure speed of fulfilment.

◆

Incentives: Members of this cluster must be able to meet customers’ uncertain demands, irrespective of a scarcity of pre-information. Each

· 392 ·

M12_GATT6818_03_SE_C12.indd 392

2/24/15 3:52 PM

Supplier conversations: supply-side

member of the team works in an individual, albeit ­complementary, ­fashion to achieve set targets, and rewards are often in the form of bonuses. ◆

Job design: Job descriptions are clear and boundaries are known and understood by all team members.

◆

Internal communications: Communications are very formal, regular and action-oriented. No long meetings for this cluster, just quick advice and then get on with it.

◆

Training and development: This cluster thrives on problem-solving exercises. The task is to make all team members fully familiar with ­best-practice resource allocation and trade-off techniques, because that is what they have to do most of the time.

◆

Role modelling: The ideal role model is the detail-conscious company baron, who is driven to achieve agreed objectives, and will stop at nothing to do so. This style is reflected in an ENTJ (extrovert-intuition-thinkingjudging) or ESTP (extrovert-sensing-thinking-perceiving) MBTI profile, which is P (Producer) or Pa (Producer-administrator) in our P-A-D-I logic.

◆

Recruitment: Clearly, team members with finely tuned analytical and judgement skills are highly valued, although not every member of the cluster has to be equally driven.

◆

Leadership style: The natural leader to emerge in this cluster will be the hard-nosed company baron who lives by the MBO creed: management by objectives. They are happy to lead from the front and take risks.

Campaign supply chains: supply-side In a campaign environment, suppliers must be masters of precision. Our ­segmentation shows they are ever reliable. It’s paramount that these ­companies are in command of their schedule, careful in their tracking of project deliveries, and capable of expediting or slowing supplies as the ­end-customers demand. The projects being served by this supply chain are typically large – on an industrial scale – as we described in Chapter 10; budgets are large and delays costly. The mantra for campaign suppliers is: deliver in full and on time, every time.

· 393 ·

M12_GATT6818_03_SE_C12.indd 393

2/24/15 3:52 PM

Dynamic Supply Chains

Capabilities ◆

Organization design: The cluster in this case is as described in ­Chapter 10, and is designed around satisfying demanding major project customers who can be very demanding. We therefore need to encourage suppliers to build capacity to ensure they can meet lumpy demand with steady, reliable delivery responses.

◆

People positioning: It is important to engineer the selection of personnel so that the bias is right, in this case a reliability bias combines with the determination to meet deadlines.

◆

Processes: Here the emphasis is on reliable processes to ensure delivery in full and on time to site, either via staging or direct.

◆

Systems/IT: For best results track and trace software supplemented by RFID is required.

◆

Key performance indicators (KPIs): For this configuration, the emphasis moves away from relationships and delivery in full on time (DIFOT). Any shortfall can be costly to the constructor/client.

◆

Incentives: Members of this cluster must be able to meet customers’ bunched demands, irrespective of a scarcity of pre-information. Each member of the team works to achieve the desired DIFOT result.

◆

Job design: Job descriptions are clear and boundaries are known and understood by all team members.

◆

Internal communications: Communications are very formal, regular and action-oriented. No long meetings for this cluster.

◆

Training and development: This cluster thrives on reliability and timeliness.

◆

Role modelling: The ideal role model is a combination of the traditional leader and the driven company baron, who will stop at nothing to meet specifications in terms of reliable delivery to site.

◆

Recruitment: Clearly, team members with finely tuned analytical and judgement skills are highly valued, although not every member of the cluster has to be equally driven.

◆

Leadership style: The natural leader to emerge in this cluster will be a combination of the hard-nosed company baron who lives by the MBO (management-by-objectives) creed, and the risk-averse traditional leader.

· 394 ·

M12_GATT6818_03_SE_C12.indd 394

2/24/15 3:52 PM

Supplier conversations: supply-side

Fully flexible supply chains: supply-side The suppliers in our fifth supply chain configuration are opportunistic: they are innovative organizations that can offer creative solutions to crisis situations – whether it is a disruption to your business or a natural disaster or emergency. What they do, they do very fast. This is critical if you’re to meet the urgent needs required within the fully flexible supply chains. Your suppliers will ask for a price premium, but what you get is a solutions mind-set – essential to meet the volatile, crisis nature of customer demand.

Capabilities ◆

Organization design: The cluster in this case is as described in ­Chapter  11, and is designed around ‘hedge and deploy’ principles. There is usually a single cluster to handle ‘unplannable’ and unexpected situations, and all members of the cluster are selected for their ability to operate in unfamiliar situations. This cluster may be comprised of ­full-time or part-time volunteers.

◆

People positioning: It is important to engineer the selection of personnel so that the bias is right, in this case a creativity bias or P (perceiver) in MBTI terms or D (Developer) in our P-A-D-I code.

◆

Processes: Processes are almost non-existent as personnel react r­ eal-time on the ground to an evolving emergency.

◆

Systems/IT: While human intervention is at a high level in this type of supply chain, any and all systems/IT will be invoked if they can produce a solution fast.

◆

Key performance indicators (KPIs): For this configuration, the ­emphasis moves away from relationships, cost and speed to finding ­creative solutions to the problem, very fast. Cost and to some extent relationships matter naught.

◆

Incentives: For members of this cluster, risk-taking is highly rewarded because a solution must be found. Mistakes occur in this environment but are not penalized.

◆

Job design: Job descriptions are non-existent as most team members must multi-task.

· 395 ·

M12_GATT6818_03_SE_C12.indd 395

2/24/15 3:52 PM

Dynamic Supply Chains

◆

Internal communications: Communications are spontaneous and informal as the action is taking place. This is the time for doing first and asking forgiveness later.

◆

Training and development: This cluster thrives on developing lateral thinking to meet unexpected problems.

◆

Role modelling: The ideal role model is the detailed ENFP (extrovert-intuition-feeling-perceiving) MBTI style, or D (Developer) in our ­P-A-D-I code.

◆

Recruitment: This type of supply chain demands very enterprising and resourceful personnel, and a lot of testing is involved in finding this relatively rare quality.

◆

Leadership style: The natural leader to emerge in this cluster will be the hard-nosed visionary who is authentic and much respected by other team members.

When customers become suppliers – reverse logistics Reverse logistics is becoming more and more common as manufacturers and retailers accept that they have responsibilities to take back product, either because it is faulty, or at the end of its useful life and requiring disposal. A.T. Kearney has provided a useful definition of the send-it-back or ­take-it-back phenomenon that is becoming increasingly apparent across a range of customer markets. ‘Reverse logistics encompasses all the activities associated with the return of goods, regardless of condition or reason for return, for the purpose of extracting value or ensuring proper ­disposal.’14 ­Products can be returned for several reasons: customer preference - ‘I don’t like it!’, customer expectations about a company’s environmental ­responsibilities, or growing regulatory requirements around issues such as reducing waste to landfill. A wide range of options now exists for products to be returned and this in itself creates complexity (as well as opportunities) for supply chains, as depicted by the possible combinations in Figure 12.8. The problem of meeting reverse demand is only worsening as more ­customers embrace online purchasing as a method of acquiring a product, and then, for whatever ­reason, want to return it to the place where they purchased it.

· 396 ·

M12_GATT6818_03_SE_C12.indd 396

2/24/15 3:52 PM

Supplier conversations: supply-side

Klas Hjort et al.15 undertook research in the Swedish e-commerce ­fashion sector and identified that ‘returns management’ (RM) is one of the emerging new factors influencing consumer behaviour, particular in the link between retailer and consumer. They found that ‘. . . RM is of great ­importance for building strong and lasting relationships in most dyads, and it is ultimately a decisive factor for obtaining competitive advantages and greater profitability’.16 Based on this research we can confidently assert that RM is a key factor that should be taken into consideration in the design of reverse flows of products and services from customers/consumers. Perhaps dynamic alignment offers a way through this apparently increasing complexity, just as it has helped with the forward-looking element of the supply chain on the demand-side. If we could limit the number of return options to a relatively few return pathways, and focus resources on these few supply chains, the cost of the reverse activity would be significantly reduced. Let’s look at five possible return pathways in our supply chains that are consistent with our experience on the demand- and supply-sides.

1. Collaborative return path: where relationships are the key driver17 Bessemer is an Australian company that has made and distributed premium quality aluminium cookware for more than 40 years. It offers customers a 40 per cent discount on a new product with a trade-in of any existing product. Many of Bessemer’s customers are loyal devotees of their product and this very attractive incentive keeps them re-purchasing. However, as the items have a longer-than-normal life cycle, the re-purchase period may be eight to 10 years after the original sale. In many respects, this is a very savvy approach. Returns constitute a third of the total aluminium used in production. At a cost per ton at the time of writing of more than $2,000, and as recycled product requires considerably less processing effort, the economics are compelling. The offer also enhances the premium brand image by providing an additional benefit, and positions Bessemer as a responsible corporate citizen that is concerned about the full life cycle of the product. The return path is supported by the extensive national network used for forward movements, and the complexity is minimized because the returned

· 397 ·

M12_GATT6818_03_SE_C12.indd 397

2/24/15 3:52 PM

Dynamic Supply Chains

item is introduced into the return path when it is exchanged for the new item. When each depot reaches an economic transfer quantity (usually a pallet), the items are dispatched, generally on the same vehicle delivering new product. The quantities returned, after many years of this operation, are also quite predictable. This is a classic example of leveraging a loyal (Ia) customer base and developing a stable and cost-effective return operation around the predictability that that relationship brings. The collaborative return path will often be built on dependencies. In this case, the manufacturing operation is highly dependent on the returns for inputs, and the marketing arm is dependent on the incentive to maintain and build an ongoing relationship with customers. Stable patterns also lend themselves to fine-tuning based around analytics, and in this case the variability of supply is a key element in the analysis.

2. Lean return path: where cost is the key driver Where items are expected to have no reclaimable value, or where there is regular and stable recycling of low-value inputs, the key driver is usually cost, and the emphasis is on routine patterns with minimal need for management intervention. Ideally, the local waste recycling system for households should be designed around the reliability and rigour of a lean path so as to keep costs down. This model will enable paper, glass, steel and aluminium to be removed on a weekly or fortnightly basis and directed through a predictable separation process, when the materials can be collected and returned for re-use or new production. The company need not intervene in this process – or engage with the customers – at any stage.

3. Agile return path: where time is the key driver Where there is an opportunity for resale, time usually needs to be the key driver in the returns process. Studies of Hewlett-Packard’s Equipment Management and Remarketing (EMR) operation18 found that laptops being refurbished for resale in secondary markets could take more than four months to go through the various phases of staging and processing before being made available for sale. Obviously the recovery value of computer

· 398 ·

M12_GATT6818_03_SE_C12.indd 398

2/24/15 3:52 PM

Supplier conversations: supply-side

equipment deteriorates rapidly with time, and time lost equates to value lost in these markets. One source of delay in this process was the use of the same manufacturer for refurbishment as for original equipment production. Inevitably new production was given a higher priority. A complicating factor in this market was also management’s perception that they needed to limit sales of refurbished items to put a floor under the price of new laptops. However, on closer analysis during this study, it was found that the markets for each were distinctly different and there was little substance to this concern. Time-sensitive returns should be treated as a value stream not a waste stream. The priority is to manage lead-times, avoid bottlenecks and support the operation with a flexible organization structure geared around identifying and quickly capturing market opportunities as they emerge.

4. Campaign return path: where it’s all about reliability and timeliness Unlike in other industries, the reverse logistics task in the construction and ship building industries is normally undertaken by a third-party contractor, and rarely by the original manufacturer (OEM) or main contractor. One example is the redevelopment of the St Bartholomew’s Hospital and the Royal London Hospital sites in London. The main contractor was Skanska, and the contractor for demolition and recycling was Keltbray.19 Some ‘4,000m3 of demolition material was crushed and reused at the Royal London for piling mat, and other inert materials were segregated and sent off-site for crushing, screening and recycling’.20 Overall, the construction team recycled 98 per cent of the construction waste on site, a fine effort. Reverse logistics is also common practice in the ship building industry, which aims to recapture value at the end of ships’ lives. The big difference in this case is that it is a closed loop supply chain in that the collection point for decommissioned ships is usually clustered in main ship-breaking yards. For example, over the past decade, over 80 per cent of the world ship breaking has taken place in two ship breaking yards, i.e., Alang in India, and Chittagong in Bangladesh. Much of the steel from Alang is sent to recycling mills a short distance away, saving time, logistics cost, and CO2 emissions.21

· 399 ·

M12_GATT6818_03_SE_C12.indd 399

2/24/15 3:52 PM

Dynamic Supply Chains

5. Fully flexible return path: where risk management reigns While the fully flexible supply chain features rarely in the forward supply chain, in the reverse supply chain it is a feature of every major manufacturer’s armoury – but hopefully only in their contingency plans. A fully flexible path requires fast, dynamic and creative responses to unforeseen situations. For most companies this means recall programmes, natural disasters or other, similarly high-risk situations. The recall programme is an important reverse logistics situation. It requires detailed contingency planning with specialized arrangements, and capacity commitments from logistics providers that can be turned on immediately they are needed. Despite all the planning, however, when the situation arises it will inevitably also require creative and fast decisions to respond to the particular situation. Reputational risk is so high in these situations that cost cannot be a consideration, just as holding or paying for spare capacity can often be justified as a risk minimization strategy.

Sustainability dimension and corporate social responsibility One of the biggest drivers of reverse logistics has been the growing demands of consumers for sustainability practices to be embedded into business operations. The trend has been sweeping across the business scene for more than a decade, as consumer consciousness of the environment grows. National governments have ignored this new movement at their peril, and some indeed have fallen because they did not take sustainability seriously. Academic and author V. Daniel R. Guide22 has calculated that the annual generation of waste in Western Europe is 550 kg per person, exceeding the current target by 83 per cent, and is trending towards doubling by 2020. This problem is not going away soon. It has to be addressed. Consumers want to see solutions, and whether the solution is straightout disposal, re-manufacturing or refurbishment, all these options will require cost-effective reverse logistics.

· 400 ·

M12_GATT6818_03_SE_C12.indd 400

2/24/15 3:52 PM

Supplier conversations: supply-side

Legislation has existed in Europe for some time that requires manufacturers to take back packaging from the consumer at the end of a product’s life. More recently legislation has been introduced in Europe and other jurisdictions that requires mandatory take-back of electrical and electronic products so that their constituent materials can be recycled. Such regulatory action is likely to continue as governments respond to concerned consumers. All businesses will need to comply; it is more than likely that supply chain design will become part of a corporation’s legislative risk management and corporate governance. It appears that the only sensible way forward is to design (or re-design) the demand-side, supply-side and reverse logistics elements of an enterprise supply chain concurrently, because of the intense interdependency between them. This is the task for corporate managements and governments alike over the next decade. As author Thomas L. Friedman bluntly puts it in his writings, solutions must be found as time is beginning to run out.23

Key ideas 1 The supply-side of the supply chain is just the mirror image of the demand-side. Use the same segmentation techniques for your supplier base as you do for your customer base. 2 We found five similar behavioural selling logics on the supply-side as we identified on the demand-side. We call them: trusted and reliable partners; process driven: planned creativity; ever reliable; and opportunistic. 3 You will achieve a far more efficient spend by aligning your procurement strategies with these five dominant supplier segments: witness what happened at JBS in Brazil. 4 As we found on the demand-side, the key is to build the right capabilities to underpin the execution of your procurement strategies via the five main types of supply-side supply chains. 5 Consumers increasingly want to return their products, either for environmental reasons or because they’re online shoppers, among other reasons. Get used to it! This creates extra complexity and cost, so it’s critical you establish efficient reverse logistics practices.

· 401 ·

M12_GATT6818_03_SE_C12.indd 401

2/24/15 3:52 PM

Dynamic Supply Chains

6 To keep your return costs down, limit the number of return options to a relatively few pathways, and focus your resources on those supply chains. Aligning your supply- and demand-side supply chains at the outset will make this task far easier.

Your challenge Have you re-connected your supply-side to the demand-side of your enterprise supply chains? And what of reverse pathways – are they up to the task?

· 402 ·

M12_GATT6818_03_SE_C12.indd 402

2/24/15 3:52 PM

Chapter 13

‘Hybrid’ supply chains How to bring the demand-side and supply-side together

T

he preceding chapters in this book all lead to this chapter, where we summarize the 25 possible combinations and ­permutations of supply chains observed in enterprises worldwide.1 We call these ‘hybrids’, and they co-exist in various combinations depending on the product or service category and the marketplace being served. Indeed, the various combinations can also operate in parallel with each other, a situation that demands that multiple alignment ­techniques be applied at both ends of the enterprise. This might appear as ­complexity ­incarnate; but again, our goal is alignment, using the principles and tools we have outlined earlier in this book. In this chapter we explore how the hybrids work, looking at examples of the world’s-best c­ ompanies in action. If ever there was a final condemnation of the one-size-fits-all mentality so common in contemporary supply chain management, this is it. If only the world was linear! Then we could more easily manage supply chains to match identified customer segments. But life was never meant to be that simple. It is therefore important to understand that alignment with customers (and suppliers) does not always work on a linear like-for-like basis. Mixed supply chain combinations are sometimes the best solution, but this formula has to be applied skilfully. We called these hybrid supply chains in our discussion of organizational design in Chapter 6. As befits the network cluster organization of the future, these supply chains can be any combination of the most commonly observed five demand-side and five supply-side supply chains depicted in Figure 13.1. In Figure 13.2 we define · 403 ·

M13_GATT6818_03_SE_C13.indd 403

2/24/15 3:53 PM

M13_GATT6818_03_SE_C13.indd 404

F igu re 13.1 ◆

TRUSTED AND RELIABLE PARTNERS

Collaborative

Lean

Agile

Campaign

Fully flexible

Supply-side network

S

S

S

S

S I

P

I

P

I

P

I

P

I

P

MK

F

HR

MK

F

HR

MK

F

HR

MK

F

HR

MK

F

HR

CULTURE–LEADERSHIP

L

MF

L

MF

L

MF

L

MF

L

MF

Internal organizational clusters

P = Procurement MF = Manufacturing L = Logistics S = Sales

Key:

Collaborative

Lean

Agile

Campaign

Fully flexible

Demand-side network

COLLABORATIVE

TRANSACTIONAL

DYNAMIC

a PROJECT ACCUMULATION

INNOVATIVE SOLUTIONS

Customer expectations (segments)

MK = Marketing F = Finance HR = Human resources I = IT

demand-side and supply-side elements of contemporary supply chains

PROCESS DRIVEN

PLANNED CREATIVITY

EVER RELIABLE

OPPORTUNISTIC

Supplier expectations (segments)

dynaMiC supply Chains

· 404 ·

2/24/15 3:53 PM

‘hybrid’ supply Chains

DEMAND-SIDE

SUPPLY-SIDE 5

Fully flexible

21 17

24 4

Campaign

13

19

18

8

Agile 23

3

Agile

14

15

11 2

Lean

Lean

7 22

Figure 13.2 ◆

Campaign

20

16 12

Collaborative

Fully flexible

25

9

6 10 1

Collaborative

the 25 possible hybrid supply chain variants

the full set of 25 possible pathway combinations, but of course some of these are rare or simply not feasible. We will now look at the most common types of hybrid supply chains, and illustrate these with current examples.

The 25 hybrid supply chain combinations The approach we use in the following examples is to specify the demand-side component first, followed by the supply-side in the overall enterprise supply chain. Some of the enterprises will be familiar to you, having been discussed in earlier chapters. Note that the examples given of these supply chain configurations are not meant to be comprehensive. They may be operating in other combinations as well. Of course, for peak performance in the hybrids, the clusters driving each type of mainstream supply chain must be collaborating with each other. Our goal with the 25 hybrid configurations is to achieve dynamic alignment, only this time it is at both the demand-side and the supply-side

· 405 ·

M13_GATT6818_03_SE_C13.indd 405

2/24/15 3:54 PM

Dynamic Supply Chains

of the supply chain. Ideally you should consider which four or five of these would achieve closest alignment with your customers and suppliers – any more than that will introduce excessive complexity and is no more likely to achieve your goals. Our approaches and tools when it comes to building capabilities and operational strategies for hybrids will be equally ­important as they are for the five generic demand-side supply chains featured in Chapters 7–11. Our focus below is to give you on-the-ground examples of these hybrid supply chains at work. We will start with the five ‘straight-through’ or mainstream supply chain combinations, followed by the 20 mixed combinations.

The straight-through hybrids The first group of five appear to provide the perfect match of supply chains, as each supply chain is matched with like. Synchronicity perhaps? Indeed, it’s often assumed that they are the most common combinations; however, this is not the case in the real world. The most common combinations are probably (in order of priority), the following: ◆

agile–lean;

◆

lean–lean and agile–agile (albeit they are single-type matches);

◆

collaborative–lean;

◆

lean–agile; and

◆

collaborative–agile.

It’s looking like lean and agile rule, which is hardly surprising given the ­rapid-fire nature of markets today, filled as they are with demanding ­customers. In these circumstances, hybrids can equip you to respond on the demand- and supply-sides; but more on these supply chains later. We’ll start with the five straight-through configurations. The examples featured are summarized in Figure 13.3.

1. Collaborative–collaborative When it comes to collaborative, we are firmly ensconced in the c­ ollaboration zone; our top priority is to maintain solid, loyal relationships and provide reliable service. Trust is the magic needed to secure these supply chains.

· 406 ·

M13_GATT6818_03_SE_C13.indd 406

2/24/15 3:54 PM

Fully flexible – Innovative

M13_GATT6818_03_SE_C13.indd 407

Honda UNICEF's Fly-away VSAT

Fi gu re 1 3.3 ◆

22

23

24

25

Dow Chemical

Moog Inc. CEMEX Liebherr

CEMEX

Schneider Electric Liebherr

CEMEX Dredging Industry

18

19

20

4

21

Campaign – Projects Accumulation

Matrix of hybrid supply chain examples

Collaborative – Trusted and reliable partners ‘Event’ business Big Day Out

Lean – Process driven

Agile – Planned creative Formula One pit stop Dell Procter & Gamble

Campaign – Ever reliable Staroup (Brazil) UPS (with Kaigen)

Fully flexible – Opportunistic Indian Ocean tsunami, 2004 Haiti earthquake, January 2010 Japan earthquake, 2011/Google Person Finder Missing Malaysian 5 Aircraft MH370

Supply-side

Demand-side

Marks & Spencer Campbell’s Soup Airbnb

BMW Staroup (Brazil) Cochlear CSR Gyprock Hunter Valley Coal Chain Daewoo Shipbuilding & Marine Engineering Viterra Land Rover Fantastic Furniture Zara Haier Unilever/Wall's

Benetton BOC Gases Marks & Spencer AIReS

Aecon

Staroup

Agile – Demanding

14

15

3

16

17

13

11

Gerdau Steel Toyota and Honda Tesco UK Filtronic Comtek Airbnb Walmart

10

2

Unilever (Thailand) Benetton Cochlear BOC Gases The Ministry of Defence, UK Ryanair Dabbawalas of Mumbai Haier CSR Gyprock Xiaomi

Red meat industry Procter & Gamble AIReS Xiaomi

Dredging industry (maintenance dredging) Royal Boskalis Westminster DEME China Harbour Company Van Oord 12

Ministries of Health Not-for-profit organizations Toyota, Nissan, Honda Renesas

Lean – Transactional

Li & Fung Unilever (Thailand) BOC Gases Unipart Group

Shouldice Hernia Centre Virginia Mason Hospital BOC Gases CSR Gyprock Louis Vuitton Xiaomi

Marks & Spencer Red meat producers (such as Stockyard Beef and Teys) Xiaomi

Lockheed Martin, Boeing Northrop Grumman Corp.

Egged Bus Company (Israel)

1

6

7

8

9

Collaborative – Collaborative

‘hybrid’ supply Chains

· 407 ·

2/24/15 3:54 PM

Dynamic Supply Chains

But can trust stretch across the expanse of enterprises and activities ­operating on both the supply- and demand-sides? Li & Fung is the consummate enterprise when it comes to owning strong relationships at both ends of the supply chain. On the demand-side, the Hong Kong based company sets up individual multi-disciplinary clusters for each individual new account. On the supply-side, each cluster develops strong relationships down to the individual factory level. The emerging problem with this approach is that with 300 clusters now in operation, these individual ‘tribes’ are beginning to compete with each other for capacity at the individual supplier level. Unilever (Thailand), one of Thailand’s largest fast m ­ oving c­ onsumer goods manufacturers, has the collaborative supply chain on both sides. With diverse products ranging from detergents to ice cream to ­personal care products, Lever Brothers’ hybrid supply chain addresses ­fluctuating production by working to a shared forecast on the demand-side. To s­ upport this dual arrangement there is a specific programme to train staff in the ­competences required to operate each configuration. Lever Brothers is aiming to have these two supply chain configurations synchronized and integrated throughout the business. BOC Gases, now part of the Linde Group, uses a similar ­a rrangement when supplying bulk gas, onsite gas, and safety gear to their major ­customers in the healthcare, mining and metals industries. Similar to Lever Brothers, BOC is synchronizing the demand-side and ­supply-side of their supply chains to ensure that a stable and reliable service is m ­ aintained for their many loyal customers. With collaboration a d ­ istinguishing feature of the collaborative supply chain, it is double ­collaboration in this hybrid! Unipart Group in the United Kingdom used this type of supply chain configuration in their strategic partnership with Jaguar Cars. With such a quality brand as Jaguar, Unipart knows that reliability, quality and ­collaboration are essential. As a major logistics services company, ­Unipart has developed their own philosophy to enshrine commitment to lean ­principles, called ‘The Unipart Way’, which they seek to share with ­customers. Unipart says, ‘We believe that no other logistics organization has developed “lean thinking” to the extent that we have’.2 We would argue, however, that ‘The Unipart Way’, being built around collaboration, is closer to the collaborative supply chain than the more cost-focused lean operation.

· 408 ·

M13_GATT6818_03_SE_C13.indd 408

2/24/15 3:54 PM

‘Hybrid’ supply chains

2. Lean–lean It’s efficiency multiplied by efficiency in this configuration. The focus is keeping costs down across the supply- and demand-sides, including ­keeping waste to a minimum. Service does not need to be Rolls-Royce style, but it must be reliable and predictable. The challenge lies in how to keep the lean supply chains so stable at low cost, but also agile. Cost and efficiency synergies are king. Unilever (Thailand) has developed a manufacturing plant for its production of the well-known Sunsilk range of hair care products. The plant services two distinct supply chains. One of these is lean–lean, based on steady demand and therefore steady production. Benetton also uses this type of straight-through single type ­configuration for its pre-season dispatch of apparel to franchisees; they call it their ‘­sequential dual’ supply chain.3 Benetton uses the dual configuration to supply garments ordered by franchisees before the beginning of the f­ ashion season. It is very much ‘push’ focused. Features of this supply chain ­configuration are: make-to-forecast; sourcing teams focused on low-cost sourcing; and logistics teams focused on forecasting, inventory management and distribution. Cochlear, the Australian-based global company providing solutions for the hearing-impaired, also use the lean–lean combination to meet the scheduled part of its global demand coming from hospitals and doctors. This high technology manufacturer has, for this segment of customers, ample leadtime to fulfil to a published schedule while doing so at a relatively low cost. BOC Gases use the lean–lean combination to meet the demand for gas cylinders and safety gear to its retail outlets.4 The Ministry of Defence (MOD) in the United Kingdom has some challenges with running parallel supply chains. It has to switch between maintenance mode in peacetime (lean–lean) to quick response during times of armed conflict (agile-agile). If it tries to manage both supply chains with the same management system, it will be very difficult to optimize either – as a result, the MOD carries huge inventories, and has incompatible ­performance management systems. As lean initiatives are essentially designed to strip out waste from supply chains, including inventory and excess capacity, one outcome is to make the system less stable. Indeed, as with ‘fly-by-wire’ technology in aeronautics,

· 409 ·

M13_GATT6818_03_SE_C13.indd 409

2/24/15 3:54 PM

Dynamic Supply Chains

the issue is all about stability. How close can you get to zero inventory and full utilization of resources without the system failing? In this case the failure is in not meeting customers’ expectations. On the other hand, if we try to increase stability by building in inventory, time and capacity buffers, agility will suffer. So the solution is to combine the two in some way rather than adopt one or other approach alone. Ryanair, the low-cost Irish airline, has been able to minimize input costs and, therefore, the cost of fares on the demand-side. Consumers can buy tickets on the Internet and pay for extras on-board if they choose. There is no loyalty club, no meeting customers and little or no advertising – as is befitting a lean operation! The Dabbawalas of Mumbai use this supply chain configuration every day as they deliver their home-cooked lunches to clients in the Mumbai CBD, at an impossibly low price. This business successfully delivers 150,000 meals a day; doing so with a high degree of accuracy. Likewise Haier, the normally agile white goods manufacturer in China, has used a lean supply chain configuration to deliver white goods to parts of the United States market at the lowest possible cost. CSR Gyprock the Australian building materials company uses this configuration when servicing the bulk plasterboard needs of distributors and large commercial builders. The building materials manufacturer uses lean– lean principles for its bulk business, but needs different supply chain hybrids for other markets and products, as discussed below. Chinese smart technology manufacturer Xiaomi supplies consumers with affordable high-quality smartphones. On the supply-side, Xiaomi has borrowed the just-in-time model from Toyota, seeking to build a lean ­production system with minimum inventory.

3. Agile–agile This is where speed of delivery and speed of sourcing must be in lock-step. Costs can be higher but that is expected when suppliers are being asked to meet fluctuating, unforeseen demand from quick response customers. As they say in other fields, move it or lose it! Benetton uses a straight-through agile–agile supply chain c­ onfiguration in parallel to its lean configuration discussed above. This is designed to move apparel quickly to market within the season in a very short timeframe.

· 410 ·

M13_GATT6818_03_SE_C13.indd 410

2/24/15 3:54 PM

‘Hybrid’ supply chains

They call this variation their ‘integrated dual’ supply chain.5 Features of this ­configuration are make-to-order (pull) and a modular organization ­structure. Their key performance indicator is meeting promised delivery time to customers. BOC Gases use this combination when supplying gas cylinders and safety gear to small- and medium-sized enterprises, generally by direct ­delivery to reduce the lead-time and maintain responsiveness. Marks and Spencer, the British retailer, used this configuration in the 1990s, somewhat unsuccessfully. It moved too far away from its original value proposition to core customers, so that their supply chain configuration was never going to succeed. Global relocation service provider AIReS was asked by Ciba Specialty Chemicals Corporation (now part of BASF Schweiz AG), to help revise its location policies to align with company goals. On the supply-side, AIReS keeps abreast of technological developments to allow it to proactively address customers’ rapidly changing needs.

4. Campaign–campaign This pathway has only recently been formally identified, although it has existed informally for as long as there have been projects. Campaign supply chains have a surge flow type as they serve large, industrial-scale projects that have highly scheduled, but irregular, deliveries. Accumulation and accuracy are key. An example is Schneider Electric, which accumulates products and engineered-to-order (ETO) assemblies, for ultimate delivery to the site of large projects such as the Gorgon natural gas development, off the ­north-west of Australia. Liebherr has calculated that in about 5 per cent of all projects, a crane with special modifications is required.6

5. Fully flexible–fully flexible Organizations responding to natural disasters and business emergencies need the ultimate flexibility because of the crisis nature of what they are trying to achieve. Demand is unplanned and unplannable, creating extreme challenges for the suppliers in these supply chains.

· 411 ·

M13_GATT6818_03_SE_C13.indd 411

2/24/15 3:54 PM

Dynamic Supply Chains

Most of the examples in this category will come from humanitarian ­ isasters such as the 2004 Indian Ocean tsunami, and more recently the d Haiti earthquake of January 2010. Increasingly the agencies involved in responding to these crises, are seeking to increase their p ­ reparedness by building both stocks and relationships with suppliers and thirdparty l­ogistics providers ahead of disaster events, thereby introducing ­elements of collaborative and lean on the supply-side, while maintaining the ­emphasis on being fully flexible and capable of any level of response on the demand-side. Other examples of this type of combination are the Japanese ­earthquake and tsunami of 2011, and the deployment of Google’s Person Finder, a website acting as a directory and message board that people can use to look for lost loved ones. Another example is the search for the missing Malaysian Airlines flight MH370, which disappeared without trace in the southern Indian Ocean in March 2014. Every conceivable piece of advanced equipment is being used in this on-going search.

The hybrid hybrids The remaining 20 supply chain hybrids are the masters of c­ o-existence, ­operating in various combinations and in parallel with each other. ­Alignment has to happen at both ends of the enterprise and in multiple ways, which requires skilful handling. These hybrids are tailor-made for delivering the value propositions underpinned and propelled forward by cluster ­organizations. You might say that life was never meant to be easy when it comes to harnessing complexity, but it is possible, and it can be fruitful! The possible supply chain combinations, are numbered 6 through 25 below.

6. Collaborative–lean This is where close collaboration and strong relationships meet efficiency and low-cost production and delivery. Sound like a collision? Not n ­ ecessarily, as both of these configurations are operating in environments that require predictable supply and demand.

· 412 ·

M13_GATT6818_03_SE_C13.indd 412

2/24/15 3:54 PM

‘Hybrid’ supply chains

Shouldice Hernia Centre7 in Canada has refined and smartly executed its approach to a particular customer segment with a single health problem, thanks to its hybrid configuration.

Shouldice Hernia Centre The Shouldice Hernia Centre has a unique service – it treats only people with inguinal hernias. These patients are in and out of the hospital in three days and back to work in about10 days, compared to the usual ­hospital stay of seven to 10 days, followed by up to six weeks for full recovery. The ­streamlined approach of this hospital and the focus on one type of ­operation has resulted in expertise in the preparation of the patient, ­surgery procedure, recovery programme and rehabilitation – as well as an international reputation attracting ‘customers’ from all over the globe. Over 95 per cent of hernia patients are male, and Shouldice Hernia ­Centre has developed its systems to address the needs of this customer category. This is achieved by maximizing the information and control the patient has in the procedure and minimizing time lost from work; which further contributes to the speed of recovery. The shortened time for recovery has decreased the negative impact on both the patient’s family and their business. Patients are admitted in the afternoon and allocated to a group that they are responsible to, and for, during their stay in the hospital. The group eats their meals together in the equivalent to a hotel dining room (in both the quality of food and style). Hospital rooms in Shouldice do not have their own bathroom – instead patients have to get up and walk to the bathroom. At every step the patients are encouraged to return to routine activity. On the first afternoon the groups are taken through a complete explanation of the medical procedure. The next day, operations are performed without a general anaesthetic; instead they are given a combination of a local anaesthetic and sedatives (they are semi-conscious). After the procedure is completed the patient is helped to walk back to their bed – in contrast to conventional approaches to hernia recovery, where patients are restricted to complete bed-rest for almost a week after the operation. The same day patients are up and walking (very slowly) in the manicured gardens of the hospital. They are required to walk to meals and exercise with their group. Two days later they are discharged from the hospital after following a programme of increased gentle exercise and instruction on how to continue the healing process. Annually, Shouldice Hernia Centre has sold-out reunions for their patients in a five-star hotel. The venue is packed with more than 1,500 patients who come to re-join ‘their’ group to catch up and celebrate.

· 413 ·

M13_GATT6818_03_SE_C13.indd 413

2/24/15 3:54 PM

Dynamic Supply Chains

The Virginia Mason Hospital fully embraced lean principles on the back end in order to provide a reliable but patient friendly service at the demand-end of its supply chains. BOC Gases uses a customer friendly front-end supply chain when servicing selected long-term contract customers in the healthcare, mining, and metal industries. CSR Gyprock used this type of configuration when servicing retail trade centres located around the country to support the relationship and network needs of the small builder/tradesmen. Louis Vuitton, a unit of Louis Vuitton Moët ­Hennessy (LVMH), the world’s largest luxury goods company, overhauled its manufacturing processes in 2005/06 in an effort to reduce costs.8 We assume the sell prices did not change though! Other luxury-goods brands are following suit, e.g., Versace, Giorgio Armani, Burberry, Cartier and Prada.9 Interestingly, Louis Vuitton is now considering a joint venture in India in a further overhaul of its supply chain.10 Every smartphone that Xiaomi makes is in direct response to the inputs from its techie and rabidly supportive fan base. They make phones fun and empower customers to love the brand. The collaborative–lean supply chain configuration operates in harmony with its lean–lean counterpart.

7. Collaborative–agile Marks and Spencer in the UK used this combination until it moved away from its domestic suppliers in favour of low-cost source markets in the Far East in the late 1990s. Red meat producers and other businesses built around the natural unpredictability of agriculture are prime examples for this hybrid. Where customers have regular and planned requirements and the relationship has been built over time to share this information, the businesses find themselves needing to ‘convert’ the unpredictability of upstream supply into the steady flow required to maintain the loyalty of their collaborative customers. Specialist grain-fed producer Stockyard Beef and beef producer Teys Australia are two examples of companies succeeding through this hybrid. Here comes Xiaomi again with another hybrid. Xiaomi has a core of users, some might say fans, who they collaborate with in order to help develop new products. Production runs sell out in just hours, such is the frenzy for

· 414 ·

M13_GATT6818_03_SE_C13.indd 414

2/24/15 3:54 PM

‘Hybrid’ supply chains

their products. Xiaomi runs an agile product development process, with small production runs. Each production run is launched over the Internet.

8. Collaborative–campaign This supply chain hybrid would be exemplified by a loyal customer with high expectations of predictable supply, buying from a project-style supplier. Collaboration is required on both sides, as is an unrelenting commitment to timelines and budgets for these large-scale affairs. Locheed Martin, Northrop Grumma and Boeing are three of the top arms-producing companies in the world. Locheed’s primary customer is the US Department of Defense and NASA. Northrop Grumma is the sole builder of the US Navy’s aircraft carriers. And Boeing has strong domestic and international sales of aircraft. Most customers of these three companies are loyal to the one supplier, and buy on a regular basis. On the supply-side, most of the capital equipment being supplied is part of projects that require a campaign style supply chain set-up. They must have the capacity to deliver in a staged way, to a specific timeline, and the capability to expedite if necessary.

9. Collaborative–fully flexible Another unusual combination, this hybrid configuration must have a focus on customer relationships and tight collaboration, while being highly ­creative under exceptional circumstances. Egged Bus Company in Israel has to try and run a user-friendly service amid the constant threat of suicide bombers attacking its buses.

10. Lean–collaborative This is the place where relationships and price in supply chains differ. Lean customers can be somewhat testy and are not interested in sharing ­information, while the suppliers in collaborative will collaborate and operate in environments based on trust. In lean, low costs are essential, while for collaborative, price is not the main driver – these suppliers are interested in expanding their business. The hybrid must marry the two. Surprising, but possible.

· 415 ·

M13_GATT6818_03_SE_C13.indd 415

2/24/15 3:54 PM

Dynamic Supply Chains

Gerdau Steel in Brazil has decentralized the production of long products using market-mills located in regional markets to allow efficient access to customers. On the supply-side, Gerdau fosters long-term relationships with its suppliers. Above all, the company tries to avoid any type of disruption by keeping dependence on any one supplier or customer to a maximum of 10 per cent of revenue. Toyota and Honda are perfect examples of this combination. Both are automotive makers and both have formed remarkable partnerships with their Tier One supply base, resulting in lower cost components. They provide a clear case of collaboration on the supply-side leading to a lean result on the demand-side. Tesco, the leading UK supermarket chain, also uses this configuration among others. Its suppliers now perform many of the functions previously undertaken by Tesco, and the result is a lean supply chain at the demandend, supported by a collaborative configuration largely supported by suppliers. However, this is probably more an example of Tesco’s power in the channel than true collaboration. Walmart operates much the same way in their supply chain arrangements with suppliers. Filtronic Comtek, which manufactures cellular base stations for the telecommunications industry, has embraced lean manufacturing principles on the demand-side. However, the company concedes that strategic supplier relationships were essential to make it work and keep the company competitive.11 Airbnb is an online business that matches people who want to rent out a room in their homes to travellers who are looking for low-cost accommodation. In 2014 it became the world’s largest ‘hotel’ chain, without owning a single hotel! It now has more than 500,000 listings in almost 200 countries. Most of the customers searching the Airbnb website are looking for an alternative, if unconventional, form of lodgings on a nightly or weekly basis. On the supply-side, Airbnb focuses on ways to help its hosts improve the quality of the experience for guests that stay in their homes.

11. Lean–agile This combination has been seen in some parts of the red meat industry, where availability of supply can be highly unpredictable, influenced by a range of factors including weather. Businesses with ongoing contracts with

· 416 ·

M13_GATT6818_03_SE_C13.indd 416

2/24/15 3:54 PM

‘Hybrid’ supply chains

retailers and export customers must do whatever is necessary to source and negotiate supply terms to fulfil their ongoing commitments, and to keep volume moving through their plant to absorb overheads. Procter & Gamble also use this approach when supplying volume products to Walmart. AIReS is a full-service provider of global assignment and management services. It focuses on relocation programmes for corporations and their relocating staff and families. Many customers require the relocation service to be fast and cost-efficient, in order to minimize disruption. AIReS, through its technology platform, IRIS, allows AIReS employees to service clients and their transferring families in a fast, flexible manner. Xiaomi, can be very lean on the front-end, and due to its exceptional skills in peak load sales, it is able to launch a new promotion every week; 70 per cent of its sales are online, thus avoiding competition at the retail store level.

12. Lean–campaign This combination is the typical configuration for an owner of a large-scale project or a contractor to the project. They both require low-cost lean ­supply from a supplier that is familiar with the relentless low-cost, t­ime-specific delivery that will be required. Dredging companies such as Royal Boskalis Westminster, DEME, China Harbour Company, and Van Oord, and their clients and contractors, share a mutual interest in having the project delivered on-time and on-budget without surprises. Project funders are also looking for cost certainty. On the supply-side, Dredging International (a subsidiary of DEME) has a Central Competence Centre where all the knowledge and experience from all over the organization is pooled to reduce risk in the bidding and construction phases.

13. Lean–fully flexible This is the type of configuration needed, and occasionally evident, where Ministries of Health and Not-For-Profit (NFP) organizations attempt to keep a steady flow of life-critical drugs (such as insulin) moving to affected populations in Third World countries within very tight budgetary

· 417 ·

M13_GATT6818_03_SE_C13.indd 417

2/24/15 3:54 PM

Dynamic Supply Chains

constraints. While the base level operation in these situations needs to be designed around low cost and reliability, there also needs to be a highly flexible ‘back-up’ supply chain that is available in emergencies, avoiding the need to hold high stocks and spare capacity in the primary channel. Automakers Toyota, Nissan, and Honda came to an unprecedented arrangement with key semi-conductor supplier Renesas following the 2011 earthquake and tsunami in Japan. The innovative arrangement allowed the three car makers to share available supply, which would not normally be allowed under anti-monopoly laws – but these were extraordinary circumstances.

14. Agile–collaborative Marks and Spencer used the agile–collaborative configuration in the 1990s when it relied on a collaborative relationship with its predominantly domestic UK supply base, and it worked well because replenishment times were relatively short. However, due to downward pressure on pricing, Marks and Spencer mistakenly changed its sourcing strategy to focus on the Far East, and that’s when the problems multiplied. The retailer had underestimated the logistics difficulties associated with this new sourcing strategy, and paid the price. Campbell’s Soup uses this type of configuration, among others, to service its retail customers. In arranging creative and unique lodgings for travellers (and not owning any of the apartments or homes being offered), Airbnb continually seeks out reliable suppliers and collaborates with them to deliver a great service. The service levels are reported online to the travellers, creating transparency and incentives at both ends of the supply chain. This configuration operates alongside Airbnb’s lean–collaborative offering.

15. Agile–lean This is one of the most common combinations in this increasingly volatile world. Customers are demanding a rapid response, with services and products delivered, fast. The cry is results, results, results! Suppliers at the other end prefer steady demand and low costs. You might expect friction to be the result, at the very least, or irritation at the most; however when these two do come together it’s a potent mix. It is the way of the future.

· 418 ·

M13_GATT6818_03_SE_C13.indd 418

2/24/15 3:54 PM

‘Hybrid’ supply chains

BMW are a good example of this type of supply chain configuration. According to Rich Morris, ‘flexibility . . . is the ability to shift production of different models among different plants, as demand shifts in different global markets’.12 Staroup in Brazil was forced to launch its ‘survivor’ project in January 2007, when its major customer for jeans, Levi’s, announced it was ­shifting its sourcing to China. Up to that point Staroup had used an agile–lean ­configuration to supply all the women’s jeans that Levi’s sold in the USA. After some experimentation, Staroup decided to adopt an agile–fully flexible configuration (discussed below) and saved a major part of its Levi’s business, at least for a short time. Cochlear is another company that uses the agile–lean combination for a large part of their business. During the past decade, Cochlear have been working to develop scale on the supply-side and agility on the demand-side. The motivation for this transformation was Cochlear’s strong but somewhat unpredictable growth in international markets, which was influenced by an increasing product range, customer demand for more customization, and categories of institutional customers with minimal demand-planning capability. On the supply-side, Cochlear has secured its supply base for components and accessories by working closely with key suppliers and by acquiring their largest supplier, upon whom it was critically dependent. In manufacturing/assembly, lean principles were adopted along with the introduction of innovative new manufacturing technology. Postponement techniques, and locating inventory buffers along the chain, have led to increased responsiveness on the volatile demand-side. The result has been reduced production cycles and increased flexibility. The changes have also resulted in improved operational efficiency, increased customer service levels and more successful introductions of new products. CSR Gyprock also use this combination: servicing its ‘pick centres’ (for assembling assorted orders) with a lean configuration and these in turn service smaller residential customers who have dynamic requirements and demanding delivery needs with an agile response. The Hunter Valley Coal Chain in Newcastle, Australia, managed by Port Waratah Coal Services (PWCS), has aimed to be lean from the mine pit/ loading point to port (on the supply-side) and agile from the port stockpile to on-board the ore carrier which is waiting for dispatch to end-users (on the demand-side). Focus on the differing requirements of their end-users,

· 419 ·

M13_GATT6818_03_SE_C13.indd 419

2/24/15 3:54 PM

Dynamic Supply Chains

however, is suggesting new combinations. The reliable demands for much of the coal used in power stations in several key markets such as Japan could lend itself to an information-driven collaborative supply chain on the demand-side, while the unpredictable requirements of that part of the market dominated by traders and parts of the spot market will always ensure an agile supply chain is also required. Daewoo Shipbuilding & Marine Engineering13 in Korea is another outstanding example of the successful application of a hybrid supply chain configuration.

Daewoo Shipbuilding & Marine Engineering Daewoo Shipyards completes a new super-tanker or container ship every 36 hours, or more than 200 a year. They are valued at $75 million to $100 million each. How can that be possible? Several ships are constructed line abreast, and up to 20 sections or blocks for each ship are built off-line, simultaneously. This is the lean part of the supply chain. These blocks, weighing several thousand tons each, are completed with all the fittings inside – piping, electricals, hydraulics – everything. They are transported from other areas of the site at the last minute and welded together, painted and launched, as fast as possible as the next ship is waiting to be assembled. This is postponement in action on a massive scale. So it is not just a phenomenon that happens with apparel and electronics. This is heavy industry with a capital ‘H’. All of this is also achieved with a well-paid labour force – Korea is no longer a low-cost labour country. So, here again, we see an innovative combination of lean and agile supply chains at work.

Global agribusiness Viterra Australia (previously ABB Grain) does s­ omething similar to Daewoo when shipping grain to its worldwide c­ ustomer base. The General Manager Terry O’Connor described how: With New Zealand’s geographic isolation and its dependence on imported grain for the animal feed and flour industries, efficient supply chain ­management requires suppliers like ourselves to understand millers’ annual requirements and sometimes unexpected demands. Our solution is to locate strategic storage at sites adjacent to the mills. This provides the millers with certainty of supply, and also flexibility in purchasing

· 420 ·

M13_GATT6818_03_SE_C13.indd 420

2/24/15 3:54 PM

‘Hybrid’ supply chains

to meet demand either on a spot or forward basis. The advantage of this is to optimize supply chain efficiencies both in the country of origin, sea freight and on-shore New Zealand storage sites.14 Land Rover’s rapid development of its vehicle the Freelander, otherwise known as the CB40 Project,15 is another demonstration of combining lean and agile supply chains.

Land Rover Two of the Freelander project’s many unique features are: the design of a large part of the new vehicle using standard components and processes (lean); and the combined in-built ‘design redundancy’ of other components to shorten the time required at assembly, to reduce the waiting time for customers (agile). To achieve this, Land Rover’s supply base was limited to 146, and fully integrated into the project at the concept phase. Suppliers were also encouraged to participate in component design and subsequent logistics processes and physical operations. In truth, this was one of the first projects in any industry to invoke a higher-order level of collaboration between multiple parties in the extensive supply chains involved, right through to the dealer network.16 It set the scene for others to follow.

Fantastic Furniture, Australia’s fastest-growing furniture chain, has its own Fantastic Lounge Factory, which produced 113,000 sofas in 2004/05, about one every three minutes! It was clearly using postponement techniques and an agile–lean supply chain combination, albeit on a somewhat smaller scale than Daewoo Shipbuilding & Marine Engineering, but just as effective. As always, you look behind the scenes and you find an entrepreneur and quality leadership at the top; it never fails. Who said Australia can’t match the lower labour-cost countries for productivity, work practices and sheer passion? Zara is world famous for its ability to work within a 15-day cycle to replenish its store network with newly designed fashion apparel. This is very much a case of agile on the demand-side and lean on the supply-side. Its main competitor, the Swedish firm H&M, is not far behind, with a 20-day replenishment cycle. Zara is designed in a vertically integrated way. It manufactures 50 per cent of its products and outsources the residual 50 per cent. The company

· 421 ·

M13_GATT6818_03_SE_C13.indd 421

2/24/15 3:54 PM

Dynamic Supply Chains

integrates backward for design, fabric procurement and colouring processes, and forward for market research and running its own retail chain. Haier, which also featured earlier, set up manufacturing facilities in California as this was its major export market. In effect, it traded off some of the benefits of low cost production in China for responsiveness to the demands of customers in the domestic US market. Finally, Unilever’s ice-cream division Wall’s, now offers to deliver ice cream to retail customers in London during the summer months, with a two-hour lead-time!17 That’s responsiveness!

16. Agile–campaign This situation is epitomized by a buyer with demanding requirements, including fast delivery, coupled with a supplier that has a project mentality. The configuration is geared to deliver on time and to a specific time schedule. Aecon Group Inc is Canada’s largest publicly traded construction company, providing a range of services to private and public sector clients across three core segments: infrastructure, energy and mining. One of its clients, Sikorsky Helicopter, needed a facility to paint two ­helicopters at once, while meeting strict air quality and fire safety requirements. Another client, Kanzaki Paper Company, wanted to renovate a large paper coating facility in 15 months. Aecon completed both demanding projects on time.

17. Agile–fully flexible Brazilian manufacturer Staroup is an example of how an enterprise can move from one hybrid configuration to another to meet rapidly changing market conditions. Once its major client Levi’s shifted to sourcing its jeans from China, Staroup had to ‘out-cycle’ its Chinese competitors to survive. Ultimately it was the agile–fully flexible configuration that enabled it to respond to Levi’s increasingly unpredictable demands with more creative, innovative solutions. This was a far cry from its earlier relationship with Levi’s, but it worked and Staroup retained a substantial proportion of the Levi’s women’s jeans business in the US market, at least temporarily. However, the company was not viable in the longer term, and was wound up at the end of 2013 with a sell-off of assets to compensate employees.

· 422 ·

M13_GATT6818_03_SE_C13.indd 422

2/24/15 3:54 PM

‘Hybrid’ supply chains

18. Campaign–collaborative Campaign is now at the demand-side of this supply chain, where a project buyer needs safe and steady supply. Loyalty and predictability are the key parameters on the supply-side. Dow Chemical is producing a system that protects an entire roof in the same way as a standard shingle; at the same time it is embedding renewable solar cells in the roof to provide energy for the home. Now that is innovation! For this project, Dow is working with D.R. Horton in Denver, the largest US homebuilder. Since D.R. Horton entered into an agreement to be the first national homebuilder to offer the POWERHOUSE Solar Shingles on their new homes, Dow and Horton have been doing a few construction projects together using Dow’s innovation. And they are still working together. On the supply-side, Dow chooses its suppliers based on reliability and relationships. They have to collaborate with Dow to drive competitive advantage and product performance through differentiation.

19. Campaign–lean This combination involves a ‘projects’ buyer and a low-cost lean supplier. Moog Inc is a US-based designer and manufacturer of motion and fluid controls, and precision control systems for applications in the aerospace, defence, industrial and medical markets. On the demand-side, companies such as Rolls-Royce, Airbus, Boeing, and Lockheed use Moog control systems in their projects. On the supply-side, Moog focuses on identifying and reducing recurring and non-recurring costs using lean techniques. As a result, scrap costs have reduced, and Moog has been able to produce highquality products on time, and at a competitive price. CEMEX, one of the world’s largest building materials suppliers and cement producers, supplies building materials to building projects. One of CEMEX’S products, ready-mix concrete, which is used in the construction of pillars, beams, slabs and walls, has a life-span of only 90 minutes, and must be used in that time. Once produced, transportation of the product to site must be fast and lean. The global Liebherr Group manufactures and supplies cranes and other equipment to construction projects. Liebherr closely controls cost structures on the supply-side, but never to the detriment of quality.

· 423 ·

M13_GATT6818_03_SE_C13.indd 423

2/24/15 3:54 PM

Dynamic Supply Chains

20. Campaign–agile This situation involves a ‘projects’ buyer and a supplier that has the capacity to respond quickly to unexpected demand. CEMEX has to contend with customers changing their orders, sometimes only hours before delivery. Indeed, in many cases, the precise quantity, quality, and type of product and service requested is unknown until shortly before the delivery date – which greatly complicates the scheduling process. There is, therefore, a need to be very agile on the supply-side.

21. Campaign–fully flexible This situation involves a buyer for large-scale projects who has a major problem, possibly an unexpected disruption to the project schedule, and reaches out to a supplier with known capabilities to find and deliver a creative solution to the problem, fast. Again, CEMEX provides a good example of this supply chain hybrid. In addition to responding to unexpected demand and delays due to traffic or ­customer needs, fickle weather conditions can cause a high level of cancellations and modifications. And not only that, there can be variable transit times due to the time of the day, and trucks and plant equipment can break down. Life can be very difficult! All of these rapid events have to be met and overcome. Similarly, this occurs for dredging companies Royal Boskalis Westminster, DEME, China Harbour Engineering Company and Van Oord. For these contractors, unforeseeable operating conditions are their business – they must deliver appropriate solutions.

22. Fully flexible–collaborative The examples of this supply chain hybrid will often come from the ‘event’ business, in this case enjoyable rather than disaster events – anything from football games to music festivals. Typically, these special occasions have long lead-times and, as they are often repeats of similar or past events, they are quite predictable. The organizers and suppliers have plenty of time and information on which to collaborate with their suppliers to ensure success. On the day, however, the operation must become fully flexible on the demand-side, responding within very short timeframes to changes in conditions.

· 424 ·

M13_GATT6818_03_SE_C13.indd 424

2/24/15 3:54 PM

‘Hybrid’ supply chains

For example, when a heat-wave hit the Big Day Out concert in S ­ ydney in January 2010 (where temperatures registered 41°C), the demand for water from the 53,000 concert-goers increased by multiples, placing intense pressure on the supply chain. As noted earlier, many NGOs and ­humanitarian agencies, who are responding to much less predictable events, see ­opportunities to move their supply chains at least partially towards this model.

23. Fully flexible–lean Honda also demonstrated a lot of flexibility when it was able to build the Honda Accord in an old truck plant with minimal disruption during the changeover, as the demand for trucks fell and cars increased.18 Another example is the Fly-Away VSAT communications system used by UNICEF during disaster relief operations. The system provides Internet access via satellite anywhere in the world and can be deployed very quickly – from 30 minutes to four hours. The Fly-Away VSAT system is now a leading telecommunications infrastructure for enabling agencies to communicate globally, and rapidly.

24. Fully flexible–agile This configuration is epitomized by the seamless and rapid turnarounds seen in Formula One pit stops or in the precision operation of Dell ­replacing 1,000 PCs lost in Hurricane Katrina, in super quick time. Procter & G ­ amble also use this approach when supplying volume ­products to Walmart.

25. Fully flexible–campaign This is the supply chain configuration ultimately adopted by Staroup in Brazil to out-cycle its Chinese competitors and retain a large proportion of the Levi women’s jeans business in the US market. Another good example is what happened when the regional distribution centre (DC) of Kaigen Co Ltd, a Japanese pharma and medical p ­ roducts company, was damaged in the 2011 Japanese earthquake and tsunami. Kaigen quickly developed a partnership with UPS and relocated its DC to Singapore within three months.

· 425 ·

M13_GATT6818_03_SE_C13.indd 425

2/24/15 3:54 PM

Dynamic Supply Chains

Inditex: the best-of-the-best hybrids The shining example of hybrids in the supply chain world is Inditex, one of the world’s largest fashion manufacturers and retailers. I spent the day with Inditex management at the company’s La Coruña site in Spain in May 2013, and what a treat it was. Inditex have a portfolio of eight brands that are designed to cover the entire consumer market for fashion apparel. These are listed in Figure 13.4, and the broader network is depicted in Figure 13.5.

Most brands have one central DC, which services the global market for both in-store and online requirements. For our discussion of hybrid supply chains par excellence, we will focus on the Zara brand and how everything converges on the La Coruña site, and is then dispatched to their worldwide chain of stores by express transport, twice a week. Figure 13.6 is instructive. Zara has two fashion categories: Basic and Trendy, and its supply chains are configured to respond to each on the demand- and supply-sides. ­Fabrics purchased from global suppliers are brought in by a lean supply chain for

Brand

Apparel category

Institutional segment

1

Massimo Dutti

Cosmopolitan

Men

2

Zara Men Zara Women Zara Basic Zara Kids Zara Home

Fast Fashion Fast Fashion Basic Fast Fashion Home Decor

Men Women Women Kids Home

3

TRF/Trafaluc

Teenagers

Girls

4

Stradivarius

Informal

Women

5

Oysho

Lingerie

Women

6

Uterqüe

High-end

Women

7

Bershka

Newest-trend

Girls/Boys

8

Pull&Bear

Casual

Girls/Boys

Figure 13.4 ◆

Inditex: brand portfolio

· 426 ·

M13_GATT6818_03_SE_C13.indd 426

2/24/15 3:54 PM

M13_GATT6818_03_SE_C13.indd 427

F ig ure 13. 5 ◆

Basic Lean purchasing

Fabric suppliers

Trendy Agile purchasing

Design

Agile sewing

Ironing

Online

Meco

Online

Narón

Online

Tordera

Online

Tordera

Online

Tordera

Online

Elche (Shoes)

Online

Sallent

Online

Zaragoza

Online

Arteixo

Online

Tordera

Inditex: network of DCs and retail stores

Lean garmentmaking suppliers

Agile garmentmaking suppliers

Cutting

‘Agile’ dyeing

Inditex

630 Stores

Online order filling stores UK, USA, Japan, China

Zara Home

357 Stores

Zara Kids

Pull&Bear 174 Stores

816 Stores

Bershka

885 Stores

Uterqüe

92 Stores

Oysho

524 Stores

Stradivarius

780 Stores

TRF Trafaluc

Zara Basic

Zara Woman

1751 Stores

Zara Men

Massimo Dutti

Home

Kids

Boys

Girls

Women

Men

‘Hybrid’ supply chains

· 427 ·

2/24/15 3:54 PM

Dynamic Supply Chains

Supply-side

Lean

Agile

Inditex La Coruña Site

Suppliers of ‘Basic’ collections (Asia)

Lean

Agile

ZARA stores worldwide

Lean

Fabric Suppliers (global)

Demand-side

Cutting to design

DCs

• Women • Men • Children • Home

Agile

le

Lean

Agile

Figure 13.6 ◆

Suppliers of ‘Trendy’ collections (local)

Agi

Agile

• Ironing • QA • Packing Agile • Despatch

Agile

How Inditex works on the La Corũna site

Basic apparel and agile for the Trendy fashion lines. The agile inbound fabrics go to cutting and sewing facilities at La Coruña (although some garments are sent to external garment makers for sewing), and then everything comes back to Inditex facilities for ironing, quality assurance, packing and dispatch. Sometimes garments are dyed, but this is not a normal pathway. Some agile suppliers are given the whole garment-making process to ­complete, i.e., cutting, sewing and ironing. For the lean inbound component, fabrics normally go to the garment making suppliers, who take care of the whole process. Sometimes Zara also does the cutting, but this is less usual. Suppliers of Basic collections are mainly in Asia; in this case they do the cutting, sewing and shipping in lean mode, but Inditex provides the fabric. Ironing is done by Zara just before garments enter the DC. The more agile suppliers of Trendy collections are usually much closer geographically to Spain, i.e., ­Portugal, Morocco, Turkey and Bulgaria. In this case Inditex does the cutting, and the suppliers do the sewing and ship the garments back to Zara for i­ roning and finishing. I hope you get the picture. This is a finely tuned operation using lean and agile supply chain combinations for inbound, internal and outbound

· 428 ·

M13_GATT6818_03_SE_C13.indd 428

2/24/15 3:54 PM

‘Hybrid’ supply chains

movements, all supported by the appropriate IT, storage and handling, and transportation arrangements. And the customers love the result, including Zara’s online customers worldwide. More details of the Inditex approach and the Zara brand business is provided below.

Inditex splits its merchandise into two (as it does for Zara) – Basic and Trendy – and this is irrespective of the brand or the location of the store. Basic fashion items have a longer life cycle, and as mentioned are largely made in Asia. Trendy has a very short life cycle, being at the cutting edge of fashion, and is therefore manufactured locally. Inditex call this its ‘proximity’ markets, where the lead-time is two to three weeks only. (Zara surpasses this of course.) In the case of the Basic lines, they are brought to Spain in a lean s­ upply chain, and placed in dedicated DCs. Trendy lines are brought into their respective DCs in a fast cycle. Both Basic and Trendy are shipped out in agile supply chains and at a fast rhythm; there is no distinction as they both reach every store worldwide, twice per week, by road (Europe) or airfreight (RoW). Inditex looks for patterns on the demand-side, and this comes from listening to the country managers who are located at central h ­ eadquarters. These managers receive real-time data on sales from their stores in their country, every day. Inditex are currently producing 18,000 different ­models of garments each year, and the key indicator of success is that these have to move at the store level. The Inditex HQ is organized into three main teams – commercial (who interface with factories); designers; and country managers (who ­interface with stores and allocate product). These three teams come together ­frequently in the head office environment. The designers use advanced CAD/CAM techniques for speed, and these are easily transmitted to factories when final designs are ready for manufacture (mainly cutting, before being sent out for sewing). Together, these teams build and test prototypes (paper patterns), and make fast ­decisions, together, often standing around a table. The HQ workspace for Zara, the biggest brand, is all open plan, with the floor space divided into children’s (boys + girls), country managers, design/marketing, women’s, and finally men’s. Now that Zara has opened in the southern hemisphere, it has ­organized special teams, realizing that the northern hemisphere product does not necessarily work in the south.

▼

Inditex—Zara

· 429 ·

M13_GATT6818_03_SE_C13.indd 429

2/24/15 3:54 PM

Dynamic Supply Chains

Inditex are very conscious of corporate social responsibility, and has a large safety team, especially focused on children’s wear. The company also works closely with suppliers, and signs a code of conduct on the working conditions of its staff. At Zara, the proportion of sales is: 60 per cent women’s and 40 per cent children’s and men’s. Zara Women has the following sub-sections: Zara Woman (top of the line), Trafaluc and Basics. The Trafaluc line is targeted specifically at daughters. Zara’s online business is growing exponentially, and it is treating this in the same way as another brand – it services home, women, children’s and men’s etc. It has its own modelling shop and photo facilities. The decision to go online was delayed until the right time, and this is how Inditex likes to work. Delay decisions, but once made, work fast. Zara Home is relatively new. Prototype stores have been set up in shopping malls, based on location, and have their own architectural teams. These are upgraded about every four years. They work on two seasons, and are segmented into four lines inside the store. Window displays are also carefully orchestrated from HQ. They are based on four seasons, and are rolled out as standard for all stores, ­worldwide. These are changed every 18 to 20 days! Inside Zara’s own factories, several of which are at La Coruña, fabric is received from suppliers, and cut to specific patterns using advanced optimization technology to minimize waste. This cut material is sent to external seamstresses in bags, and later returned to the factory for final finishing (ironing and quality assurance). From here the garments are transferred to Zara’s own DCs and shipped to stores. All the stock in the DCs is moved around in a hanging format, sorted into boxes, by store (not hanging), and shipped to stores twice a week. Product that comes from outside suppliers to the DCs in boxes, is opened, put on a conveyor belt, and automatically picked on a special sorting machine (designed by Inditex), with a capacity of 60,000 pieces per hour. Inditex re-uses the boxes sent to them by suppliers each week.

The secret of success at Inditex is a sophisticated mix of the following factors: ◆

Change is in the DNA of Inditex employees.

◆

The focus is on fast adoption of new ideas.

◆

There is no fear of failure. Employees are encouraged to try things, and find what works.

· 430 ·

M13_GATT6818_03_SE_C13.indd 430

2/24/15 3:54 PM

‘Hybrid’ supply chains

◆

Inditex always approaches challenges with an open mind, e.g., it is using the cargo space of large commercial airlines through its new online ­e-commerce business. Emirates are now a big carrier, as are Korean Air.

◆

A pleasant work environment is created, and people grow quickly in their jobs.

◆

The whole culture is to share experiences with everyone in your work domain.

◆

The biggest challenge is how to handle the large expected growth rate in future.

◆

Part of the success formula is that Inditex operates the same everywhere. This consistency is a big help to staff.

◆

In the commercial group, it has many nationalities represented; these people know their home country markets well.

◆

With the new online business, the company understands that it has to get closer to the customer.

Inditex is currently using manual processes either through direct deliveries or through direct pick-ups from local stores, but developing its own robot technology to speed up processes. Again, it is innovating and owning the new technology. It is also working on its master data file to solve the usual problems of weight and volume, which are drivers of supply chain cost. It became very clear from my discussions with Inditex-Zara executives that their commitment to continuous improvement is deeply embedded in their DNA. It starts at the very top of the organization and infuses the c­ ulture. They innovate everywhere, e.g., sales assistants use Bluetooth ­earpieces ­in-store; high-speed picking/sorting machines operate in the ­distribution centres; and everyone uses mobile phones. It is action, action, action! They are also not afraid to go to the original equipment m ­ anufacturer (OEM) and request collaboration on development work, demonstrating how to build synergies at the supply-side as well as the demand-side. Much of what Inditex-Zara are doing is almost intuitive, and again it comes from their culture of focusing relentlessly on the consumer/customer. It is what I would call dynamic alignment. They did not use my model ­originally, but it is useful in helping them to understand why they have been so ­successful. What a role model this company is!

· 431 ·

M13_GATT6818_03_SE_C13.indd 431

2/24/15 3:54 PM

Dynamic Supply Chains

Key ideas 1 We have found clear evidence of all 25 variants or supply chain hybrids in the Gattorna taxonomy, although some combinations are rarely seen while others are very common. 2 In the volatile world that we now live in, and expect to continue, it is not surprising that the most prevalent combinations appear to be agile–lean, lean–lean and collaborative–lean. 3 To be the best-of-the-best in the world of hybrids, you should identify which three or four combinations would best align your company with your customers and suppliers, then put all your resources behind these. Start by analyzing the proportions of your business going down each of the main supply chain pathway combinations. 4 The role model for hybrid supply chains is Inditex (Zara), which in my view has the best supply chains in the world – by a country mile! 5 Remember you are the master of the hybrids. Make them work for you.

Your challenge From the list of 25 supply chain hybrids, which combinations are running through your own enterprise? Could you rapidly shift from one hybrid to another if your market changed?

· 432 ·

M13_GATT6818_03_SE_C13.indd 432

2/24/15 3:54 PM

Part 3

Executing supply chain management

· 433 ·

M14_GATT6818_03_SE_C14.indd 433

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 434

2/24/15 3:54 PM

Chapter 14

New outsourcing business models that drive value How to turbo-charge your supply chain operations

U

p to this point we have been striving to demonstrate how an enterprise can re-align with its customers, suppliers and third parties. This type of transformation takes time, tenacity and, above all, leadership. But for some enterprises, time is not on their side. Something more radical is required to achieve the desired realignment in a much shorter timeframe. In this chapter we go in search of new business models that can be applied to the whole enterprise and its constituent supply chains. The models could well be adopted by an existing business facing tough competitors and changing market conditions, where their very survival is at stake. Or they could apply to totally new businesses looking to establish themselves in a market: they need a new business model to break in. For these reasons and more, we will review what is new in the world of business models, and how these offer the opportunity to shape different combinations of supply chains through outsourced providers. New outsourced business models give us the opportunity to embed alignment in our supply chain, do it quickly with multiple external partners, and do so without having to combat resistance internally or build new capabilities. Now that’s turbo-charging! In the previous edition of this book, I tried to push the boundaries beyond conventional outsourcing models, and look for ways to establish a new type of business consortium that brought together the required capabilities to create a new way of doing business – quickly, and without the usual cultural

· 435 ·

M14_GATT6818_03_SE_C14.indd 435

2/24/15 3:54 PM

Dynamic Supply Chains

resistance that emerges internally. I’ve even been reluctant to use the word ‘outsourcing’ – then and now – as it means too many things to too many people (and many of them negative!). Unfortunately the concept of outsourcing has been disregarded in recent times due to its association with high-profile failures. The experience of Marks and Spencer in 1998, when it turned its back on local UK suppliers and opted to outsource all its apparel requirements from distant markets in the Far East, is a good example of what can happen when the blind pursuit of cost savings leads to quite the opposite outcome. But difficult trading conditions await us and we have to suspend preconceptions and consider what outsourcing offers us. Today’s rapidly changing markets are forcing shippers, those businesses distributing their products, and the third-party providers (3PLs) alike to revisit this topic. We can’t escape it. To make a new business model work, however, a lot must happen. Everything must come together – innovation, cultural fit, advanced organization design, and a leadership style that’s prepared to try something new and reap the rewards of a quantum improvement in operational and financial performance. That is no easy task, and sadly, not much progress has been made in the five years since I last visited the topic. In fact, the very idea of partnering with external parties in some type of organizational alliance or entity and then proceed to aligning with customers is, for some, horror writ large. It is treacherous enough trying to do it between the organization and customers, without another business entity straddling somewhere across or in between. But there are ways and means, with new approaches that I will be discussing in detail below. Let’s get this point made first: a ‘business model’ is simply the way an enterprise organizes itself to make money. It’s the core logic of how your business creates value in a sustainable way. New business models are just that – new and often innovative ways of organizing the enterprise to make money on a sustainable basis. Can you think of a genuinely new business model? Today they come in both formal and informal arrangements, and to be worth the investment in time and resources, they must be game changing. According to Mark Johnson and his colleagues: There’s really no point in instituting a new business model unless it’s not only new to the company but in some way new or game-changing to your industry or market. To do otherwise would be a waste of time and money.1

· 436 ·

M14_GATT6818_03_SE_C14.indd 436

2/24/15 3:54 PM

New outsourcing business models that drive value

Perhaps the best-known new business models are those nurtured in industry clusters, which were first identified by Michael Porter in 1990.2 ­Examples include information technology in Silicon Valley, biotechnology at nine locations across the USA, banking in Switzerland, and movie ­production in Hollywood and of course India’s own Bollywood. These c­ lusters act as incubators for new ideas and set the direction for industry. Rubbing shoulders with each other helps to share knowledge, excite passions and encourage more than a bit of intense competition, as well as ­intensifying the development of associated industries. This simply doesn’t happen in other environments, at least not in such an intense, industry-focused way. ­Industry clusters in Europe have generated world-class industries, from ceramics in Italy, fashion in Paris, Milan and London, and more recently New York and Tokyo, to the original watch/clock industry in Switzerland, and cut flowers in the Netherlands, as the example below describes. Perhaps a contemporary example of this clustering arrangement can be found in the form of ‘logistics city states’ such as Singapore and Dubai.3 The seeds of new ideas might be appearing in your industry at this very moment – but do you recognize them? New business models are emerging in a multitude of formats in different industries around the world. In particular, new business solutions in publishing,4 tobacco5 and aviation fuel6 exist today. The airline industry has its alliances, brokers and call-centres; in the automotive industry, Daimler AG formed an alliance with the Swatch Group to develop the design for its environmentally friendly Smart car, now one of Daimler’s major brands; Arshiya International in India is building a completely new third-party logistics provider (3PL)/fourth party logistics provider (4PL) combination business model; eco-tourism is emerging as a significant industry segment; and many other examples are at different stages of development. All of these new-breed business models are based on the principle that it is better to bring together the required combinations of capabilities, fast, in a new integrated organization rather than trying to develop them organically over time. The resulting hybrid businesses bring to life the idea of ‘embedded alignment’. The desired alignment with customers is created and embedded almost instantaneously in the newly formed enterprise. There’s an almost immediate end to the hard work of trying to change your internal culture to achieve alignment; the required alignment is embedded from the very start. Sound easy? We will get to the hard part later.

· 437 ·

M14_GATT6818_03_SE_C14.indd 437

2/24/15 3:54 PM

Dynamic Supply Chains

Cluster industries and the Netherlands flower market The cut flower market in the Netherlands is an example of a highly perishable luxury product being transformed into a global product through an innovative business model. The market origins are from the late 1800s when vegetable growers started auctions to sell their own produce instead of selling through wholesalers. The wholesalers tended to foster intense competition between the growers – driving down prices. This developed into the flower auctions known today, that are owned by the growers in a cooperative that helps set market prices and provides an exchange of information on future market trends. Basically it is an antecedent of the open auctions that were all the buzz when first ‘discovered’ in the 1990s. This innovative solution to power imbalances in the supply chain (where the wholesalers dominated) fostered a cluster of industries with strong links to the cut flower market. Not all of these industries are directly involved in the Dutch auctions yet have formed a service or supplier to the industry. For example, initially it might seem counter-intuitive for the Netherlands, with its limited landmass, to become an exporter of cut flowers. However, due to the early development and adoption of glasshouses in this country the cut flower market was facilitated by a state-of-the-art glass production industry. Glasshouses provided the means for intensive cultivation of land, resulting in both high yields and more standardized product. Even new technology developed in the Netherlands is now being used at the famous Melbourne Cricket Ground to promote the growth of grass in the shadow of the giant stands. Other well-developed industries closely associated with cut flowers in the Netherlands are the strong agricultural businesses (dairy, agronomy), horticulture products (fertilizers and pesticides), horticultural education and training, along with the innovative logistics developed since the mid1990s that allows the transportation of perishable products around the globe. The cluster comprises a range of products and services – from horticultural advice and innovative packaging for the global transport of flowers, to state-of-the-art logistics systems, fertilizers and pesticides and glass products for green houses.

Why are we doing this? You might ask: ‘Why do we need new organizational formats in the first place? My business is travelling along very well, thank you.’ One very good reason, particularly if you are a small- to medium-sized enterprise

· 438 ·

M14_GATT6818_03_SE_C14.indd 438

2/24/15 3:54 PM

New outsourcing business models that drive value

(SME), is scale. Scale is critical simply because it gives businesses greater operating efficiencies and competitiveness. That means, you may be faced with new competitors, perhaps not just yet . . .  but watch them enter your market soon! Let’s face it, in many smaller economies the size of entire industries is less than a single organization in other parts of the world, particularly in the Northern hemisphere. If you are in a smaller economy and you want to compete, you need to find new ways to achieve scale – even if only artificially. In this context, a report by Booz & Company (now part of PricewaterhouseCoopers) proposed the concept of ‘virtual scale’, which allows smaller companies to ‘compete with industry giants by pooling resources with carefully chosen partners’.7 This is not an unreasonable concept, but it relies heavily on the companies’ ability to form strong and lasting alliances. The new scaled-up organization will only survive if there is an ‘equity’ structure to hold it together when the going gets tough, as it surely will. There is also the diminishing returns effect of just doing more of the same, as depicted in the first two levels of Figure 14.1. Re-inventing the organization, even using sophisticated alignment principles described in earlier chapters, has its limitations, mostly to do with the time it takes to fully execute plans. Therefore, we have to seek out more radical forms of organization formats. Why are radical formats necessary? Surely, they are risky? Paradoxically, I don’t think they are – indeed they are essential. For too long, enterprises have segmented their customer base using institutional, geographical and other internal parameters. This immediately ‘disconnects’ the non-customer-facing operations inside the Firm from the most important people in the business: customers. No wonder they fail to get a clear view of what customers want! Unfortunately, the idea of weaving multiple supply chains into the fabric of a business is still a foreign concept. In addition, the underlying mechanisms that cause cultural resistance to new initiatives are still largely a mystery to executives brought up in a predominantly functional world, where specializations are preferred and rewarded. Cross-functional interaction seems almost too difficult to contemplate. We can therefore see why the old models of doing business have prevailed for so long! I am an optimist though. Businesses will inevitably overcome the factors that have retarded new business models from emerging and shaping future

· 439 ·

M14_GATT6818_03_SE_C14.indd 439

2/24/15 3:54 PM

Value

Effectiveness

M14_GATT6818_03_SE_C14.indd 440

2. Management sophistication

Alignment zone

Process

Performance/capability continuum

Function

•

•

Standard procurement processes Warehouse and material handling procedures • Transport (inbound and outbound) • Manufacturing • Materials handling

1. Operational excellence – the basics

Performance gap

Source: Adapted from Figure I.1 in Gattorna (2003), p. xi

F ig u re 1 4.1 ◆

Cost

Introduce integrated model Supply chain ‘design thinking’ • Customer segmentation • Organization design • Technology integration • Network optimization modelling • Strategic sourcing • Supply chain planning • Collaborative design • LSP management •

Performance gap

Collaboration

•

Synchronization

4PL : Fourth Party Logistics Provider MSCO: Managed Supply Chain Operation JSC: Joint Services Company VNC: Virtual Network Consortia (JSC and VNC are new terms coined by John Gattorna)

Key: ®

Consortia Network-of-networks • Industry-level solutions • Inject more innovation • Strategic partnering • ‘Lead box’/numbers exchange ® • 4PL ; MSCO; JSC; VNC •

•

3. New business models

Super alignment zone

Dynamic Supply Chains

· 440 ·

2/24/15 3:54 PM

New outsourcing business models that drive value

supply chains. But you need to watch out for the two things that can stand in the way: a lack of management willpower to embrace the changes inherent in new business models; and a lack of understanding of what is involved, both good and the bad. We will pursue this theme in more depth in the following pages. Ultimately, you have to move at least some part of your enterprise to Level 3 in Figure 14.1. This involves pulling the existing organization apart and re-configuring it in some way, but doing so in conjunction with partners who have capabilities to complement your own. I call this the Humpty Dumpty effect. You should take decisive action when it’s clear that you need to radically re-align the needs of your market with your current internal capabilities. Similarly, a fundamentally new approach is called for when an enterprise cannot break through the capability wall surrounding it in order to deliver its own strategies.

Jumping the high bar Embracing new operating models, however, is not an easy task for today’s C-level executives. Many are innately conservative, and this is only reinforced by the increasingly stringent scrutiny being applied by analysts, investors and regulators, particularly since the onset of the global financial crisis (GFC) in 2008–09. The investment community today is looking more critically at top management’s plans and strategies for survival, growth, profitability and projected returns on investment. Senior executives must convince investors they have the ability to ‘execute to plan’; and if they are proposing a new operating model, they have to show that it will indeed be a more efficient way of deploying shareholder capital. The bar just keeps getting higher. And we can’t expect that to change in the future. If anything, the scrutiny is set to increase. The recession in the wake of the GFC made sure of that. With supply chains accounting for up to 80 per cent of an enterprise’s capital investment and 60 per cent of working capital,8 they are already coming under almost daily scrutiny by financial analysts around the world. There is simply no place to hide. It is therefore imperative that management finds new supply chain operating models that are more capital efficient 9 and less demanding in terms of up-front investment requirements.

· 441 ·

M14_GATT6818_03_SE_C14.indd 441

2/24/15 3:54 PM

Dynamic Supply Chains

Some of the more enlightened perspectives on the need for new business models have come from the IBM Global CEO Study 2008, where CEOs told us that they expected more turbulent trading conditions than ever before, and how this might be of advantage to those that seized the moment.10 They weren’t wrong! The study found as follows: ◆

CEOs said that innovating their business model is one of their most prominent strategies.

◆

The strongest margin performance was realized by those companies that entered the downturn with significant financial means and leveraged their resources to drive industry model innovation.

◆

Indeed, during periods of extensive industry change, companies must choose to either shake up their industries or face their own demise.

◆

One example of failure is Blockbuster, the DVD and video retailer, which had been challenged by fast-growing online competitors with disruptive business models such as Netflix. The incremental approach adopted by Blockbuster was simply not good enough to assure their ongoing survival.

Given that we all seem to be agreed that business model innovation is an untapped growth lever, let’s see what progress is being made in corporate logistics arrangements to meet these new and challenging trading conditions.

Hierarchy of outsourcing models A range of outsourcing vehicles have evolved over the last five decades; in some ways they give us an evolutionary picture of how enterprises have developed new models to meet new market demands. Based on our work in the Alpha project11 we have depicted a hierarchy of supply chain models, in Figures  14.2a and 14.2b, to show their key characteristics and development over time; these range from the traditional Prime Asset Provider to the world of Virtual Network Consortia; the latter has not yet become a reality, but is expected to be so during the next decade or so. For the purposes of this chapter I focus attention on the conventional 3PL model, and discuss ways

· 442 ·

M14_GATT6818_03_SE_C14.indd 442

2/24/15 3:54 PM

New outsourcing business models that drive value

that this model can be turbo-charged through new supply chain permutations, and look at the worldwide trend to rationalize 3PL numbers under the management of a few Lead Logistics Providers (LLPs). Joint Services Companies (JSCs) are also discussed in some detail. We will now look in detail at each of the outsourcing business models as listed in Figures  14.2a and 14.2b; the numbering system in the figures applies below.

Type 1. Prime Asset Provider (PAP)

2. Third Party Logistics Provider (3PL)

3. Lead Logistics Provider (LLP)

Key characteristics • Transportation

any mode

•

Warehouse, cross-dock, property facility

•

Manufacturing (outsourcing)

•

Packaging products

•

Integrated warehousing and distribution

•

IT infrastructure integration and support

•

Localized data tracking

•

Asset owner and asset buyer

•

WMS systems

•

Experienced logisticians

•

Project/contract management

•

Single point of contact

•

Management across multiple (subordinate) 3PLs

• Technology •

Figure 14.2a ◆

asset provider,

Mode Single mode provider

Combination of functions

Several 3PLs managed by one ‘super 3PL’

integration

Continuous improvement

Hierarchy of outsourcing models

Source: Alpha Research Project, University of Wollongong & Logistics Association of Australia, 2003

· 443 ·

M14_GATT6818_03_SE_C14.indd 443

2/24/15 3:54 PM

Dynamic Supply Chains

Type 4. Fourth Party Logistics™ Provider (4PL)

Key characteristics •

Strategic relationship

•

Best with two primary equity partners

•

Several complementary equity partners

•

Experienced operational staff

•

Supply chain re-engineering

•

Service, system and information integrator

•

Continuous innovation essential

• Technology

5. Joint Services Company (JSC)

6. Virtual Network Consortia (VNC)

F i g u r e 1 4 . 2b ◆

Mode New business model

as the prime capability

•

Manage 3PLs and their assets

•

Co-owned, co-managed company

•

Small number of equity partners

•

Agreed incentives and rewards; performance based

•

Innovative culture embedded

•

Significant financial engineering to fund initial set-up and ongoing operation

•

Possible sunset clause

•

Dynamic capability network

• Type

of execution model with embedded alignment similar to 4PL and JSC, but without strict equity arrangements

•

Stakeholders arrayed in loose alliances; can join/leave as appropriate

•

Provides particular supply chain solution at speed and at scale

•

Highly connected processes across companies

•

Shared investment-shared incentives

New business model

New business model

Hierarchy of outsourcing models – (continued)

· 444 ·

M14_GATT6818_03_SE_C14.indd 444

2/24/15 3:54 PM

New outsourcing business models that drive value

1. Prime asset provider (PAP) There are few if any providers operating in this restricted mode any more, with the possible exception of ‘toll manufacturers’.

2. Third-party logistics provider (3PLs) In a recent survey, executives from 3PL companies indicated they were in effect ‘. . . stuck between a rock and a hard place – having to reduce costs, but not knowing how their actions might affect profitability’.12 That about sums up their predicament. The second largest challenge according to the same survey ‘. . . is providing differentiated value to their customers’.13 Clearly, most 3PLs have still not caught up with the idea of segmenting their customers along behavioural lines as described in Chapter 2, and then re-aligning their whole business model behind these results, including differentiated value propositions. A case in point is work we did for the Agility 3PL logistics provider. In 2010, Agility commissioned us to research the buying behaviours of a sample of their global clients. The clients selected to take part in this ground-breaking research were drawn from a wide range of industries, and included: Alcatel-Lucent; Nokia; Pfizer; Schneider Electric; Shell; Siemens; Tyco; Intel; United Technologies/Sikorsky; Kraft; Jabil Circuit; Hitachi; Abbott Laboratories; and Emerson. Several of their clients exhibited more than one buying behaviour, which translates into more than one operational need. This is something that 3PLs do not seem to recognize or cope with well, having preferred to service clients in a more one-dimensional way. The key behavioural segments we identified are listed below. (These largely correspond with my customer behaviour segments, but differ in some respects.) ◆

collaborative, where reliability is critical but ‘working together’ is the mind-set;

◆

transactional, where price and consistency are paramount;

◆

dynamics, where speed and flexibility are the key drivers;

◆

solutions at speed (similar to my quick response segment but with a solutions bias), where customized problem-solving is the key focus; and

◆

shared innovation (my innovative solutions), where working together on new formats is key. · 445 ·

M14_GATT6818_03_SE_C14.indd 445

2/24/15 3:54 PM

Dynamic Supply Chains

Agility’s client segments 2 and 3 in Figure 14.3 are considered core 3PL business, and regarded as a given; but segments 1, 4, and 5, hold the key to ‘differentiation’ and hence offer opportunities for improvement and growth. These segments are depicted in Figure 14.3. The good news is that the same segments will be evident everywhere that 3PL services are being bought, not only for Agility but for other 3PL enterprises. The only change from country to country, region to region, will be the mix of these segments. Understanding this reality should assist 3PLs as they seek to improve their alignment with global clients, as Agility is now doing. The issue then is to convert these client insights into differentiated value propositions and corresponding operational responses, as we would in any of our generic supply chain types, and this should be straightforward. Of course, the above listed global clients are spread throughout all the segments, and in some cases appear in more than one segment, which although not totally unexpected, creates a more complex picture. Better than competitive rates on base volumes is an entry-level condition for most clients, and the easiest way to justify introducing a new player to the business. The transactional segment is always highly price sensitive, but collaborative customers are less price-sensitive. And where there are signs of need for innovation or solutions there is less price sensitivity. Dynamic is ‘deal sensitive’, where price is evaluated in relation to the result, and who else can do it. The key point is to break apart dynamic volumes from transactional volumes, otherwise the pricing is driven by the price sensitive part of the client’s business, and cost-to-serve is driven by the highly variable part. Breaking price down in relation to type of service also reduces direct comparisons with competitors and makes ‘cherry picking’ more difficult. Indeed, the request-for-quotation (RFQ) process of selecting 3PLs, so widely used by clients, in effect hides their true needs/buying behaviours, and makes a differentiated response nigh on impossible unless the 3PL submits both complying and non-complying responses to a RFQ. The worst outcome is that neither the business engaging the 3PL nor the 3PL provider itself gets any satisfaction from the outcome of a straight RFQ, which is adjudged solely on rates/price, because a significant ‘misalignment’ is built into the process (see Figure 14.4). The opportunity is to move to a differentiated approach as depicted on the right side of the figure.

· 446 ·

M14_GATT6818_03_SE_C14.indd 446

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 447

1. Collaborative

Price assessed vs. results

Most price sensitive

agility’s global client segments

administration Experience Risk management

Responsiveness Scalability Meet service specs. Service variable demand

Core

3. Dynamic

Competitive pricing Reliability/ consistency Compliance

2. Transactional

Source: Gattorna Alignment fieldwork for Agility – extracted from unpublished report, 2010

F igU re 14. 3 ◆

Less price sensitive

Relationships Win-win Reliability Risk management Integrity

Distinguishing expectations

Logics

Segment

Less price sensitive

Customized solutions Flexibility Growth Innovation

4. Solutions at speed

Innovation New ways to integrate supply chains Longer-term contracts Collaboration Least price sensitive

i

5. Shared innovation

New oUtsoUrCiNg bUsiNess models that drive valUe

· 447 ·

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 448

Alternative responses to RFQs

(1) Misalignment

Response segment

Collaborative and cost/efficiency segments

Predictable – Lean requirement (e.g., 60%)

Volatile – Agile requirement (e.g., 30%)

Source: Gattorna Alignment fieldwork, 2010

F ig u r e 14 .4 ◆

3PL RFQ Response: complying

Solutions segment

Disruptive – ‘Solutions’ requirement (e.g., 10%)

Actual demand

RFQ Response: complying

RFQ Response: non-complying

RFQ Response: non-complying

(2) Alignment opportunity

Predictable – Lean requirement (e.g., 60%)

Volatile – Agile requirement (e.g., 30%)

Disruptive – ‘Solutions’ requirement (e.g., 10%)

Actual demand

The RFQ process can hide the true needs of the client. Finding ways to reflect these needs enables a differentiated response, with operations and commitments more aligned to what the expectations will become anyway – at the wrong price!

Dynamic Supply Chains

· 448 ·

2/24/15 3:54 PM

New outsourcing business models that drive value

Beyond pricing considerations, it is also obvious from our research that innovation is a major unmet requirement of clients, and has been for almost the entire life cycle of the 3PL business model. This conclusion is reported in the 15th Annual 3PL Survey conducted by Capgemini and Georgia Tech in 2010,14 and again reinforced by Adrian Gonzalez in his 2013 article.15 And in the fieldwork we did with Agility clients in 2010 we found 57 per cent showed some ‘D’ bias (innovation) in at least part of their requirements. This is clearly not going to go away, and 3PLs have to find ways to better service this aspect of their clients’ expectations. Part of the problem is that innovation means different things to different shippers/clients. Clients in the transactional segment need some component of innovation to reduce cost. While clients in the dynamic segment need some innovation to promote speed and flexibility. But often this innovation component is minor and therefore hidden. And the same client may need both forms on different occasions! Confused? That’s clients/customers for you. The key to understanding what type of innovation is relevant in a particular situation, is to understand the shipper business’s own customers/ markets and the pressures they are under. This is where 3PLs have not done a good job to date. The opportunity is not necessarily to have all the answers on tap, but to have the resources and be prepared to explore and invest, initially in R&D laboratory mode, leading to customized solutions. Over time these customized solutions become tomorrow’s generalized solutions, which can be rolled out to the broader client base.

Two-way exchange of personnel One trend that is happening is the movement of senior executives between clients and 3PL companies. Marv Schlanger, the previous CEO of CEVA Logistics (since succeeded by Xavier Urbain), brought with him some unique perspectives from his time in the chemical industry.16 Of more significance is the movement in the opposite direction, from 3PLs to global shippers. Especially in industrial companies who have hitherto been more focused on manufacturing excellence, and only casually interested in logistics, the move of top executives from 3PLs to these companies has brought about a positive albeit ‘disruptive’ influence, and along with it a new focus on areas previously ignored, e.g., customer alignment; container utilization;

· 449 ·

M14_GATT6818_03_SE_C14.indd 449

2/24/15 3:54 PM

Dynamic Supply Chains

new types of transport and 3PL arrangements that focus on win-win rather than simply squeezing rates. This is happening at Schneider Electric as we speak with the recruitment of experienced executives from 3PL companies, and the transformational impact has been swift and performance enhancing.17 I think on that basis we are going to see more moves in this direction.

The emerging multi-supply chain service provider The opportunity for Agility and other equivalent 3PLs is there to break the mould and escape from the single rate card philosophy. But this will take a much closer examination of individual client’s businesses, initially to understand the context and mix of business, with retrospective reviews and adjustments as part of the process. In this way, pricing becomes a more complex formula, but this is an advantage, because it muddies the waters and makes it more difficult for shippers to cherry pick. In operational terms, capacity planning becomes easier and more realistic, largely because volatile volumes are easier to plan for when separated out from the overall aggregated volume. Baseload or regular volumes become more apparent when the disturbance factors are identified and managed differently. And of course collaborative clients will be there to willingly share data, which provides a stable underpinning layer to capacity planning. In this way, 3PLs can achieve their oft-stated dreams of matching the current and emerging aspirations of their more sophisticated clients, and better respond to the undercurrents and operational stresses apparent in the businesses conducted by so many client shippers. All these sentiments are summarized in Figure 14.5, where we have suggested different recipes of operational strategies in response to the wide array of behavioural segments found in the marketplace among the shippers buying the 3PL service category.

Control towers are coming A variation on the 3PL theme has appeared in the last few years. Sophisticated global companies such as Unilever, Samsung, Pfizer, P&G, Agilent and Philips have set up their own in-house transport management systems in a ‘control tower’ format in a bid to more closely manage their 3PL contractors,

· 450 ·

M14_GATT6818_03_SE_C14.indd 450

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 451

High reliability

Maximum utilization of available capacity High utilization

Scheduled delivery

CRM

Reliability

Capacity

Fulfilment

Systems/IT

Low

Own assets

Not required

Own and/or alliances

Innovate to develop relationship

Risk profile

Assets

Alliances

Global reach

Innovation

Completely new service models No price sensitivity Reliability not an issue Low New methods Develop new systems Strategic investments New networks High: manage risk Share assets Alliances outside 3PL industry Designs as required Fundamentally new paradigm

Non-standard service No price sensitivity Less reliability Low: hedge and deploy Speed Systems and human intervention Hedge and deploy On–off network orchestrations High: manage risk Selective alliances Develop in-market alliances Develop as required First to market with new service

Meets SLAs Lower utilization: buffers Postponement Modelling and analytics Spare capacity Optimal network design Medium Own assets and alliances Develop consortium

Shared innovation

Long-term investment in innovations Special capability option

Competitive price

Fully flexible

Greater emphasis on finding and delivering solutions at speed

Non-standard service

Agile

Operational strategies

Own and subcontractors Subcontractors Additional customization Re-engineer process

Selective

Own assets

differentiated supply chain configurations

Source: Gattorna Alignment fieldwork, 2010.

F ig Ure 14 .5 ◆

Least-cost pathways

Predictable routing

Network Low

Cost reduction

Resource allocation Priority to customer retention

Transactional

High reliability

High reliability

Lowest price

Moderate price sensitivity

Standard services

Standard services

Lean

Pricing

Collaborative

A

Core logistics business

Portfolio

Strategy dimensions

Greater emphasis on relationships, account management and sharing

New oUtsoUrCiNg bUsiNess models that drive valUe

· 451 ·

2/24/15 3:54 PM

Dynamic Supply Chains

particularly the transportation component, and achieve better end-to-end supply chain visibility for themselves.18 Control towers are cross-divisional organizations with integrated ‘information hubs’ that provide supply chain visibility. They are typically set up to monitor, measure and manage transport and inventory movements across supply chain networks (Figure 14.6 below depicts a typical control tower). GT Nexus is one of the main control tower middleware technology providers. According to Gartner, supply chain visibility and event management are the most important applications being sought by enterprises looking forward.19 Yet in the same paper, Gartner forecast that by 2016 less than 20 per cent of companies will be able to provide end-to-end supply chain visibility!20 What is wrong with this picture? As we move towards a network of networks configuration, in which enterprises will source anywhere, manufacture anywhere, and sell anywhere, an end-to-end visibility capability becomes critical. And the solution will be provided by either an in-house control tower, or outsourced to an LLP to build a similar capability, or a joint services company owned and operated by two or more major partners. Walmart is going one step further. Walmart Canada, ‘has strengthened its distribution network by purchasing two of its service providers. Trucking company, Translogic Express Dedicated, and distribution centre operator, SCM, will both now operate as full Walmart subsidiaries.’21 Is this a trend for the future as shippers lose patience and start buying their former 3PLs?

3. Lead logistics provider (LLP) The LLP model, after a slow start, is becoming more popular among global shippers as they try to rationalize their 3PL supplier base.22 Companies such as DHL, DB Schenker and Kuehne + Nagel are stepping up to this new super-role, and the key to success is their ability to bring integrated technology to clients much quicker than they could otherwise organize and implement internally themselves. This buys time for them to get their own IT systems in place. Shell Upstream have done something similar, reconfiguring an earlier attempt at a 4PL® structure to service their land logistics for oil and gas production in The Netherlands. The revised model draws on alignment

· 452 ·

M14_GATT6818_03_SE_C14.indd 452

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 453

Centralized information gathering and monitoring

ted

ec

nn

Co to ol

ntr

co tow

Manufacturing process

Control tower technology approach

Inbound process

ERP/MES

er

Outbound process

ERP/TMS/WMS

Set up a middleware software/system integration platform

n co

tro

r

we l to

ERP/TMS/WMS

Co

nn

o

t ted

ec

Source: R.J. van Doesburg, Capgemini, 2011

F ig u re 1 4.6 ◆

Individual processes

Individual system

Process collaboration and system integration

Set up of a virtual network

Organization for monitoring and decisionmaking

New outsourcing business models that drive value

· 453 ·

2/24/15 3:54 PM

Dynamic Supply Chains

principles in the way it seeks to understand client expectations and organize accordingly.23 Clients will enjoy several benefits from embracing an LLP arrangement, including: ◆

An accelerated move towards ‘digitization’, especially through the use of transport systems, such as the transport management system (TMS).

◆

Common processes, tools and interfaces across client network irrespective of legacy ERP or WMS systems in place.

◆

A simpler management task, because there is only one lead organization to interface with.

◆

A track-and-trace functionality is immediately available, in real time.

◆

The ability to access different cost-to-serve alternatives through the client network.

◆

A virtually guaranteed 5 per cent productivity improvement, and the possibility of gain-share for a large part of the savings, year-on-year as experience grows.

◆

The flexibility to change the LLP if performance objectives not met.

Not a bad list indeed!

4. Fourth party logistics provider (4PL) Radically new business models in supply chains have been slow in coming. Perhaps the first time they were seriously considered was in 1996 when Accenture24 invented and trade-marked the fourth party logistics concept, better known simply as 4PL®. Accenture originally defined the 4PL® model ‘as a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization, with those of complementary service providers, to deliver a comprehensive supply chain solution’.25 The motivation for this organizational innovation grew out of the very real frustrations that shippers around the world were experiencing at the time with their 3PLs. As indicated already, 3PLs emerged in the mid-1970s as an outgrowth of single-mode transportation and warehouse service companies. Unfortunately, few of these companies have been able to successfully make the transition to the satisfaction of their shipper clients, as evidenced by

· 454 ·

M14_GATT6818_03_SE_C14.indd 454

2/24/15 3:54 PM

New outsourcing business models that drive value

the 1994 survey carried out in Britain among 250 companies across several industries.26 Only a third of the sample felt that their expectations were being met on a consistent basis; the other two-thirds were unhappy. Hardly a resounding endorsement! There have been many similar surveys carried out in the intervening years, and the results have been largely the same. Perhaps the biggest issue for the fledgling 3PL organizations between 1970 and 2010 was their seeming inability to develop the ‘creative solutions’ so sought after by their shipper clients. Clearly logistics service organizations lacked the essential innovation gene so essential to spawn the desired creative solutions. This failing was due to their lack of scale in talent and strategic thinking, which in turn was a throwback to their operational roots. Over the past 30 years, much has changed in the global, regional and local 3PL marketplace; fewer, larger, more sophisticated organizations now fill this space and there has been a discernible closing of the original capability gap between shippers’ expectations and their perceptions of 3PL capabilities to meet these expectations.27 The 4PL® business model, which brings together a select combination of principal parties with a number of minor equity parties with special capabilities, was born as a direct result of the doubt that accompanied the early development of 3PLs. But it too has suffered, albeit in a different way; the original design concept and operational philosophy behind the 1996 version, depicted in Figure 14.7, has largely been lost or become confused over the 19 years.28 Indeed, several factors combined to force compromises: relatively long lead-times in the negotiation phase; the pure scale of the proposed new business model; and the apparent rigidity of the 4PL® design. In fact, many current versions of 4PL®s look nothing like the originally intended design; the original design concept has largely been lost. A more contemporary version of this model is shown in Figure 14.8, and involves two oil and gas companies coming together to form a joint venture company to capture the combined synergies embedded in their respective operations in the same off-shore production fields. In total, more than 40 genuine 4PL®s have been designed and built across multiple industries around the world, and Figure 14.9 shows a sample of these. The early 4PL® prototypes (1994 to 2004) taught us many valuable lessons about what does and does not work in the design and implementation of new supply chain business models. These lessons, discussed below, should be heeded as we move to the next generation of business models.

· 455 ·

M14_GATT6818_03_SE_C14.indd 455

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 456

Classic 4PL® new business model

Source: Adapted from Figure 27.4 in Gattorna (1998), p. 43

F ig u re 1 4.7 ◆

Client

Client

External clients (limited in number)

Client

• Logistics strategy • Reengineering skill • Best practice benchmarks • IT systems develop.

• Assets • Working capital • Operational expertise • Operational staff 4PL® organization

Complementary partner(s)

Service provider

Primary clients(s)

Service provider

Service provider

External service providers

• Hybrid organization – formed from a number of different entities • Typically established as a JV –   separate legal entity owned and operated by at least two primary client(s) and their partner(s) • Alignment of goals of partners and clients through profit sharing • Responsible for management and operation of entire supply chain • Continual flow of information between partners and 4PL® organization

Key characteristics of new business models:

Dynamic Supply Chains

· 456 ·

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 457

Production Procurement Logistics

Ground transport service Sea transport service Supply vessels and infield support vessels Air transport service Warehouse/DC facilities and operation (inc. inventory management and tracking) Critical spares Helicopter services Training centres Maintenance programmes Safety (HSE) Camp facilities and catering Network modelling

OUTSOURCED SERVICE PROVIDERS (3PLs)

Management structure Governance

JOINT SERVICES COMPANY

Example of oil and gas Joint Services Company (JSC)

Source: Gattorna Alignment fieldwork, 2014

F ig u r e 14 .8 ◆

Seconded staff IT investment Continuous innovation culture

Operational expertise

Start-up equity Assets Working capital

CONTRIBUTION TO JSC ORGANIZATION

Company 1 Company 2

SYNERGY PARTNERS

Start-up equity (minor shares) Logistics strategy Re-engineering skills Best practices IT systems Customer service management Supplier management Logistics consultancy

Technology integrator Technology provider

COMPLEMENTARY PARTNERS (Selected on capability requirements)

New outsourcing business models that drive value

· 457 ·

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 458

1998

1999

GEC Alstom 2000

2001

TriGem 2003

2004

P&G

2005

PDO

2006

HRW

2007

2008

2009

Opel

2010

JCB

2011

WilliamsSonoma

GM Europe

2012 2013

Triumph Intl

KJO Navistar

Infinera

KimberlyClark/ Barloworld Kellogg's

DHL/NHS

Honeywell

KNPC

BMW

Unilever

Adidas

Wider application

Enhanced 4PLs and new business models

Li & Fung

Broaden concept to new business models

2002

Transnet

Agora

ePValue/ICGC

Disalfarm

Fiat Iveco

AT&T Wireless

Historical evolution of 4PL®-style new business models

Source: Accenture/Gattorna Alignment, 2014.

F ig u re 14. 9 ◆

Accenture registered 4PL® as a trademark

1995

GE Medical Systems

Ryder

Royal Vopak

Compaq Motorola

Ford España

1996 1997

Connect 2020

Tradeteam

New Holland

1994

Logistics

SCM and procurement

Spoornet J Sainsbury

Lessons learned

Early concepts

Powertrack

Fourth party logistics (4PLs)

Pioneers

Dynamic Supply Chains

· 458 ·

2/24/15 3:54 PM

New outsourcing business models that drive value

Early adopters of the original 4PL® business models have enjoyed significant financial and operational improvements, and these have been reported in detail in my earlier edition of this book.29 The original 4PL® design was specifically structured to address and overcome most if not all the issues encountered by the early 3PLs, for example: 1 Strategic: a single point of contact for all supply chain requirements designed to reduce the time demands on senior management. 2 Financial: continuous improvement and on-going re-negotiation of service level agreements (SLAs) as a central feature of the new 4PL® organization. 3 Operational: the simple act of establishing an entirely new entity meant that staff and management could be carefully selected, thereby reducing possible union and internal cultural resistance. However, despite some hard-won successes of the 4PL® business model, it has been difficult to maintain the integrity of the design. In fact, it is not unusual these days to hear that companies are requesting ‘tenders’ for a 4PL® provider, just as you would do in the days when 3PLs were invited to respond to a request-for-quotation (RFQ) for specific contracts.30 In the process, some of the essential elements that differentiate 3PL and 4PL® business models have become blurred. 3PL providers are adding to the confusion by re-badging themselves as 4PL® providers.31 One thing is for certain: you cannot simply issue a tender in the conventional sense for a 4PL®! Petroleum Development Oman (PDO) found this out.

The Omani government and Royal Dutch Shell own Petroleum Development Oman (PDO) jointly, with the former having the majority interest and management control. In 2003–04, PDO decided to set up a 4PL® to move its onshore oil rigs and undertake associated cargo transport and handling. From the outset, PDO made the decision to go out to a worldwide tender for a ‘4PL® Manager’, which was to be given the task of raising and operating the consortium of contractors needed to carry out the specific tasks involved. They subsequently awarded a five-year contract to Tibbett & Britten, a UK-based 3PL with no prior experience in oil field operations. This company had the lowest tender, and was accepted by PDO

▼

Petroleum Development Oman

· 459 ·

M14_GATT6818_03_SE_C14.indd 459

2/24/15 3:54 PM

Dynamic Supply Chains

because they wanted to prove that the cost of their logistics operations could be significantly reduced. Things just went downhill from there. Tibbett & Britten was subsequently taken over by Exel plc, another UKbased 3PL which, after reviewing the contract, decided to persevere even though they too had no previous oil field experience. Against advice to the contrary, PDO insisted on setting up the 4PL® with back-to-back contracts – between themselves and the 4PL® Manager, and between the 4PL® Manager and the operating 3PLs. Ostensibly this was because PDO, as a government-owned entity, was within the purview of the Government Tender Board and could not enter into equity-based arrangements with private enterprises. They clearly had not heard of public private partnerships (PPPs). Poor leadership at the 4PL® Manager and continued tension between PDO Logistics and the other party meant that performance was unacceptable. In addition, the internal PDO customer, Well Engineering, was also unhappy with both performance and cost. The obsession with cost reduction was demonstrated to be invalid when it was pointed out that by adding additional assets (and cost), rigs could be moved faster and therefore have less down-time between holes, thereby producing more revenue for PDO and reducing the total number of rigs needed in the field. In this instance, agility led to lower total cost although rates were still a focus in the cargo haulage area. When Deutsche Post DHL took over Exel plc in December 2005, they also inherited the PDO 4PL® contract in Oman, and again there was a change in leadership personnel at the 4PL® Manager. Unfortunately, these personnel came to their new positions with predominantly 3PL operational experience. Nothing had changed despite two rotations in ownership! Indeed, this has been one of my key observations in this whole saga: the inability of 3PLs to step up to the 4PL® role and manage differently. They keep reverting to what they know – which is the 3PL modus operandi. And this has badly affected the relationship with the three specialist rigmoving 3PLs, all Omani owned, who do the actual work day-to-day and generally do it well in what is a harsh operating environment. The performance of the overall consortium has improved significantly in the past 12-24 months, with something of the order of 12 drill stringmonths saved through treating this as an agile rather than a lean supply chain. But the underlying problems remain, and it is hard to see how this type of performance can be sustained into the future under the current management regime. The key problem is that the contractual arrangements between the owner, PDO, and the 4PL® Manager, Bahwan DHL, is still driven by a cost-saving mentality, and the KPIs reflect this. Similarly, for the 4PL® Manager to reach its own operational and financial

· 460 ·

M14_GATT6818_03_SE_C14.indd 460

2/24/15 3:54 PM

New outsourcing business models that drive value

objectives it feels compelled to engage in an adversarial relationship with the 3PL subcontractors, squeezing them for lower rates at every turn, without themselves adding the required value in the form of innovative techniques for the benefit of all parties. This first contract was due to end in January 2010 and has subsequently been extended for two years while a second-generation 4PL® contract is prepared for tender. Hopefully, valuable lessons have been learned and the next generation contract will not suffer from the same difficulties. The key is to only seek expressions of interest from suitably qualified companies with significant experience in this type of oilfield operations. It’s just too difficult to learn on the job!

Perhaps the only independent research32 published on the comparative value created by a true 4PL® business model revealed that the EV/ EBITDA33 earned by a genuine 4PL® was of the order three to five times greater than the more conventional single mode or 3PL models. So why do 3PLs aspiring to the 4PL® manager role inevitably revert to type? It’s the culture factor I suspect. See Figure 14.10 for more detail on the relative profit performances of the different levels of logistics provider. Some single-mode companies developed variations of the 4PL® business model to operate in parallel with their core business. For example, Spoornet, the freight division of South African Railways, has been working on multiple collaborative industry-level models for more than a decade. These models involve developing customized e-marketplaces for suppliers and buyers in several major industries, and attaching a 4PL®-style virtual management company to coordinate the fulfilment task that is physically carried out by other 3PLs and single-mode transportation companies. The success of this venture is still being assessed, but this configuration could well be the forerunner of future supply chain industry solution models. Another example is found in New Zealand with the commodity company M-co, which operates internationally in markets for gas and electricity commodities and telecommunications.34 In April 2009, M-co was acquired by NZX Ltd. The key lesson that has emerged from the early experience with the 4PL® business model in its various forms over the past 20 years is that it still takes a tremendous leap of faith by management to embrace an organization design that is so radically different from conventional practice. But then that is what leadership is about. Nevertheless, C-level executives simply do not

· 461 ·

M14_GATT6818_03_SE_C14.indd 461

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 462

Relative profitability of LSP models

Shipping

Trucking

Rail freight

Valueadded services

‘A 3PL is a provider of third party logistics execution services; and improver of specific supply chain functions (supply chain management). Manages a logistics function (warehousing, freight forwarding, transport) using own assets for someone else.‘

3PL

‘A Fourth Party Logistics™ provider is a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.‘

Transportation providers

Third party logistics solutions

Logistics providers

Source: Adapted from 4PL® Report, Dr Jochen Vogel, Lehman Bros, 2001

F i g u r e 14.1 0 ◆

supply chain redesign

Global supply chain co-ordination

Freight forwarding

Air freight

EV/EBITDA – Multiples 3–5 times lower than those at the top

EV/EBITDA – Multiples 3–5 times higher than those at the bottom of the pyramid

4PL®

4PL®s yield significantly more shareholder/stakeholder value than traditional 3PLs. The market rewards growth and profitability (ROCE) rather than size-for-size’s sake.

Dynamic Supply Chains

· 462 ·

2/24/15 3:54 PM

New outsourcing business models that drive value

feel comfortable engaging in such new styles of organization design that are relatively untested, especially now where conditions are so volatile. In these situations managements tend to play it safe. Typically, the easy way out is to embrace the norm and undertake large-scale transformations of existing organization structures. What if the same mind-set had been adopted in the area of product development? Answer: little or no progress, and probably extinction of the company by now. That’s why it is so hard to reconcile the slow progress made by many global companies in their supply chain designs, compared to the rapid rate of innovation on the product side of their business. Perhaps we should shift some product development executives into logistics and supply chain functions and see what they can achieve acting as a disruptive force! The difficulty in executing 4PL® designs has led me to search for new and more flexible structures during the past 10 years. Interestingly, during the same period, significant progress has been made in adapting 4PL® concepts and principles to the service sector. A good example is the British healthcare logistics provider NHS Logistics (which is described in my earlier book Living Supply Chains.).35 The UK National Health Service (NHS) outsourced NHS Logistics and part of NHS Purchasing and Supply to DHL, forming a joint venture in 2006. The new entity continues to provide end-to-end supply chain solutions for the NHS. DHL is responsible for procuring 10 product categories such as catering, clothing, stationery, bed linen and medical supplies, and delivering them to NHS hospitals and GP surgeries.36 Since 2008, the NHS supply chain has delivered significant savings in conjunction with a 14 per cent reduction in carbon emissions, reduced energy consumption across the network by 18 per cent, and achieved a recycling rate of 71 per cent from business waste.37

Level 3 – the next generation? What does the next generation of supply chains look like then? The performance/capability continuum depicted in Figure 14.1 shows how we have transformed from the basic operational excellence of Level 1, through the management sophistication of Level 2, and have now reached Level 3, where we have either established new models, or have the potential to do so. The diagram paints a future of how the new business models might be configured

· 463 ·

M14_GATT6818_03_SE_C14.indd 463

2/24/15 3:54 PM

Dynamic Supply Chains

in different ways. There are updated versions of the original 4PL®, and newer business models such as managed supply chain operations (MSCOs), joint services companies (JSCs), and virtual network consortia (VNC), otherwise known as ‘networked supply chains’, which we will get to in a moment. The speed with which these models are adopted is largely in the hands of the shipper/ principals who own the business being transacted. They must take the lead and drive selection of the various equity and capability partners required to make such entities a success for all the parties involved. It takes an entrepreneurial (or deal-making) culture in the set-up stage to do this, but the potential rewards are enormous. For example, I was involved in one business case in the oil industry where the principal partners saved 36 per cent on their baseline operating costs, mainly through rationalizing terminals and transportation capacity. The partners were previously competitors. Such is the quantum of the benefits possible from these new models – the potential cannot be ignored for long, irrespective of previous concerns and biases. The good news is that there is emerging evidence that global and regional 3PLs have significantly closed the capability gap that was both real and perceived among their shipper principals/customers over the past five years.38 For example, Deutsche Post World Net (DPWN), with its acquisition of Exel Logistics, now has a complete array of logistics and supply chain capabilities available under the one brand, DHL. However, a lot of this early promise has been destroyed in the aftermath of the GFC. It is therefore an opportune time for a new generation of business models to emerge on to the scene, ones that are far more flexible than previous versions. These would typically have the five characteristics outlined below. These are in addition to the nine design principles that are described shortly. 1 Built-in sunset clauses are needed to provide consortium members with more flexibility to enter and exit the joint venture as required. 2 The major shareholding principals would have the option of either rolling-over or folding the entity after a fixed period (say seven to 10 years), and buying the capabilities back on the basis of a pre-agreed formula. 3 More attention should be given to including both sides of an industry (buyers and sellers) in the proposed JSC; this is an essential ingredient for success in the future. One-sided arrangements simply won’t fly in the future – they never have.

· 464 ·

M14_GATT6818_03_SE_C14.indd 464

2/24/15 3:54 PM

New outsourcing business models that drive value

4 Banks and other financial institutions would be encouraged to join the JSC as minority equity partners. For them there is also the added sweetener of capturing all the other financial services required by consortium members. 5 More attention should be paid to the requirements of government regulatory bodies such as the previous Competition Commission (UK); the Australian Competition and Consumer Commission (­ Australia); the Commerce Commission (NZ); and the International Trade Administration (USA). These statutory bodies should ideally be included in discussions at an early (design) stage. This will assist the approval process because these authorities will see, at close quarters, the cost-based rationale for these new organization structures. It is unlikely that straight out mergers and acquisitions will receive the same sympathetic treatment because they inevitably reduce consumer choice. The best chance of introducing these new generation models will be in Europe and the Asia-Pacific region as competitive pressures build, but this is truly a global issue. Pressure for change will ultimately determine the rate and location of adoption. The only difference between the JSC model and the more advanced virtual network consortia (VNC) is that the latter version will make it even easier for equity holders to enter and exit the virtual management company on a ‘plug-and-play’ basis. Doctoral research has been undertaken on this category of ‘networked’ models to determine if operational effectiveness can be further increased through a more informal configuration than even that proposed by the virtual network consortia.39 Further work on what Ogulin et al. call the ‘informally networked supply chain’ (INSC) is documented in their 2012 paper.40

Joint services company (JSC) – what’s different about that? The major new business model in Level 3 is the JSC. Too often in the 3PLs and other outsourcing permutations, the essential ingredient involved contractual arrangements, where one party had given an external party business to carry out on its behalf, usually under tightly worded legal-style conditions.

· 465 ·

M14_GATT6818_03_SE_C14.indd 465

2/24/15 3:54 PM

Dynamic Supply Chains

Instead of guaranteeing success, the ‘performance’ measures became selffulfilling prophecies of failure! Within two or three years the business would be again back in-house and the 3PL discarded. We have witnessed this scenario many times during the past few decades, as neither the principal (owner of the business being transacted) nor the 3PL provider has been able to find the right balance between capability, price, innovation and service. The JSC model is a far different proposition. The structure of the organization, its incentive/reward systems and funding arrangements are all designed to bring together parties that have the necessary array of capabilities for a particular task. These ingredients are critical for success. The one-to-one contracts used with 3PLs have failed in all but the most common operational situations. As customers become more demanding, particularly in the fast-moving consumer goods, automotive and electronic high-technology industries, suppliers must look for solutions outside their own resources and those of their immediate 3PL contractors. These solutions will require the unique combination of a particular array of capabilities for a specific task that are only available from across multiple organizations. Selecting and bringing such parties together, and keeping them motivated and rewarded for a significant period (say 7–10 years), is the challenge facing many global multinational companies today. While there are three main options (and variations around each), the one most likely to achieve a quantum improvement in performance is the JSC business model, as shown in Figure 14.11. Based on the parameters in Figure 14.12, it seems almost foolhardy to either: a) embark on major change programmes and take all the up-front risk while waiting for the promised benefits to accrue (traditional consulting) or b) lose control of particular business functions in pursuit of short-term cost reductions (traditional outsourcing), when a third option exists. This is the development of a co-owned, co-managed delivery model where capability is built and executed very fast in order to provide shareholders with almost immediate results. This is what global financial centres want to see, and this is how to give it to them. The paradox is that this approach is technically easier and less risky to engineer in change management terms. It will deliver much improved results, faster, and is better than taking what appears to be the safer, slower, internal change-management pathway to improved performance. In the end, it is the internal cultural forces of darkness that will

· 466 ·

M14_GATT6818_03_SE_C14.indd 466

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 467

Ownership and risk People Objective Motivation Incentives Funding Focus Control Future option Strategy ◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

Borne 100 per cent in-house Bought-in resources Process improvement Policy and compliance Milestones 100 per cent in-house Template roll-out Programme management Sustain non-core activity Better IT

Client-hosted solution

◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

Contracted out Transferred Cost reduction Cost reduction Cost-based service rewards Outsourcing provider Cost reduction By contract only Return difficult Cost reduction

Outsourcing solution

◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

Jointly owned Enhanced career path Share price growth Mutual shared goals Fusion of all partners’ share prices Own, or other third parties Capability at speed Improved and flexible ROI easier to get Market leadership

Strategic transformation and joint services company

Comparing the three outsourcing options

Source: Adapted from Figure 9.10 in Gattorna (2006), p.225

F i g u re 14.1 1 ◆

Why should a company embark on such a pivotal change programme and either (a) take all the risk and the upfront costs while waiting for the benefits (traditional consulting) or (b) lose control of business functions in pursuit of short-term cost reductions (traditional outsourcing) when there is a co-owned execution model able to build capability to drive shareholder value with immediate results?

◆

◆

◆

◆

◆

◆

◆

◆

◆

◆

Feature

The structure, motivation and funding options that define strategic transformation programmes place clear daylight between the value of this approach compared to either traditional contract-style outsourcing or 1990s-style consulting services

New outsourcing business models that drive value

· 467 ·

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 468

◆

◆

◆

◆

◆

Fees Dividends Incentive payments

Equity/investments Services

Dividends Share in benefits Fees Consultancy

◆

◆

◆

Capital/equity Tech. applns

Governance

◆

◆

◆

◆

◆

◆

Assets Personnel Business Equity Innovative culture

Co-founder 3

Co-founder 2

Founding company 1 (Majority equity holder)

ROA Capabilities Services Dividends Share in benefits ◆

Managing organization (Joint Services Company)

Dividends Licence fees

Technology provider (Minor equity)

How each member of a JSC earns a ROI

Source: Adapted from Figure 9.8 in Gattorna (2006), p.220

F ig u re 14. 12 ◆

◆

◆

◆

◆

◆

◆

◆

Capital/equity Best practices Technology implm. Personnel Innovative culture

* One may be given minor equity position

Service providers – Selected 3PL* – Consultants (re-engineering)

◆

◆

◆

◆

Technology integrator (Minor equity)

◆

◆

◆

◆

◆

◆

◆

Bank (Minor equity holder)

Equity Capital loans Financial products/services Financial engineering

Assets rationalization Reduced operating costs

Dividends Interest Fees Share in benefits

◆

◆

◆

◆

◆

◆

Business

Additional client organizations (No equity)

Dynamic Supply Chains

· 468 ·

2/24/15 3:54 PM

New outsourcing business models that drive value

undo the best laid transformational plans, as they have done so many times in the past. But there are risks in the suggested approach as well, which we will now consider more closely.

Risks with forming a JSC Clearly, forming any new business model carries its share of risks, but for 4PL®s, most if not all of these risks were flushed out during the prototype era of 1994 to 2004. The way to reduce the risks is to study them in detail and consider the remedies.

Founding partners The first and perhaps most difficult task is to find at least two founding partners of like minds for the JSC; cultural ‘fit’ is essential for success. The principal partners can be drawn from the same industry or a related industry. The key is to find two enterprises, preferably at the big end of their industry, that have products with the same or similar handling characteristics and/or going to the same or similar delivery destinations. If two such parties cannot be found, or if they can be found but are not willing to pool their businesses to significantly increase scale, then it’s simply not possible to launch this class of business model. In other words, don’t try it! But you could try looking in the large process industries, where companies have downsized for several years and cannot find any new avenues for reducing costs. They offer a good potential source for partner enterprises. Another source could be fragmented industries where only a few majors exist, beyond which there is a long tail of small- to medium-sized enterprises; examples would be the pharmaceutical and alcoholic beverage industries. In each case, a JSC configuration will bring major benefits to both major and minor (complementary) parties that join the original venture. By the way, the idea often gets stifled at this point by senior executives who use the ‘we are not prepared to give up our competitive advantage in logistics’ argument, or ‘we really believe this is the way to go but we don’t want to be the first’. Interestingly, every time I hear these comments opposing the formation of a JSC, it invariably comes from executives in enterprises whose logistics and supply chain performance is nothing near ‘competitive’ in the first place; they are quite simply in denial.

· 469 ·

M14_GATT6818_03_SE_C14.indd 469

2/24/15 3:54 PM

Dynamic Supply Chains

Ownership structure Once the two (or three, maximum) principal partners have been identified and agree to spin-off a new management company to manage their joint logistics operations, it is time to agree the all-important equity structure. The principal partners will usually take the majority of the equity between them. Maybe this is an area where private equity firms can be introduced, because apart from bringing equity to the arrangement, they often have experienced supply chain executives who can inject much needed capabilities into the management structure of the new company. Indeed, a new outsourcing vehicle such as that envisaged here is all about capabilities, sourced from best practice enterprises, which then become complementary or minor equity partners in the new venture. Equity is essential for all active members of the consortium, because it provides the basic motivation to stay together and help each other in a non-contractual environment. The other part of this motivation is provided by setting appropriate performance milestones and corresponding incentives/rewards, which all parties share according to their equity position. These elements of the organization design will make a big difference if and when the going gets tough. No such fallback is in place for the so-called ‘4PL® Manager’ that is usually a single company that wins through the tender process. Yet, several enterprises have tried to go this route.41

Perceived independence A board and executive team should be installed to run the new entity so that the newly formed JSC is perceived to be independent from its major shareholders. Independence could become a vital issue if you later decide to publicly list the new company and launch it as a supply chain provider in its own right. Such a scenario would have been thought impossible some years ago, but it’s likely to be played out in several countries as pressure on margins builds to intolerable levels.

Secondment of the best talent You should look to second or permanently transfer the best talent from the founding enterprises to the new (virtual) management company. This is an essential ingredient for success. Transferring staff can help you to sidestep

· 470 ·

M14_GATT6818_03_SE_C14.indd 470

2/24/15 3:54 PM

New outsourcing business models that drive value

the usual internal resistance to change and put in place only those personnel who passionately want to be involved in the new venture, a type of genetic engineering! It is important to minimize the cultural differences between staff in the JSC, and indeed to shape a new culture quickly. The design of the organization structure will be an important factor in success, and should be approached using the principles already outlined in Chapter 6.

Organization life cycle The principal shareholders should reach initial agreement on the life of the organization, with a minimum of seven, but preferably ten, years in the first phase. To lessen the concern in the formation stage it is recommended that a ‘pre-nuptial’ clause be agreed between all parties to the effect that at the end of the initially agreed life of the entity, the principals have the option to buy-back their respective business and capabilities according to a pre-agreed formula. On the other hand, if the principals agree, the arrangement can be extended for another term, at which time a similar review and decision is contemplated. This clause provides the flexibility that did not exist in early versions of the original 4PL® business model and its absence may have contributed to the slow acceptance of that model.

Scope of operations At a very early stage in the development of the JSC, you should define and agree on the exact scope of operations among all partners, and the partners’ specific roles within that scope. The principle is that no party should be part of the JSC unless they bring one or more of the unique assets or capabilities required to execute the business of the venture. No passive investors are welcome.

Financial engineering One of the most vital roles is the financial engineering of the new venture. The financials have to make the JSC immediately viable, and it is here that major financial service institutions have an opportunity to lead. Sadly, too many of our modern financial institutions are not prepared to do so, and are missing out on huge opportunities to capture future revenue streams; but they must take some risk at the outset to reap later rewards. I strongly believe there is less risk for banks and other financial institutions in getting

· 471 ·

M14_GATT6818_03_SE_C14.indd 471

2/24/15 3:54 PM

Dynamic Supply Chains

involved in this type of business model. As a principal partner, they would invariably have a seat at the Board table, and would be able to influence the management of the new entity, rather than simply stand aside as an external observer and/or mortgage broker. This insider role just became even more important in the wake of the GFC. Some limited activity is already starting to happen in this area of financial engineering, with GE Commercial Finance (GECF) and Barclays Bank taking the lead. GECF has combined with DHL to roll out a new inventory ownership product called Trade Distribution Services. This product is directly designed to address concerns of manufacturers with their cash-to-cash cycles and the consequent impact on working capital. Under the proposed arrangement, GE Commercial Finance takes ownership of the finished goods inventory from the seller’s point of shipment until the buyer’s just-in-time point of purchase. GE owns the inventory and DHL manages it while in transit between seller and buyer. There are benefits in this arrangement for all the parties involved, so we are likely to see more of the same as other enterprises recognize the benefits potentially available, at relatively low risk. Unfortunately, Sarbanes–Oxley in the USA has undermined the successful development of this model, which is a great pity because that was not the intention of the legislation.42 Meanwhile Barclays have formed a dedicated group under the name Barclays Logistics, and they are pursuing the development of new financing products and limited involvement in joint ventures. They are treating this development as very much ‘experimental’ in the early stages. J.P. Morgan also provides a unique combination of trade services and supply chain finance services with its Global Supply Chain Finance product.43 A more recent example is Borderlinx, which is an innovative collaboration between a logistics provider (DHL Express), a credit provider (Visa), and a customs clearance and e-commerce service provider (Borderlinx). This unique combination of companies is designed to take the pain out of cross-border shopping for the consumer.44

Ability to meet performance milestones Clearly, if targeted savings/benefits are not achieved on time the whole venture is at risk, as the equity players will not realize the forecasted ROI. But if the partners can meet the conditions described above it is unlikely that they will fail to achieve their targeted savings. At the outset, JSC managers should lay out the proposed milestones for the life of the venture; transparency in · 472 ·

M14_GATT6818_03_SE_C14.indd 472

2/24/15 3:54 PM

New outsourcing business models that drive value

the initial stages is important for the cohesiveness of the new organization structure. This approach was followed by the former Andersen Consulting (now Accenture) and a North Sea oil exploration consortium in 1994, and it proved to be a winning initiative. But how will we achieve the embedded alignment referred to at the start of this chapter? The new ‘service company’ will ideally own little or no infrastructure, other than technology, and will in effect coordinate and manage an array of hand-picked 3PLs to achieve the desired outcome. One of these outcomes will be to fulfil all the service level agreements (SLAs) entered into with the owner-principals and other external organizations. This will by definition require the JSC to deliver different levels of service to achieve the multiple supply chain alignment already discussed in Chapter 2. However, it is more than likely that the new entity will be capable of delivering the required responses, in parallel, and cost-effectively; because it will be specifically designed to do this from the outset. This is in effect embedded alignment. Going beyond the business that the founding partners bring to the JSC, there is a risk that future expansion will be limited if other companies in the industry, especially direct competitors, are unwilling to add their business to the growing pool. They may not have a choice if the model is designed well from the start and grows rapidly to a dominant position, but if the cost economics of the JSC are not clearly evident, other companies may choose not to join the burgeoning industry supply chain solution. This is now less of a risk than a decade ago, but it becomes real if the JSC is launched without at least two major industry players.45

Availability of best 3PLs Another early risk in forming a JSC is that the best 3PLs in the logistics industry, and relatively few exist across the globe, may not be immediately available because of long-term contractual commitments that cannot easily be set aside in the short term. It may be necessary to negotiate exits from existing contracts in crucial cases.

Excessive disruption There is always the risk of excessive disruption to the existing business during the establishment phase of the JSC. The best strategy is to plan for this and then execute as fast as possible. Given that an entirely new organization · 473 ·

M14_GATT6818_03_SE_C14.indd 473

2/24/15 3:54 PM

Dynamic Supply Chains

is being set up, the risk of ‘cultural resistance’ will be minimal, and if the new staff members are selected carefully, most will welcome the rapid pace of change. Going slow in implementing change these days is a recipe for failure, because a slow pace allows competitors and internal forces alike to mount more strident defences. In any case it’s unlikely that the disruption will be any worse than that encountered in an internal transformation project. At least in the case of the JSC, most if not all the action takes place ‘off-line’, thereby minimizing disruption to the mainstream business.

Culture The cultural challenge for JSCs is to encourage entrepreneurial behaviour and embed a subculture of innovation early in the life of the new organization, while encouraging a focus on continuous improvement. The current crop of 3PLs generally lacks these cultural capabilities and will probably never have the resources and mind-set to fully develop and sustain them. And yet these are the very attributes that client organizations desire most, because they know that it will reduce costs on a progressive and sustainable basis over time. The ‘rate game’ cannot be sustained indefinitely; something has to give.

The risk of doing nothing The biggest risk of all is of course doing nothing, or just as bad, continuing to embrace traditional change management practices because they appear to be safe and risk free. Indeed, nothing could be further from the truth, as we have already demonstrated in this chapter. I have never forgotten the concept of ‘tensegrity’ first introduced to me by Colin Benjamin, many years ago; the idea that building protection around a company, and indeed an industry is quite the wrong thing to do, because eventually that protection is removed, for some reason, and the unprepared on the inside just collapse in a heap. More about this concept in Chapter 17. The more appropriate way to prepare for change is to inject oneself with change, regularly, and desensitize yourself to its harsh realities. Transforming organizations is a risky business at the best of times, and attempting to carry out major change coincidentally with operating the company is akin to do-it-yourself brain surgery – it is seldom successful. Therefore, other less conventional ways must be sought to achieve the quantum improvements in operational and financial performance that await the brave.

· 474 ·

M14_GATT6818_03_SE_C14.indd 474

2/24/15 3:54 PM

New outsourcing business models that drive value

Design principles for new outsourcing business models Despite the choice of business models now available to us, it’s not just a matter of shopping around until we find the best buy! We have to do the hard work to find the best way to structure and operate our new, most advanced outsourcing ventures. The goal once again has to be alignment of businesses and customers, and in this case you have the opportunity to embed alignment from the outset to drive future value. We have identified nine principles that you should use as a guide: 1 Ensure the new service company is co-owned and co-managed; this holds the disparate members of the consortium together and motivates them to achieve shared goals. It does what a contractual arrangement cannot. This is a criterion that has been largely overlooked in the many new business models that were tried during and after the e-commerce era, when we saw numerous one-sided marketplace models emerge only to fail.46 My own preference is to go all the way and develop industry supply chain solutions that involve the equity participation of key stakeholders in a particular industry. The arguments against such an open approach will be discussed later in this chapter. 2 Facilitate the rapid realization of benefits (cost savings, profitability and revenue generation); investors and analysts will no longer tolerate backloaded benefits. Those days are gone. 3 De-risk the implementation of new systems technology and other operational processes; this will help gain the confidence of the investment community. 4 Take advantage of any state-of-the-art assets that are readily available from other specialist players; there is simply not enough time to grow assets, competences and capabilities organically in major competitive markets. 5 Reduce up-front implementation costs through financial engineering practices and careful choice of consortium partners. This lowers investment requirements and enhances asset efficiency. 6 Infuse a subculture of innovation and continuous improvement through some conscious corporate genetic engineering. This is essential for success of the venture and quite feasible if you understand the internal behavioural forces in play.

· 475 ·

M14_GATT6818_03_SE_C14.indd 475

2/24/15 3:54 PM

Dynamic Supply Chains

7 Embed pre-determined KPIs and corresponding incentives (for all parties) in the new organizational design. Every party involved must make a fair return if the consortium is to succeed and stay together. See Figure 14.12 for typical commercial arrangements. 8 Recognize all the risks involved in this new style of business model, and confront them head-on. 9 Use the OODA loop to ‘out-cycle’ your competitors’ supply chains, in speed of decision-making as well as action. The result is a completely new type of execution model that will deliver scale at speed and, paradoxically, at lower risk than traditional change initiatives. Why? As has been argued throughout this book, it’s the people factor that will ultimately decide the success or failure of a major transformation, and everything else fades into insignificance. I think this approach of bringing together the best-of-the-best resources and capabilities in a consortium-style structure will also overcome the negative aspects of performance observed in numerous mergers and acquisitions (M&A) over the past decade – and they too were in search of scale, but overlooked a few key issues such as cultural compatibility! An Accenture White Paper47 documents some of the value-destruction which has occurred during the pursuit of scale via M&A activities, and concludes that: ‘the scale-driven perspective is not without merit; it is simply incomplete’.48 I agree with this view. For many businesses, the best model will be the Joint Services Company, while others, once analyzing their market will develop the most appropriate structure. The key is to get started. Now.

Going forward: new complexities and new solutions In the future we can expect to see enterprises of all types experimenting with different combinations and permutations of business models in search of performance improvement. Although the risks associated with introducing new organization formats were once considered unacceptably high, the situation now is quite the reverse; the risk of not embracing new business models is even higher, and from what we now know about the difficulties of transforming organizations from the inside out, it is easy to see why this

· 476 ·

M14_GATT6818_03_SE_C14.indd 476

2/24/15 3:54 PM

New outsourcing business models that drive value

is so. However, as always, everything comes back to the quality of executive leadership, and their individual and joint resolve to innovate to succeed in the difficult times that surely lie ahead. One significant development in the last few years is that of a jointly managed agency whose prime function is to share information, called an ‘Infomediary’. I have a different name for it, ‘Lead Box’, but let’s look first at the Infomediary in the case example described below.

MIT-Zaragoza International Logistics Program Prashant Yadav of the MIT-Zaragoza International Logistics Program and colleagues from other groups49 have been researching the problem of inadequate forecasts and lack of demand visibility for essential medication in developing countries. This is causing higher levels of risk for pharmaceutical companies and other channel members, as well as disincentives to invest and a general lack of alignment between the parties in the corresponding supply chains. They have conceived the idea of a ‘Global Health Infomediary’, which collects information from funding agencies, procurement agents, national buyers and other parties who have a wealth of information, but don’t currently share it. The revolutionary aspect of the Infomediary is that it generates ­aggregated and country-level forecasts by product type. This is a massive development. Being able to view data at an aggregated level is crucial in this and other industries where demand and supply conditions are volatile. My colleague Deborah Ellis is currently conducting doctoral studies into this very issue, focusing on the supply of insulin to developing countries for the treatment of Type 1 diabetes.50

Something similar has been in operation at Cash Services Australia (CSA) for several years. This is an enterprise jointly owned by Australia’s four major trading banks, ANZ, Commonwealth (CBA), Westpac and NAB. It effectively gathers the ‘in-demand’ information for the cash national requirements of each bank, aggregates the data, and then manages the optimal pick-up and delivery of cash throughout the Australian economy every day, using several armoured car companies as subcontractors (see Figure 14.13). All this is done within operating guidelines set by the Reserve Bank of Australia. Again, this is another case of demand aggregation being used to fulfil individual requirements in an optimal way.

· 477 ·

M14_GATT6818_03_SE_C14.indd 477

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 478

Mint

CBA

RBA

W‘pac

CONTRACT MANAGEMENT Armoured Carriers AFTER

DATA by depot

DATA MANAGEMENT REPORTING AND ANALYSIS

CONTRACT DATA at REQ‘S bank and industry level

NAB

DATA at bank level

ARMOURED CAR AND PROCESSING INFOMEDIARY CONTRACT MANAGEMENT

CSA

ANZ

Trading Banks

CSA‘s ROLE IN CASH

The new business model at Cash Services Australia (CSA)

Source: Carpenter Ellis, 2003

Fi g u r e 14 .13 ◆

BEFORE

ATMs, Branches, Retail Sites

CASH POINTS

Armoured Carrier 1 Armoured Carrier 2

CASH DEPOTS

RBA: Note Printing

CASH PHYSICAL NETWORK

Dynamic Supply Chains

· 478 ·

2/24/15 3:54 PM

New outsourcing business models that drive value

Cash Services Australia CSA was formed in 2001, when the Reserve Bank of Australia transferred to the trading banks its traditional role of managing the physical distribution of notes and coins. Significantly, CSA is authorized by the Australian Competition and Consumer Commission (ACCC) to use aggregated customer information to optimize the distribution and processing of cash, and to achieve economies of scale for the benefit of the industry as a whole. This might sound like bank talk, but in fact it’s pure 4PL® speak! CSA was required to give an undertaking to the ACCC that each customer can only see 1) their own data and 2) aggregated industry data for at least three customers. The undertaking also spells out the control on data and software that protects each bank’s competitive information from the other customers of CSA. Regular audits are part of these controls. So, despite the regulation, it is still possible to build an industry-level solution for the benefit of all participants. Why have we not seen more of this style of design? Refer to Figure 14.13 for a before and after view.

The final example illustrates the same principle but involves a very different industry–coal. My consulting firm was advising Port Waratah Coal Services (PWCS), which manages the export of 100 million tonnes of mainly thermal coal to more than 75 customers worldwide, from the Port of Newcastle, 150 kilometres north of Sydney, Australia. We found that sharing information was critical to ensuring the effective operation of the industry’s unique supply chain.

Coal exporting at the Port of Newcastle involves a complex equation: 17 coal producers, 27 load points and 39 mines; three rail track owners; two owners of rail rolling stock; a single port authority; and the terminal operator, Port Waratah Coal Services. The huge growth in the demand for coal in the five years to 2008, much of it volatile because of the presence of traders, led to capacity problems along the length of the coal supply chain in the Hunter Valley region, and was manifested in queues of ore carriers sitting off the coastline of Newcastle. Some of them waited for up to three weeks to be loaded, costing millions of dollars in demurrage, and generating quite a few newspaper headlines in the process!

▼

Port Waratah Coal Services

· 479 ·

M14_GATT6818_03_SE_C14.indd 479

2/24/15 3:54 PM

Dynamic Supply Chains

When we deconstructed four years of demand data we found that around 60 per cent of the demand for coal in the Hunter Valley was extremely consistent. This could easily be handled in an efficient way using, in effect, a lean supply chain. However, the residual 40 per cent of demand was extremely volatile, and when mixed with the other steady demand component, all patterns were lost from view. This volatile component could be serviced, but it would take additional capacity at different points along the chain. This was the agile supply chain alive and well! PWCS’s problem was that it could not get an on-going aggregate view of demand similar to the view we had gained in the one-off exercise. We developed the idea of a ‘Lead Box’ organization, similar to the Global Health Infomediary. The notion is to keep important data confidential, hence the name. The idea was to set up an independent organization that gathered data from different sources, including individual coal producers and their customers, and aggregated this. The data would then be usable at three levels, to: 1 Inform long-term capacity investment decisions; 2 Inform the allocation of coal supply chain capacity to individual producers; and 3 Lead to short-term optimization of the supply chain operations, involving stockpiles; train scheduling; maintenance schedules; berthing sequences, etc. The overall scheme is depicted diagrammatically in Figure 14.14. It has not yet been implemented because of the vested interests of stakeholders in the Hunter Valley coal chain, but it’s inevitable that this type of structure will be needed if the demand for coal continues. In a similar way to the banking industry, it is likely that the competition regulator, the ACCC, will agree to this shared arrangement for the good of the industry, which is facing stiff competition from South Africa, Indonesia and Brazil.

From our experience at PWCS and other places where it is necessary to share infrastructure, it becomes very obvious that some type of Infomediary is going to be an essential element of future designs where there are multiple users of the available infrastructure; parties are just going to have to learn to share information, albeit in a confidential environment. Our view of what this will look like is depicted in Figure 14.15.

· 480 ·

M14_GATT6818_03_SE_C14.indd 480

2/24/15 3:54 PM

M14_GATT6818_03_SE_C14.indd 481

S&OP style review and refine process with individual producers

Informs CBS allocations

Forecast potential throughout by type and source

Outputs

Leadership

Capability

Strategy

Marketplace

Informs short-term (e.g., 7–28 days berth, stockpile, train scheduling) and medium-term operational plans, e.g., maintenance schedules

Proactive demand/ supply optimization

Volume, probability and risk assessments by type

Aggregate historic trend analysis

Aggregate market analysis and thirdparty data

A new business model to manage demand and capacity planning . . . the ‘Lead Box’

Source: Unpublished PWCS report by Gattorna Alignment, 2008

Figure 14.14 ◆

Illustrative

Hunter Valley Coal Chain Analytics Group*

* Specific organization model to be decided

Informs LT capacity investment decisions

Other demands on coal chain, e.g., new mine/new producer forecasts

Initial producer plans and forecasts

ILLUSTRATIVE

New outsourcing business models that drive value

· 481 ·

2/24/15 3:54 PM

Dynamic Supply Chains

INPUTS

Demand data: Contracts and forecasts from infrastructure users, e.g., mining companies

Other triangulating data, e.g., customer provided forecasts; shipping company data

‘Lead Box‘ Infomediary*

Short term: operating plan Medium term: capacity allocation; maintenance planning

OUTPUTS

Long term: capacity planning

Independent macroeconomic analysis and forecasts * Infomediary: Coined by John Hagel and Marc Singer in NET Worth HBR Press, 1999. Term refers to an organization designed to allow information to be gathered from multiple parties and used productively while protecting the confidentiality of those that contribute. Originally conceived to collect consumer data.

A new business model is needed to manage demand and capacity planning in multi-user supply chains . . .  the ‘Lead Box’ concept

Figure 14.15 ◆

Source: Unpublished report by Gattorna Alignment for PWCS, 2008

A sneak preview of the future comes from India.51 Driven by the ­visionary thinking of Ajay Mittal, Chairman of Arshiya International, we are seeing the development of a completely new business model in India, from scratch. The concept, which is now a partial reality, is to build Free Trade Warehouse Zones (FTWZs) in five major Indian cities, connected by a rail network traversed by trains owned by Arshiya International to transport up to 90 containers per rake, between the FTWZs which are ­configured like a diamond across India. Hanging off each FTWZ is a virtual ­distribution ­network, involving hundreds of 3PLs controlled by Arshiya’s own i­nformation systems, to make the ‘last mile’ deliveries. The general sluggishness of the Indian economy is making progress on this new model, slow and difficult, but I am confident it will be a winner in the end. Throw in the fact that India’s complex tax system specifically, is due for a major overhaul as GST is introduced, and you have a revolutionary new

· 482 ·

M14_GATT6818_03_SE_C14.indd 482

2/24/15 3:54 PM

New outsourcing business models that drive value

way to service both domestic and export/import customers. Figure 14.16 is a schematic of the new model. The future is in capable hands in India, and elsewhere if this style of thinking spreads across geographies, as I am sure it will. We have to learn to expect innovations emanating from unexpected places, and we have to learn how to innovate and compete in this new environment. For those who do, the potential rewards are enormous.

FTWZ hubs Sub-hubs Rail network

Virtual distribution network

Figure 14.16 ◆

Arshiya’s Project Diamond

Source: Adapted from Figure 27.5 in Gattorna (2009), p.381

· 483 ·

M14_GATT6818_03_SE_C14.indd 483

2/24/15 3:54 PM

Dynamic Supply Chains

Key ideas 1 Incredible opportunities exist for those prepared to step up to the plate and go well beyond simple operational excellence (Level 1). We must wake up to the fact that it is ‘supply chain versus supply chain’ from now on, rather than company versus company as in the past. And within a decade it will be networks versus networks! 2 A new best-of-breed business model gives you the opportunity to embed alignment quickly. You can avoid the internal cultural resistance and the ‘capability wall’ that all too often hinder innovation and change. 3 To do so, you must ensure cultural compatibility and align your objectives with your key partners/stakeholders and other consortium members – from the very start. 4 Watch out for the two things that can stand in the way of shaping new business models: poor leadership, and poor understanding of what is involved, both good and bad. 5 Any new business model should be equity-based if it is to be successful. This is one of the most important insights I’ve gained from my work over the past two decades. An equity arrangement helps to keep the consortium together and focused when the going gets tough, as it surely will. 6 You must take the lead and drive the selection of the equity and capability partners required to make the new venture a success. It takes an entrepreneurial (or deal-making) culture in the set-up stage to do this. 7 The ‘Infomediary’ or ‘Lead Box’ is an exciting development, and has the potential to remove a huge quantum of costs out of supply chain networks; it just requires the courage to either lead or be a member of such a consortium.

Your challenge Is your market experiencing the turbulence or rapid change that requires a new business model to shape your supply chains? Are you prepared? And are you ready to lead such an initiative?

· 484 ·

M14_GATT6818_03_SE_C14.indd 484

2/24/15 3:54 PM

Chapter 15

Service sector supply chains How to apply proven supply chain principles in the service sector

I

have been waiting for years, perhaps decades, for the service sector to catch on and apply some of the supply chain principles and techniques proven so successful in many product industries. Instead, old practices have continued, with procurement and process improvement commanding the most attention, at the expense of real innovation. In this chapter we consider how service industries vary in character to product industries, and look at examples of service enterprises grappling with the transformation of their supply chains. Yes, it has to be said that service supply chains can be tricky to manage because their ‘product’ – a service – is often intangible. Regardless of the differences, however, service sectors such as financial services (including banking and insurance), the legal and accounting professions, tourism, and even academic institutions are all networks of a sort, so by definition they have supply chains running through them. In today’s rapidly changing marketplace these service enterprises will benefit from dynamic alignment in the same way as product businesses, using the same approach: segment your customers and suppliers, establish tailored supply chain configurations, and then go for it. Satisfy your customers’ buying behaviours. In the end, service should mean just that – service!

· 485 ·

M15_GATT6818_03_SE_C15.indd 485

2/24/15 3:56 PM

Dynamic Supply Chains

I remember discussing services and how they are delivered with the Vice-Chancellor of Victoria University, Melbourne, Professor Elizabeth Harman in 2007. She had read my earlier book, and had come to the conclusion that universities, like businesses, have supply chains running through them too. The new students come in at the supply end, and gradually work their way along a particular supply chain (course) where different subjects are taught, until they are a finished product, and are delivered onto the job market! A very insightful perspective and one that changed her approach to curricula design. Banks and insurance companies are even more obvious examples, with layers of processing centres, zones and branch offices and ATMs, all linked electronically in vast networks. Applying proven supply chain principles seems like a ‘no brainer’ to systematically achieve sustained performance improvement in the future. But do they get it? No.

The product/service spectrum The difficult thing about the service sector is that service comes in different shapes and formats. In order to make some sense of the topic before diving into service supply chains, I have developed a diagram (Figure 15.1) to show the different types of service in the market, stretching from purely intangible services through to the more tangible services that are attached to a physical product. At the intangible end of the spectrum we have services such as insurance, university education, tourism, law and accountancy, consultancy, and medical services provided by the medical profession, to list just a few. In many ways, these more intangible services can be characterized as professional services, where the product is information and/or knowledge. As we move along the spectrum, we find financial services provided by banks and other institutions, medical services delivered by hospitals and healthcare centres, emergency assistance provided by fire brigades, and management and maintenance delivered by facilities and maintenance firms; all are involved in delivering services related to finance, assets or risk management, something a little more tangible. Further along we see examples of service firms offering tangible products, e.g., third-party providers (3PLs), who transport and store products for their clients; e-commerce providers, who deliver a combination of online ordering and physical fulfilment; and

· 486 ·

M15_GATT6818_03_SE_C15.indd 486

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

catering/hospitality enterprises who offer a combination of storage and delivery of physical products. Finally, at the far right of the spectrum the emphasis shifts to the physical product itself, with services provided to augment the product – management and delivery. In all cases, the common factor is that networks exist through which the services and/or the products move, from design, through to creation or manufacturing, and finally delivery to customers and ultimately consumers or end-users. And given that networks exist in all cases, it follows that supply chain principles developed largely at the tangible end of the spectrum apply equally well upstream at the intangible end. Yet few if any firms have taken advantage of this insight.

Supply chain design: manufacturing vs. service industries Even though there are differences in the tangibility between service and product industries, the objective in each case is the same, i.e., to satisfy customers. Indeed, as Elliott Taylor describes: The process of locating, obtaining and transporting the inputs needed to do this is the core function of supply chain management. Supply chain design in the manufacturing industry requires a great deal of focus on the physical product that is being manufactured and a broader supplier base, while service firms typically have little need for physical inputs other than office supplies, which are indirectly related to the product, and often work with a much smaller group of suppliers.1 The differences between service and product organizations can be summarized as follows: ◆

Inputs. Both service and manufacturing require inputs of labour, ­supplies and capital investment. ‘The primary difference is that the cost of ­manufacturing labour is involved in procuring, transporting and manipulating physical material, while almost all service industry labour is expended on manipulating information and developing relationships.’2

◆

Logistics. In manufacturing firms, the emphasis is on moving m ­ aterials and finished product from location to location. ‘The size and weight of objects being shipped and the distance from the supplier to the

· 487 ·

M15_GATT6818_03_SE_C15.indd 487

2/24/15 3:56 PM

Dynamic Supply Chains

manufacturing facility can play a major role in the cost of the product. In service organizations, particularly in the financial sector, these factors are irrelevant because no physical product is moving. . . .’3 ◆

Finished goods. This is where raw materials are transformed into a final product ready for use by customers. ‘In the service industry, a finished good equals a closed file. The loan is booked, the home loan has closed, or the class has been completed, leaving no physical evidence. . . .’4

◆

Inventory. ‘Service firms, unlike manufacturers, do not hold inventory; they create a service when a client requires it. Manufacturers [largely] produce goods for stock.’5 Although in the new operating environment this is not necessarily true.

◆

Customers. Service firms produce a service as and when a customer demands it, and manufacturers produce goods for customers in a ­combination of MTS (make-to-stock) and MTO (make-to-order).

◆

Labour. ‘Service delivery is labour intensive, and cannot be easily ­automated.’6 On the other hand, manufacturers can automate many ­processes to reduce labour inputs.

◆

Location. ‘Service firms do not require a physical production site. The people creating and delivering the service can be located anywhere.’7 For example, management consultancies and distance learning providers can transmit their knowledge services online. Albeit, however, the delivery site can still matter in service industries, e.g., professional service firms being located in city CBDs, and universities sited close to their students and major support services in capital city and regional centres.

In summary, services range from the intangible to the tangible, they are heterogeneous, simultaneously produced and consumed, and are ­perishable, all of which makes their supply chains a little more tricky to design, but not impossible. What’s the problem then? Why haven’t more service firms moved to apply supply chain principles, systematically, to their business? After all, the end goal is the same for all producing organizations, and that is to satisfy customers and consumers, and develop a financially sustainable business. The good news is that irrespective of whether the category being purchased by customers is a tangible product, or an intangible service, or a combination of both, the starting point in supply chain design remains the same – identifying and segmenting customer buying behaviours as ­discussed in Chapter 2.

· 488 ·

M15_GATT6818_03_SE_C15.indd 488

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

Service supply chain examples In Figure 15.1, I use examples from the spectrum of service categories to explain how tried and proven supply chain principles can be applied to their respective service chain networks. Unfortunately, because some industry commentators assess the ‘flow of materials’ as negligible in service chains, they have discounted the relevance of mainstream supply chain techniques to service industries.8 This is quite incorrect in the wider context of end-to-end supply chains and their corresponding networks.

Banking/financial services Every type of transaction that occurs in banking occurs via a network, whether it be cash transactions, cash delivery and financial payment networks (through branches, ATMs or technology) or the lending, trading and

Product/service characteristics spectrum Intangible (Service – Service)

Insurance Higher education* Tourism Legal* Accounting Doctors/medicine Consulting Financial planning Telecommunications Training Transportation* Energy Call centres Public sector*

Data/information/ knowledge

Semi-tangible

Tangible (Product – Service)

Banks/FSIs* 3PLs Life sciences/Healthcare* e-commerce/online Delivery services Fire brigades FMCG agencies* Facilities management* Hotels* Maintenance Food service/restaurants* Emergency services Network services* Software providers Case: South Australian Health Commission*

Money/asset/risk management

Product storage/delivery

Retail (B2C)* FMCG* Wholesale (B2B) Manufacturing (B2B) Pharmaceutical Construction

Product management/ delivery

* Examples provided in accompanying text

Figure 15.1 ◆

Taxonomy of service types

· 489 ·

M15_GATT6818_03_SE_C15.indd 489

2/24/15 3:56 PM

Dynamic Supply Chains

investment services provided to customers ranging from small businesses to large institutional investors. If you look at a banking network, as I do in Figure 15.2, they are simply a network of processing centres, layered in echelons, from the consumer-facing branches and ATMs, back to central processing centres at head offices. These different nodes or processing centres all serve particular functions, and the trick is to locate specific functions in the most appropriate centres in terms of cost. The nodes in the network are all connected by electronic links, and some physical transport of money, from customers to off-site contractors where it is sorted and re-distributed to the network of front-line branches and ATMs serving consumers. A typical banking network is depicted in Figure 15.2. In the past, banks in particular have focused on parts of the network, e.g., procurement and sustainability issues across the network; process improvement; and the cost of the branch network, especially in terms of labour and transaction processing costs, with the latter often leading to a decision to outsource. But at no stage has there been a concerted effort to model the entire network infrastructure, based on an analysis of the customers’ buying behaviours for the services being offered. This is a gross oversight, and a major opportunity awaits the first bank to grasp it. Indeed, rather than start at the consumer end, some banks, such as the Bank of America, are chasing the potential contribution to their bottom line through improved management of their purchasing spend on services.9 While there is certainly short-term gain in this approach, it does not form part of an overall coherent supply chain methodology, putting the cart (supply-side) before the horses (consumers). In addition, their approach to segmenting service suppliers is based on their concern for value and risk, rather than a combination of suppliers’ and their own expectations, which is a long way from our dynamic alignment model. One bank that does get the sequence right is the Co-operative Bank in the UK. It conducts well-designed customer satisfaction surveys of its clients annually, using customer experience measurement consultancy, The Leadership Factor. The result is a customer satisfaction index well into the top quartile of The Leadership Factor’s large database of customer satisfaction performance.10 What we do not know is if this information is used in the design of the company’s supply chains that links with their customers, a tangible opportunity awaits. Another bank that has been getting closer to the right approach is NatWest, which is part of the Royal Bank of Scotland (RBS) in the United

· 490 ·

M15_GATT6818_03_SE_C15.indd 490

2/24/15 3:56 PM

M15_GATT6818_03_SE_C15.indd 491

ATMs

Mobile devices

Retail branches

Typical institutional network for banking/financial services

Consumers

Call centres

ATMs Online banking

Corporates

Mobile banking

Business services

Internet

Savers/depositors/cash collection (retail)/reserve bank

Processing (e.g., electronic clearing systems and data warehouse)

Branches

Non-cash supplies (physical)

Nodes: where processes/transactions occur Links: electronic, informational or physical

Figure 15.2 ◆

Key

Users/ customers

Retail facilities

Head office processing

Collection facilities

Suppliers

S e r v ic e s e c t o r s u p p l y c h a i n s

· 491 ·

2/24/15 3:56 PM

Dynamic Supply Chains

Kingdom. The bank conducted a behavioural segmentation of its customer base, which provided a more accurate picture of typical characteristics and behaviours of the 14 segments in its customer base. This new understanding was the basis of improved targeting and efficiency of NatWest/RBS’s subsequent direct marketing campaigns.11 Interestingly, banks are becoming more interested in the financial flows associated with the physical flows through the supply chains serving their B2B clients. ‘Financial supply chain management, as the name implies, covers the payments side of trade, from the moment a purchase order is cut, to the time of settlement and everything in between.’12 According to Marcus Hughes: Supply chain finance is in its infancy. Many innovations and financing models are yet to come. A combination of the visibility and risk mitigation afforded by large payment and invoicing networks, and multiple sources of liquidity from corporates, banks, and institutional investors will play a key role in increasing efficiency of the financial supply chain. Meanwhile, the multiplier effect of large networks means they are ideally positioned to accelerate growth and drive bottom line benefits for their participants, corporates and banks alike.13

Facilities management Facilities management as a service function has only been studied scientifically since the early 1980s. The discipline ‘has evolved from traditional operations and maintenance (O&M) and was used for the first time in 1980 in Michigan’.14 Supply chain management is seen as ‘relevant for Facilities Management, which for a large part is delivering services to users of buildings’.15 Facilities management can include space management, operational services, and other outsourced services as required. It involves all the same elements as a typical supply chain, e.g., information flow, capacity management, customer relationship management, supplier relationship management, service delivery management, cash flow and demand management. Indeed, in many ways, the application of supply chain principles in a facilities management context has outpaced other service sectors.

· 492 ·

M15_GATT6818_03_SE_C15.indd 492

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

FMCG services – the cases of ELGEKA SA and DKSH There is no better example of supply chain alignment in a service ­organization than the Greek master distributor and trading company, ELGEKA SA. A privately owned company, Elgeka is the market representative for a ­number of high-profile principals/consumer brands in Greece, and d ­ istributes these brands to equally high-profile retail organizations. It is the classic ­intermediary, with no products of its own, just the services it provides to both ends of the channel. And because of this, Elgeka lives or dies on how well it aligns with both principals/brand owners at one end and customers at the other end. At the customer/retail end, we identified five types of buying behaviours: collaborative, commercial, dynamic and new solutions (‘solutions at speed’ and ‘let’s go places together’), as depicted in Figure 15.3. As with our five generic supply chain types in earlier chapters, the buyer behaviours for Elgeka’s customers vary when it comes to the relationships, price sensitivities, responsiveness and level of innovation expected of their service providers. Likewise, we identified up to five selling behaviours among its principals/suppliers as depicted in Figure 15.4. These are collaborate, pragmatic, ferrero, and innovative solutions (with the same sub-segments, but on the supply-side – ‘let’s go places together’ and ‘solutions at speed’). The point of this example is to demonstrate that the same principles apply to the alignment of supply chains in service enterprises, at both customer and supplier ends. In the Elgeka case, by improving the alignment of its supply chains on both the supply and demand-sides, Elgeka was able to materially improve its margin. And accurately identifying them at the outset is key to success. Another excellent example of a service company undergoing a supply chain transformation is DKSH, the Swiss-owned global market expansion business. DKSH’s business is to assist its customers to expand their respective businesses in existing or new markets. It has been particularly successful in the FMCG industry, but it is also a leader in other sectors such as healthcare, as the following example describes.

· 493 ·

M15_GATT6818_03_SE_C15.indd 493

2/24/15 3:56 PM

M15_GATT6818_03_SE_C15.indd 494

Higher margins/discounts

Distributor reputation

F Igur e 15.3 ◆

Availability – minimize out-ofstocks

Responsiveness

On-time delivery

Accuracy

Flexibility

Promotional offers

Product differentiation

More demanding approach

Product information

Accuracy –‘no mistakes’

Creative co-operation

New products/unique products

Better promotion

Manage variability

Open to test products

Product differentiation

Good personal relationships

Cooperation

Responsiveness

On-time delivery Emphasis on promotions

‘LET’S GO PLACES TOGETHER’

Additional support services

‘SOLUTIONS AT SPEED’

New solutions

Product differentiation

Responsiveness

Dynamic

elgeKa customer segments – buying behaviours

Consistency

Good (personal/ regular) communications

Reduce complexity

Price/cost aware

Values brands

‘Understand me’ /support me

Consistency/ reliability

Cost/price sensitive

Relationship critical

Partnership approach

Commercial

Collaborative

DynaMIC Supply ChaInS

· 494 ·

2/24/15 3:56 PM

M15_GATT6818_03_SE_C15.indd 495

ITALY

Ferrero

Better ways of doing things

Communication in real time

Brand development – take the time to understand our brand

F Igur e 1 5.4 ◆

Management of dual logics as appropriate

Capacity (i.e., adequate infrastructure) Flexibility/quick reaction

Accuracy in sales and distribution (A)

Be alert and react (to changes in the market)

Control costs

Channel power in customer negotiations

Able to handle promotions/variability

Forecasting capability

Planning capability

elgeKa principal/supplier segments; selling behaviours/expectations

Accuracy and forecasting capability (e.g., focus on zero returns)

Focus on quality and reliability of merchandizing

Support and understanding

High level of communication – structured (A) and personal (I)

Brand building

Significant sales growth

Open communications

F

Distributor reputation important Regular/reliable information

Find new markets

Communication in real time

Solve problems together

Loyal and expect loyalty Wide distribution and diversity of channels

New products and packaging

Loyalty

‘SOLUTIONS AT SPEED’

Trust

‘LET’S GO PLACES TOGETHER’

Innovative solutions

Relaxed – not demanding

1. ‘Implement our strategy’ (esp. multi-nationals) 2. Agree – then do it

Systematic implementation capability

Pragmatic

Find new markets

Prefer long-term relationships

Partnership approach

Collaborate

ServICe SeCtor Supply ChaInS

· 495 ·

2/24/15 3:56 PM

Dynamic Supply Chains

DKSH Services company DKSH helps companies grow by offering a portfolio of ‘market expansion services’, i.e., sourcing; research and analysis; marketing and sales; logistics and distribution; and after-sales service. DKSH presents a global footprint for its suppliers/clients via four main business units – consumer goods, healthcare, technology, and performance materials. In the country where it has the largest footprint, DKSH services the modern trade, general trade, and healthcare, serving nearly 100,000 active delivery points in Thailand alone through its in-country logistics network. It also operates in Hong Kong and throughout Asia. Led by former GE executive, Jonathan Guyett, Vice-president Supply Chain, DKSH is in the process of transforming its business by re-aligning its supply chain services with its customers and suppliers, using the Gattorna dynamic alignment model as the template. The transformation is focusing on its business in Thailand and other parts of Asia, and early results are looking very promising. Its 2009 annual gross revenues were CHF8.6 billion, and it enjoyed double-digit growth from 2002 to 2008. While headquartered in Switzerland, DKSH operates in 35 countries with business locations in the Asia Pacific, Europe and the Americas. It is now a market leader in its category, and provides a great best-of-the-best example for similar service enterprises.

Life sciences and healthcare The life sciences industry is one that is based on knowledge transformation – from a scientific breakthrough into a product, normally a medically related product which then needs very close service relationships. Many of the service businesses in life sciences are still in the fledgling stages, or as yet, to be developed; one day we will see these emerging in fields such as genetics, immunology, biochemistry or climate sciences, among others. The potential is as big as your scientific imagination! But there are already very established sectors in life sciences and healthcare, and in the latter, one of the biggest or most developed life sciences sectors is the pharmaceutical industry. For such a mature industry, pharma has been way behind other industries such as FMCG when it comes to supply chain design and delivery of services. But some of the world’s biggest pharmaceutical companies are finally moving in the direction of supply chain transformation as they ward off decreasing margins on products coming off patent. The better companies

· 496 ·

M15_GATT6818_03_SE_C15.indd 496

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

in the pharmaceutical industry ‘have at last understood that the traditional pharma supply chain model is strategically and financially unsuited to the new business environment’.16 The best pharmaceutical companies are embracing change in the management of their assets, sourcing plans, and attempts to understand customers. There is still some way to go for companies which have traditionally been so product oriented; but there is a lot of upside for the companies that can take advantage of applying supply chain principles to their business. An interesting perspective of the future of services in the life sciences is provided by the successful global services business DHL. Its paper ‘Key Logistics Trends in Life Sciences 2020+’17 outlines the megatrends and associated challenges coming down the road towards the pharmaceuticals and medical devices sectors. Trends such as global demographic changes and urbanization, technological advances, and climate change impacts are very real and certainly have major logistics implications. The DHL paper emphasizes that ‘logistics’ will be growing in importance in the future; it also recognizes that current supply chains in the pharmaceuticals and medical devices sector could be characterized as reflecting a one-size-fits-all approach – that sounds familiar! The paper goes on to suggest that this mentality has to change if business performance is to improve. But the real question, which is not addressed, is how? Here the paper is short on ideas. The authors make the classic error of suggesting that new ‘differentiated’ supply chain designs can be informed by segmenting into different life sciences product categories. Wrong. This is the old ‘inside-out’ way of viewing the world. Instead, I would advise quite the opposite, i.e., viewing the world through the eyes of customers and consumers, and reverse engineering back into the supply-side. This is what we call ‘outside-in’, and it is an approach that the best-of-the-best companies in the world are now using to design their supply chains, e.g., Inditex, Unilever, Schneider Electric, DKSH, CBH and Dell. Because we find that there are up to five different buying behaviours for particular product/service categories in most markets, it implies that the equivalent number of discrete supply chain configurations exist to satisfy and align with up to 80 per cent of the market. In practice this provides the different pathways through a network, from suppliers to customers and consumers, and one of those pathways will be e-commerce, direct to consumers. It is all about how customers and consumers prefer to buy, and then how well we as suppliers are able to align with their preferences.

· 497 ·

M15_GATT6818_03_SE_C15.indd 497

2/24/15 3:56 PM

Dynamic Supply Chains

If we adopt this approach, answers to questions about how we should configure our e-channel, and how we should ‘adapt’ to rapid changes in demand patterns, become relatively easy to answer; we simply set up separate supply chain configurations, hard-wired into the business, to deliver the appropriate service propositions, no more, no less! It is indicative of the problem in making the transition from product supply chains to service supply chains that authoritative sources in the industry still don’t get it – and DHL is ahead of the game on this front. As an overall comment, the paper starts well and has interesting observations to make at the macro level. But the life sciences industry is now so far behind FMCG, electronic hi-technology and fast fashion, it should be seeking to learn from experiences in those sectors, and leapfrog to a new level of supply chain sophistication. The alternative is to just follow your nose and improve incrementally by focusing on what goes on inside the sector. The right choice is obvious to anyone outside the sector.

Government health services Healthcare is one service industry that has a vast network of supply chains. Health services are often provided by government (and we discuss the public sector in a moment), but healthcare typically involves an array of private as well as public operators and enterprises. In the case of one State Government health service provider in Australia, the South Australian Health Commission, as long ago as 1996 we prepared a proposal to develop an integrated health logistics strategy for its network of 50 plus hospitals. My view of dynamic alignment was not fully developed at the time, but alignment with customers was our objective. It’s a good example of supply networks in a service industry. Our initial view was that the solution lies in aligning user requirements and buying behaviours at the health unit level, with characteristics of products/services emerging from the supply base. In between, a series of physical channels (or supply chains), connect suppliers to users. The design of channels would consider procurement, transport, inventory and storage arrangements along the way. The challenge was to configure an appropriate architecture of these elements to underpin the ‘whole of health’ vision of the South Australian Government. We sought to deliver a coordinated solution, and in the process deliver benefits to all stakeholders through leverage of available synergies across

· 498 ·

M15_GATT6818_03_SE_C15.indd 498

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

all health businesses. The idea was to support buyers and end-users of the health commission, with aligned facilities to deliver the require spread of service propositions. The schematic of the proposed design is depicted in Figure 15.5. This case study is instructive because even though government is in the hot seat in terms of public funding and accountability for healthcare, the potential for greater synergies in supply chains – or the potential for poor performance – is shared across private and public enterprises. That is the same case in private-to-private enterprise supply chains in healthcare.

Food service and restaurants One service we often consider intangible – even though we literally consume the results – is the food served in restaurants. Most restaurant patrons ‘.  .  .  probably don’t think about the complex logistics and supply chain manoeuvers that must occur to bring their meal to the table. But behind the plate is a dynamic and intricate supply chain that links farmers and growers, food purveyors, restaurant supply vendors, distributors, purchasing co-ops, transportation and logistics providers, and restaurants’.18 As logistics and supply chain activities are so critical to success, the restaurant industry is one of the service industries paying more attention to logistics operations. Witness the position of McDonald’s at #2 in Gartne’s 2013 league table, second only to Apple. Previously, restaurant owners had focused more narrowly on the procurement end at the expense of the delivery end. That is now changing. This change in emphasis is due to the realization that ‘restaurant chains can’t easily grow by building hundreds of new locations,’ says David Parsley, Senior Vice President Supply Chain Management Brinker International, Inc., which owns and operates more than 1,500 restaurants globally.  ‘Instead they have to manage their supply chains in a way that brings bottom-line profitability.’19 Restaurant chains have also realized that there are two keys to success: improved visibility along their supply chains, and better management of the volatility that they incur as part of day-to-day business. The trend for ever-changing menus makes this task increasingly difficult, as does the fact that the meals can be delivered at a drive-through, casual dining, or upscale dining locations – consumers make their choices and restaurant chains have to be ready with the appropriate response. By another name, this is dynamic supply chains in action.

· 499 ·

M15_GATT6818_03_SE_C15.indd 499

2/24/15 3:56 PM

M15_GATT6818_03_SE_C15.indd 500

F I gure 15 .5 ◆

Co-ordinated operations management – receipt/storage/ distribution/administration Some aspects outsourced

Wholesaler cross-docking facilities

Supplier warehouses

Coordinated strategic management - supplier management - negotiations and contract management - inventory management

Direct delivery – major items

Direct delivery – small and frequent

Flexible deliveries (mixed)

Direct – large volumes

HEALTHCARE FACILITIES

Other

Engineering

Offices

Kitchens

Stores

Labs

Radiology

Theatres

Wards

END USERS

Supply-side and user synergies revealed in potential supply pathways in healthcare supply chains

Capital equipment

Maintenance products

Domestic supplies

Food

Medical/surgical supplies

Pharmaceuticals

SUPPLIERS

DynaMIC Supply ChaInS

· 500 ·

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

Food service and hotels Hotels are another recipient of services from food companies or they deliver such service themselves. Here the prime consideration is keeping costs as low as possible, while satisfying guests. Previously, as in the case of restaurants, the emphasis had been on procurement and inventory management, which as we know are only part of the equation. The task facing hotel owners today is to radically improve the level of understanding of logistics and supply chain principles of hotel management. Only then will additional value be extracted. Global companies such as the Wyndham Hotel Group and Hilton Hotels & Resorts are leading the industry in this regard.20 An unpublished doctoral thesis on hotel food supply chains in southwest England found that ‘hotel food service is characterized by low exploitation of information technology, and manual-based supply chain activities with a high level of dependency on head chefs regarding supply chain performance’.21 DHL has done some good work in this institutional segment, piloting procurement and logistics operations for hotels in Kuala Lumpur. The solution involved consolidating deliveries of dry food, beverages and other supplies to multiple hotel properties in Kuala Lumpur.22

Retailing We might call the retailing industry the king of service. Or we should, because the service associated with selling and delivering retailers’ products can make or break success over the long term. This is partly because retail service is so tangible. When a product reaches the hands of a customer, so too has a service been exchanged. Service may have delivered the product, or made the sale happen, and in the process left the customer an experience they did or did not like. We’ve seen throughout this book that service is a part of the value proposition that the best-of-the-best retailers offer to their different customer behaviour segments, whether it be high or low levels of service, at high or low cost. That is, of course, if they’re properly configuring their supply chains and seeking dynamic alignment! The job of retailers is to understand their customers at a very deep level. Retailers the world over are facing major challenges to keep up with the fast-moving consumer. Tesco, one of the leading global retailers is meeting this challenge by ‘personalizing’ supply chains to its customers, by

· 501 ·

M15_GATT6818_03_SE_C15.indd 501

2/24/15 3:56 PM

Dynamic Supply Chains

anticipating customers’ needs and innovating for customers in partnership with its suppliers.23 The race is also on to adapt to the needs of the omnichannel shopping habits of consumers.24 Even those retailers that had highly developed supply chains at the institutional level, have been plunged back into the mix as consumers embrace e-commerce to take their shopping to borderless locations.

Air transport Perhaps the most developed supply chain in the service sector is in airlines. After years of just focusing on cost reduction, airlines are now belatedly turning their attention to customers, using customer relationship management (CRM) technology and integrated loyalty programmes. But problems remain. CRM research shows that ‘airlines have only a rudimentary understanding of customer preferences, what influences customer decision-making, and the triggers for ensuring customer loyalty’.25 This is due primarily to the fact that most airlines still use inflexible, ‘siloed’ legacy systems that prevent key stakeholders from accessing all the information they need to make informed decisions in a timely manner.26 This problem will need to be overcome to allow airlines to design their passenger supply chains from the market backwards, an absolute requirement for dynamic alignment and ultimate financial sustainability. Alaska Airlines is one company that has taken up the challenge and is using a suite of Oracle software to integrate customer data from various sources for use in the design of their ‘product’ and the way it is ultimately delivered.

Public sector Supply chain management in the public sector is concerned with the ‘coordination of all parties involved in delivering the combination of inputs, outputs or outcomes that will meet a specified public sector requirement’.27 The focus may vary from service sector to sector, such as healthcare or education, but the principles are the same, although in the past the emphasis has been more on procurement and contractors than other parts of the overall supply chain. This seems to have been a common flaw in many service-style supply chains. Also, the public sector ‘focuses on [the] network of institutions which are interlinked vertically and horizontally . . .’.28

· 502 ·

M15_GATT6818_03_SE_C15.indd 502

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

The challenges facing public sector supply chains appear to be: ‘tension between citizen and customer requirements; cost pressure in public supply chains, and complexity of multi-dimensional supply chains’.29 You will notice that these are not dissimilar to the challenges facing private sector supply chains, but the realization is coming somewhat later to the public sector. Perhaps the only additional factor in public sector supply chains is the level of political governance, one form of which could be complying with ‘transparency and procurement rules that are typical of federal, state, and municipal agencies’.30 Despite clear differences, public and private supply chains are both subject to three important trends that are driving change:31 ◆

the supply chain models require total process visibility, to increase the speed of sourcing and decrease costs;

◆

the supply chains must become more agile, to avoid the costs of obsolescence inherent in fast-moving markets; and

◆

the supply chains must have transparency in their operations, to ensure that regulatory requirements and ethical standards are met.

In summary: public sector supply chains are not very different from their private sector counterparts. Public sector customers demand that materials and services be delivered with the speed and cost structure of the private sector, and public sector supply professionals are struggling with how to accomplish that. It can be done – by using private sector principles such as strategic sourcing, supplier management, and inventory control in a way that is acceptable in public sector settings.32 In any event, public sector executives will have to speed up this t­ ransformation process because their supply chains are clearly unprepared for major supply chain failures,33 something that is likely to require a fully flexible supply chain configuration as described in Chapter 11.

Law The lawyers are getting on board too. In the past decade or so, the merger activity in the law sector has been increasing as Firms gear up to service an increasingly global clientele. But many of these mergers have failed, and one

· 503 ·

M15_GATT6818_03_SE_C15.indd 503

2/24/15 3:56 PM

Dynamic Supply Chains

of the main reasons has been cultural misalignment of the merging firms. A good example of the difficulties encountered is evident in the merging of the 160-year-old Australian law firm, Mallesons Stephen Jaques, and the 20-year-old Chinese firm King & Wood.34 Learning to work across global service networks is becoming increasingly critical to the success of professional service firms, but there is a long way to go before we can declare victory in this area.

Higher education Tertiary institutions worldwide are increasingly coming under pressure on two fronts: to change their curricula and bring it into line with the requirements of industry and commerce; and to extract more operational efficiencies in the way educational assets and resources are allocated and used. Indeed, here is a prime example where proven supply chain principles could be applied with great effect. If we conceptualize the students as the raw materials on the inbound side, and employers as the customers on the outbound side, with the tertiary institution in the middle acting like a typical manufacturer, the whole frame looks like a giant supply chain network. See Figure 15.6 for a representation of this concept. The inclusion of employers in the network reflects the fact that ultimately it is the employers who will give newly educated students a job: they are consuming the ‘product’ coming out of universities. In other models that do not cover the entire supply chain network, the students would be seen as the sole consumer of the education service. However, in our view students are the clients and the employers are the customers of the education system. As the students pass through the network, value is added through knowledge accumulation. Some of this knowledge can come from inside the tertiary institution, and some from outsourced contractors who deliver this learning either in person or online. This mix of providers, and the corresponding flexibility, should allow tertiary institutions to develop more multidisciplinary study courses, something that external employers want to see more of because it is a better reflection of the real world. In parallel with this change in design, universities can share more facilities and teaching resources to become more cost-effective. Of course, the ultimate solution is to build a network optimization model of each tertiary institution and run scenarios that will dictate the design and use of all

· 504 ·

M15_GATT6818_03_SE_C15.indd 504

2/24/15 3:56 PM

M15_GATT6818_03_SE_C15.indd 505

F Igu re 15.6 ◆

Student pathways

Links to universities in other countries

Faculty

Faculty

Capabilities

Faculty

Outsourcing organizations

Faculty

Faculty

University A

Faculty

University B

Tertiary institutions in one country

networks of tertiary education institutions: a new conceptual model

Key linkages

Student population in-bound to tertiary institutions

Client (supply-side)

Business/ govt. sectors

Wider community/ society

Customers/stakeholders (demand-side)

ServICe SeCtor Supply ChaInS

· 505 ·

2/24/15 3:56 PM

Dynamic Supply Chains

available facilities, and in the process take cost out in appropriate areas while at the same time improving service to the students and ultimate customers in industry, commerce, and government. Is this too much to wish for going forward? I think not, because it has to happen, like it or not. My thinking on the challenge of universities as education service providers is captured in a speech that I delivered at the Innovations in Tertiary Education Delivery Summit, ITES 2014, in Auckland, New Zealand, on 6 June, 2014. The New Zealanders are ahead of the crowd in actively seeking new education delivery paradigms that are more effective for students and employers alike, and more efficient to deliver. Below is an extract from my speech.

My own education was multi-disciplinary, starting with engineering (at the University of Melbourne), combined with two business subjects. When I enjoyed the two business subjects so much, it got me thinking. A few years later I studied for my MBA (Monash University), and was introduced to the notion of writing a minor thesis to replace yet more coursework. It was exactly at that point that I became interested in distribution management and logistics. And I followed up this interest a few years later by undertaking doctoral studies (Cranfield, UK). My thesis is still very relevant today. Its title: The effects of innovation on channels of distribution. After my explanation today, I hope you too will realize just how pervasive supply chains are in our daily lives and society at large; they go well beyond the narrow notion of logistics, with trucks and sheds seemingly the main focus. Indeed, contemporary supply chains are the ‘central nervous system’ of business and the economy at large. They are omnipresent. That is why the GFC in 2008/09 brought us near to the brink of disaster; if banks had completely stopped swapping credit with each other, goods and services would have stopped moving along supply chains, and everything would have ground to a halt. Supply chain thinking in its various forms has only been around as a management discipline for 50 years (since 1965). In that time it has grown with an operational philosophy of ‘one-size-fits-all’. No deep conceptual framework. Very descriptive. And hence little or no predictive capability. In 1989 I tackled this problem, and have been working on it ever since. I set out to find a new paradigm that would replace the 2-D paradigm of one-size-fits-all, and something that would remove the over- and underservicing that had evolved in the largely growth markets post-WWII. To be brutal, everyone has been guessing the design of their supply chains!

· 506 ·

M15_GATT6818_03_SE_C15.indd 506

2/24/15 3:56 PM

We started by developing our ‘strategic alignment’ model, which we later renamed dynamic alignment to cater for the way customers and stakeholders move and change their mind-sets in different situations. This was essentially a B2B concept, but it can be used also for B2C, or indeed in any channel situation. Once we had found the magic number of dominant buying behaviours (we call them behavioural segments), we automatically knew how many supply chains were needed in most situations, i.e., four or five to give around 80 per cent coverage of the target market for any given product/service category. All this work was carried out using major corporations as our laboratories, including Fletcher Challenge Limited and Fonterra here in New Zealand. Based on the dynamic alignment model, it is clear to me that most solutions in management science are ‘hybrid’ (rather than pure) solutions, involving a mix of disciplines. The trick is to understand what the appropriate mix is in a given situation. But no tertiary institution teaches this, and when young graduates go out into enterprises they are met with the same old conventional approaches; nothing new is tried to test their young eclectic minds. Based on the dynamic alignment model it is also clear that the propensity for misalignments in and between institutions is large. Consumer behaviour may be taught in a marketing class; strategy as a capstone subject; culture remains the purview of HR; and leadership courses are thin on the ground. Then there is engineering (for modelling); analytics to handle ‘big data’; and accounting activity based costing (ABC). All these subjects are taught across several faculties, in an uncoordinated way. What hope the students? Now I recognize that all entities are networks, containing supply chains running through them, including the service industries such as financial services, education (all levels), tourism, legal, accounting, consulting, etc., yet few companies in these sectors have recognised the potential value available through applying proven supply chain principles. Maybe it’s the terminology that turns them off? Turning to the tertiary sector, all the elements of dynamic alignment and supply chain networks are present – inbound raw materials in the shape of students; the tertiary network itself including all the physical facilities and knowledge exchange flows through universities; and the end product emerging into the employer market. Yet we continue to run our faculties and universities on the basis of vertical silos, dominated by budgets! In other words, on the basis of inside-out thinking versus the outside-in thinking I am recommending here. We get stuck on the inside, buried in the culture, and devoid of any linkages to the outside world that we are supposed to be serving.

▼

S e r v ic e s e c t o r s u p p l y c h a i n s

· 507 ·

M15_GATT6818_03_SE_C15.indd 507

2/24/15 3:56 PM

Dynamic Supply Chains

Relatively recently, online access to knowledge outside the tertiary institutions has opened up completely new channels to buy in outsourced product more cost-effectively, and replace some of our internal resources which are no longer relevant or cost-effective. We must work out the optimal mix of internally developed knowledge and externally sourced knowledge, and combine in ways that bring more multi-disciplinary dimensions to the students as they pass along the educational pathways, because that is what industry, commerce, and government expect. Finally, apart from new curricula designs, there is the potential to revolutionize the way we use our facilities, both inside a single institution, and between institutions, and we now have the modelling tools to do just that. This, combined with new business models for our tertiary institutions will make education much more relevant in the years ahead. But innovation and leadership are needed in truckloads! Simply deregulating universities as Australia is doing (which will enable universities to set their own course fees) is another example of one-size-fits-all thinking. It will benefit some perhaps, but deprive many others who will not be able to afford the consequent higher fee levels (while not putting any pressure on the delivery model), particularly at the most prestigious universities. And the country’s universities (and the country itself) will slip back in world rankings.

Network services The final example is a ‘network services’ company – SATS headquartered in Singapore. The company has two core businesses, food solutions and gateway services. Food Solutions looks after inflight catering, institutional catering, remote catering, stadia catering, and airline linen laundry. Gateway Services looks after passenger and baggage handling, ramp and cargo handling, security services, and cruise handling. The company is the first-choice service provider for over 60 scheduled airlines that use Changi Airport in Singapore. SATS recorded SGD1.82 billion in revenue in FY2013. As indicated above, its twin engines of growth are food solutions and gateway services, and it operates the largest aviation services network in Asia. SATS is truly a modern day ‘network of networks’.

· 508 ·

M15_GATT6818_03_SE_C15.indd 508

2/24/15 3:56 PM

S e r v ic e s e c t o r s u p p l y c h a i n s

Its operation statistics are impressive. In FY2013–14, it managed 44 airports in 12 countries; handled 626,000 flights; managed 85 million passengers; prepared 76 million meals; and handled 4 million tonnes of freight. Most importantly, SATS has an impressive executive team that is currently reviewing the alignment of its two core businesses with their respective customer bases in order to pursue a sustainable growth path into the future.

When lean met services McKinsey & Company cite many of the same industries as noted above when they introduce their ‘next frontiers’ article about the application of lean principles to service industries.35 In particular they foresee ‘an unprecedented amount of product-performance data now available through machine telematics. These small data sensors monitor installed equipment in the field and give companies insights into how and where products are used, how they perform, the conditions they experience, and how and why they break down.36’ The next step is to link this data back to product/service design in order to make strides towards improving customer service and boosting productivity. All this is contributing to the end result of: more scientific insight into how product and service attributes contribute to customer value; new ways to look at what matters most for classic lean variables such as lead-time, cost, quality, responsiveness, flexibility and reliability; and new opportunities for cross-functional problem solving to eliminate anything that strays from customer-defined value.37 Perhaps this statement is a bit ambitious because we know from our work that achieving these mixed outcomes will require a mix of different supply chain configurations with attributes that match the situation. This is a big task given that most service industries are still at the starting gate when it comes to supply chain design. They do, however, have the opportunity to look to their cousins in product industries and learn how they transformed their businesses. The good news is that the same principles of dynamic alignment that product industries use can be applied to the supply chains of service enterprises. Synergies are just waiting to happen.

· 509 ·

M15_GATT6818_03_SE_C15.indd 509

2/24/15 3:56 PM

Dynamic Supply Chains

Key ideas 1 Service sector industries have different degrees of tangibility, from intangible (pure) services, to tangible products augmented by (after sales) services. 2 The problem for many service industries is they are still focusing on the supply end of the supply chain (procurement), and on process improvement, but that’s about it! 3 The definitive difference between pure services and other variants is that they are produced and consumed, simultaneously. This adds a layer of complexity when considering the implications for the supply chain. 4 We must remember the similarities rather than the differences between ‘product’ and ‘service’ supply chains. And they have the same objective – to satisfy customers/consumers at optimum cost. 5 Both intangible services and tangible products move through ‘networks’ of nodes, connected by links, which are either physical or electronic. We can apply the same supply chain thinking here! 6 Our conclusion: service industries still lag significantly behind product industries in systematically adopting supply chain techniques, although there are notable exceptions.

Your challenge If you are a senior executive in one of the service industries offering the ‘intangible’ services shown in Figure 15.1, have you attempted to apply supply chain thinking and methods learned from the product industries? If so, with what success?

· 510 ·

M15_GATT6818_03_SE_C15.indd 510

2/24/15 3:56 PM

Chapter 16

The new world order How to set your agenda for the decade ahead

W

e are witnessing a changing of the guard. The dramatic ­emergence of the Amazon.com juggernaut that is big enough to unsettle even Walmart is one clear indicator that turbulence is on the way. Globe-spanning multinational companies are fast becoming an autonomous force in the world: they are bigger than all but the largest national economies. Some argue the supply chains of these ­corporations, which connect producers and providers to ­customers around the world, have led to the emergence of an ‘Independent ­Republic of the Supply Chain’,1 more powerful than governments and their ­regulators. But could our future be so dastardly, and lead to your demise? It doesn’t have to be so. In this chapter I review the issues that could be about to influence your supply chain performance, for better or worse. One such issue is the requirement for corporations to meet customers’ expectations and that they become sustainable and act ethically in their practices. How will you react? It could well be that the customer is ultimately in control of the ­supply chain network after all! We look at the vast array of issues that could be on your horizon, from the large to the small, and update their priority. We have found six new issues for you to consider since the last edition of this book. One thing is certain, identifying the issues early, then assigning them an appropriate level of resources, is the key to avoiding unnecessary and costly ‘crises’.

· 511 ·

M16_GATT6818_03_SE_C16.indd 511

2/24/15 3:57 PM

Dynamic Supply Chains

Change has always been a constant in our operating environments. But today we seem to be buffeted on all sides. If it’s not a global credit crunch and recessionary economies flowing from the GFC, it is transformational technology making us remake how we operate, or it is global giants applying ever-more sophisticated supply chain capabilities and strategies. Looming large in our new world are ‘big data’ and associated a­ nalytics, which when combined with the increased capacity afforded by cloud ­computing, can boost experimentation and innovation on a much larger scale. This is as it should be. It doesn’t have to be a threat; the ­innovation can work to your advantage too. That’s the surprising nature of issues – they can be good and bad. Trading between nations is now under the ­spotlight too, as companies endeavour to overcome natural and man-made ­impediments, and achieve success without the need for yet more ­regulation by ­governments; that is a ‘no-no’. Here there will no doubt be winners and losers. We are ­seeing more focus on collaboration as enterprises work out who to ­collaborate with, and who not to waste time with. A whole new emphasis on design is underway, as is a more measured approach to risk and risk mitigation.

Here come the Exocets As we begin to understand more about the world in which supply chains are omnipresent, it is a case of the more we find out, the more we realize we don’t know. We have come a long way in the past 50 years, but there is still a lot more to learn over the next decade. There is always some w ­ arning of future events, however subtle, and Kenneth McGee of Gartner Inc. quotes examples of the Three Mile Island nuclear disaster and the space shuttle Challenger explosion, to demonstrate this point.2 A more recent and vivid example is the 2011 nuclear disaster in Japan, which occurred when a 9.0 magnitude earthquake triggered a massive tsunami on the north-east coast, engulfing the Fukushima Daiichi nuclear power plant. The e­ arthquake may have been the fifth most powerful in the world, and the tsunami rated the second most destructive in history, but critics contend damage to the power plant was still avoidable3 because the nuclear plant’s ­operator, Tokyo Electric Power (Tepco), had actually predicted the disaster if not the exact timing. In 2008, Tepco engineers made three separate sets of calculations that showed that the Fukushima Daiichi power station could be hit by tsunamis · 512 ·

M16_GATT6818_03_SE_C16.indd 512

2/24/15 3:57 PM

The new world order

as high as 50 feet, according to the company. Tepco spokesman Mr Takeo ­Iwamoto said ‘Tepco did not tell regulators at the Nuclear and Industrial Safety Agency (NISA) for almost a year, and then did not reveal the most alarming calculation, of a possible 50-foot wave, until March 7 of last year [2011] – four days before the tsunami actually struck’.4 If only the warnings had been delivered – and acted upon. The point from these examples of disasters, natural or not, is that there are many events that seem totally unexpected to the point of being ‘unplannable’ (as described in Chapter 11), but are in fact already on our horizon. Not many of us will face a tsunami caused by an earthquake (I hope!) but we will have many issues ­coming our way, of varying magnitude and impact. I have been scanning the supply chain’s long-term horizon for more than 20 years, and identified 23 issues, or Exocets, that I think will affect the way enterprise supply chains ­perform during the next decade. To help prioritize this list, I have been using a critical issues analysis technique that I developed in the 1980s.5 It is simple to use, but very effective in practice. Indeed, I still find executives using this technique 20 years after I introduced them to it. First, a definition; I see an issue as: anything that is either impacting now or will impact at some time in the future on the performance of the organizational unit under review; in this case, the enterprise and its constituent supply chains. An issue defined in this way can come from anywhere in the organization’s operating environment, which is why I refer to them as Exocets. The Exocet missile can be fired from multiple platforms – ships, submarines, aircrafts or helicopters, which means it could come from any direction at any time; you get the picture – you’re exposed! But unlike a real-life Exocet, an issue may not always destroy its target – it can have a positive impact, if you are prepared, that is. I find issues either strike terror in the hearts of businesses or they are totally ignored. But how do issues emerge in the first place? Do they suddenly occur in a crash, as in a crisis? Or do they linger on the horizon for some time before unleashing their full force? Using the model described in Figure 16.1, issues normally enter the matrix at the top left-hand corner, where they very often linger and go unnoticed for some time. Over succeeding years they can drift around in the matrix, and may not be spotted until they reach crisis p ­ roportions in the bottom right-hand corner. Then it’s time for ‘crisis management’. Many executives spend their lives doing nothing more than reacting to the issues that become crises. · 513 ·

M16_GATT6818_03_SE_C16.indd 513

2/24/15 3:57 PM

Dynamic Supply Chains

Impact Low

Significant

Major

New entry

Periodic review

Monitor continuously

Significant

Periodic review

Closely monitor

Planned/ delayed response

Major

Monitor

Planned/ quick response

Crisis – respond immediately

Urgency

Low

Figure 16.1 ◆

Critical strategic issues impact/urgency matrix framework

The idea of the impact/urgency matrix is to push back the b ­ oundaries, study the issues as they occur, and address them before they reach crisis ­proportions. Issues are like radio waves – they are in the air that surrounds us, but we can only do something about them early if we tune in to the ­appropriate wavelength. Once we have clearly identified an issue and ­understood the likely implications of its presence, we can either continue to monitor it over time, or take immediate or more measured action. If the matrix is re-visited on a regular (say quarterly or six-monthly) basis, the movement of issues can be monitored systematically and action taken in a proactive way. The aim of course is to avoid further crises, by moving from a reactive to proactive mode. I remember working with John Rickard, Group Chief Executive of Hooper Bailie Industries, an Australian mini-conglomerate, in the ­mid-1980s. His problem was that the Board of the holding company was acquiring diverse companies, often without involving him; e.g., tanneries one year, vineyards or office interiors the next. As a result, John was always in crisis mode. One day, about a year after we had been systematically plotting and managing the issues that arose across his portfolio of businesses, he told me, ‘I feel there’s something wrong – I don’t seem to have any crises these days,’ or words to that effect. What had happened was that the issues management technique had helped him get ahead of the oncoming crises

· 514 ·

M16_GATT6818_03_SE_C16.indd 514

2/24/15 3:57 PM

The new world order

and anticipate events so that he had more time to do what he was paid to do as CEO: lead the conglomerate, provide direction and work more systematically on shaping his portfolio of businesses to achieve the desired performance.

Critical strategic issues facing supply chains of the future My approach is to regularly identify the issues in today’s market and ­consider what impact they could have on your enterprise and its supply chains – in the ensuing five, 10 or 15 years. In my 2006 book, Living Supply Chains, I identified a list of 13 strategic issues as those most likely to have an impact on the performance of enterprise supply chains over the period 2006 to 2016. I subsequently updated these and added four more issues, numbers 14 to 17, in Dynamic Supply Chains in 2010. I used the prioritization technique described above to assess the ­criticality of the identified issues, and to guide my decision as to how and when to ­allocate resources to alleviate or enhance an issue’s impact. Each issue is plotted on the impact/urgency matrix shown in Figure 16.2 using the ­guidelines described in each box of the 3 × 3 matrix in Figure 16.1. For this book, I have reassessed the priority of each of the original 17 issues to reflect changing circumstances over the intervening five years, and I am now adding a further six to the list (issues 18 to 23). I have applied the same approach to prioritization that I used a decade ago. The issues below are listed in the same order as 2006, for ease of ­comparison only – the order does not reflect their current priority.   1 Sustainability across all supply chains in the light of pressures for ­ecological, social and corporate responsibility. This issue is split into two parts: 1a. Sustainability; and 1b. Corporate social responsibility (CSR).   2 The impact of oil prices on cost-to-serve.   3 Future practices in outsourcing, in all its forms.   4 The wider adoption of supply chain ‘principles’ by service organizations.

· 515 ·

M16_GATT6818_03_SE_C16.indd 515

2/24/15 3:57 PM

M16_GATT6818_03_SE_C16.indd 516

Urgency

F ig ure 1 6.2 ◆

Low

15

19

12

9

16

10

15

12

9

10

16

2

Significant

17

7

22

14

11

17

2

1

4

1

1b

14

11

7

20

18

4

8

21

1a

13

6

3

5

8

6

13

Major

assessment of critical issues facing enterprise supply chains

2015

2017

2020

2025

Impact

3

23

5

New

18. Emerging era of digitization 19. Requisite automation 20. Harnessing omni-channels in retailing 21. Big Data Analytics 22. Re-shoring of manufacturing 23. Bilateral import/export trade flows

1a. Sustainability 1b. Corporate social responsibility (CSR) 2. Impact of oil prices 3. Future practices in outsourcing 4. Service organization supply chains 5. Vulnerability to disruptions 6. Genuine collaboration 7. Talent acquisition and management 8. Multiple organization formats 9. Spread of supply chain networks 10. Whole-of-enterprise mind-set 11. Co-opetition – competitor collaboration 12. Innovation, in all forms 13. Network complexity 14. Pricing regime impact 15. Financial links in supply chains 16. Knowledge management 17. Subculture of continuous improvement

Key:

dYnaMiC SupplY ChainS

· 516 ·

2/24/15 3:57 PM

The new world order

  5 Vulnerability of supply chains to sudden unplanned disruptions; risk, and use of risk management regimes.   6 The rise of genuine collaboration along enterprise supply chains.   7 Tapping the talent inside and outside enterprises.   8 Learning to design and manage multiple organization formats.   9 Coping with the national, regional and global spread of supply chain networks. 10 Adoption of a whole-of-enterprise mind-set in managing supply chain operations. 11 Co-opetition – collaboration with competitors. 12 Innovation (all forms), product design and product life cycles. 13 Network complexity and use of optimization techniques. 14 Impact of pricing regimes on supply chain performance. 15 Financial links in enterprise supply chains. 16 The role of knowledge management in developing intelligent supply chains. 17 Developing a subculture of continuous improvement in enterprise supply chains. 18 The emerging era of digitization (new). 19 Requisite automation (new). 20 Emergence of omni-channels in retailing (new). 21 The rise and rise of big data analytics (new). 22 Re-shoring of manufacturing (new). 23 Bilateral import/export trade flows (new).

Is that really a priority? Assessing where to put your effort Your enterprise could be operating in quite a unique environment and therefore have different strategic issues to those listed above. But I have adjudged this list of issues as the key ones to focus on using my experience in a broad range of sectors, and assigned each a specific priority as shown

· 517 ·

M16_GATT6818_03_SE_C16.indd 517

2/24/15 3:57 PM

Dynamic Supply Chains

in Figure 16.2. I have shown their position as assessed in 2010, and also provided their likely updated position in 2015. The positions of the six new issues (18 to 23) are provided for the first time. I will discuss each of the top-priority issues and comment briefly on how the application of dynamic alignment principles may assist in resolving each. I have segmented the issues into three main groups, starting with the highest priority. ◆

Group 1: The crisis issues which are about to strike: 5, 21, 20, 7, 8, 13 and 3.

◆

Group 2: The significant impact issues which could pounce at any moment: 17, 15, 12 and 16.

◆

Group 3: The major impact issues that should be on your radar; 1 [a and b], 18, 6, 4 and 23.

◆

The rest: The issues that are significant but, like Group 3, could be here sooner than you think: 2, 19, 9, 10, 11, 22 and 14. These residual issues will not be analyzed in detail but will be monitored instead.

Remember that this is the suggested order of priority. It will be up to you to analyze each issue and decide which are the most critical for your ­particular enterprise and circumstances. Figures 16.1 and 16.2 can be your starting point.

Group 1: Crisis issues – about to strike, 2015 to 2017 There are seven critical issues that are in the ‘crisis-respond immediately’ field in our impact and urgency matrix; these require our most attention. I start with Issue 5, which is now in a critical position in the very right hand bottom corner of the matrix: it could have a major impact – now! The other issues span outwards in terms of their impact and urgency, and I order them accordingly.

Issue 5: Vulnerability of supply chains to sudden unplanned disruptions Sudden failures in supply chains can be due to multiple causes, including:6 ◆

disruptions: natural disasters, terrorism, and war;

◆

delays: due to inflexibility of supply;

· 518 ·

M16_GATT6818_03_SE_C16.indd 518

2/24/15 3:57 PM

The new world order

◆

systems: failure of technology infrastructure;

◆

forecasts: inaccurate forecasts, lack of forecasting;

◆

capacity: capacity inflexibility; and the list goes on.

One such failure occurred in March 2000 when lightning hit a power pole in Albuquerque, New Mexico. The lightning strike caused a massive surge in the surrounding electrical grid, which in turn started a fire at a local plant owned by Royal Philips Electronics NV, ultimately damaging millions of microchips. Nokia, a major customer of the plant, almost immediately began switching its chip orders to other Philips plants, as well as to other Japanese and American suppliers. Thanks to its multiple-supplier strategy and responsiveness, Nokia’s production suffered little during the crisis. In contrast, L.M. Ericsson, another mobile phone customer of the Philips plant, employed a single-sourcing policy. As a result, when the Philips plant shut down after the fire, Ericsson had no other source of microchips, which disrupted its production for months. Ultimately, Ericsson lost $400 million in sales.7 This is a spectacular example where two different approaches to risk led to very different outcomes; but many more risks abound in the way ­supply chains are designed and operated. For instance, if lean principles are taken too far, and stocks of components and finished goods in the p ­ ipeline are reduced to very low levels to cut costs, it will become ­susceptible to even the smallest disruption in supply or fluctuation in demand. In these ­situations, it is prudent to hold reserves of inventory along the supply chain in different stages of completion. This in-built redundancy costs money, but has to be offset against the cost of lost sales and lost customers through non-supply. As a result of the Japanese tsunami, Toyota is reviewing its single ­sourcing strategy.8 At the time of the earthquake, some 15 per cent of parts for Toyota’s North American built vehicles came from about 500 suppliers in Japan. As a result, after the earthquake, Toyota wasn’t able to run full ­production until the end of 2011 – nine months after it struck.9 On the other hand, GM employed a team of hundreds of employees to work on Project J, which shifted parts from low-volume plants in the USA to other facilities, while at the same time helping supplier factories in Japan to get back up and running.10 As a result, GM says that its bottom line for 2011 was not significantly impacted by the Japanese earthquake.

· 519 ·

M16_GATT6818_03_SE_C16.indd 519

2/24/15 3:57 PM

Dynamic Supply Chains

The strategic importance of managing supply chain risk is all the more obvious due to the profound changes in market share that followed the ­disaster. For example, GM regained its former position as the #1 a­ utomotive company, a title previously held by Toyota since 2007.11 So the conclusion is that sudden disruptions to enterprise supply chains cost money, and this conclusion is confirmed by a 2012 survey sponsored by Zurich Insurance in the UK, which found that 88 per cent of UK organizations (across all major sectors) had experienced a significant disruption or delay in their supply chains over the previous 12 months, rising to 97 per cent for those in the manufacturing sector.12 Given the rise in terrorism, which has injected even more uncertainty into the operation of global supply chains, the solution is to put much more forethought into developing risk mitigation strategies, before something ­happens. Hau Lee and Michael Wolfe suggest six strategies:13 ◆

Comprehensive tracking and monitoring – to detect a security breach at the earliest possible stage.

◆

Total supply chain visibility – so that you can respond in a meaningful way once the extent and location of a security breach or other disruption is known.

◆

Flexible sourcing strategies – we saw how important this is in the case of the fire at the Philips microchip plant.

◆

Balanced inventory management – the importance of reviewing ‘safety stocks’ has been brought back into focus, after years of cutting and ­trimming inventories to reduce costs.

◆

Product and process re-design – this has taken on new significance, and led directly to the development of postponement techniques. Indeed, one of the strategies used by Nokia to mitigate the problems caused by the fire at the Philips plant was to re-design its microchips so that they could be sourced from alternative suppliers.

◆

Demand-based management – which means influencing demand with pricing and other offers to upgrade to the next level of product. Dell does this very well.

The fully flexible supply chain configuration, described in C ­ hapter 11, would surely help to secure supply chains in most eventualities and ­protect them against the impact of sudden shocks. In particular, the

· 520 ·

M16_GATT6818_03_SE_C16.indd 520

2/24/15 3:57 PM

The new world order

cluster organization design and corresponding entrepreneurial subculture are ­essential ­ingredients for success in such unforgiving circumstances. Indeed, Professor Yossi Sheffi of MIT highlights the role of culture in his book The Resilient ­Enterprise.14 He too believes that resilience and flexibility in an organization derive largely from having the appropriate culture in place. In the context of the dynamic alignment model, a fast-­reacting ­entrepreneurial subculture will often be the key to aligning your firm ­successfully, ­irrespective of the processes and technology. Nokia ­demonstrated this when the fire occurred at its microchip supplier; Dell epitomizes the fast-­moving culture of a high-tech company, as does DHL in its express package b ­ usiness. All the necessary traits for developing a resilient organization, underpinned by an entrepreneurial subculture, have been discussed in Chapter 11.Yossi Sheffi has also defined ­similar elements for achieving the necessary dynamic culture for a fully flexible ­supply chain; these are:15 ◆

continuous communications among informed employees;

◆

distributed power;

◆

passion for work; and

◆

conditioning for disruption.

Changing and shaping the culture so that it can cope with sudden disruptive events in supply chains is the key starting point in preparing for unexpected events. Anything can happen – it’s just a matter of where and when. So we shall see much more emphasis on developing both variants of fully flexible supply chains in the future. Update: If anything, the vulnerability of supply chains to disruptions is an issue that has become even more critical over the last five years, as i­ndicated in Figure 16.2 by its movement downward towards the bottom right-hand corner of the matrix, into the ‘crisis-respond immediately’ zone. There is now clear evidence of the impact of disruptions in research ­carried out by Kevin Hendricks and Vinod Singhal.16 They found that ­average ­shareholder returns dropped by 33.08 per cent in a three-year period, from one year before a disruption was announced to two years after the ­announcement.17 That’s a staggering figure! They quote two examples of recent disruptions that have had a major effect on the companies involved: Mattel’s product recall of lead-tainted toys18 and Boeing’s delay in delivering its Dreamliner aircraft.19 Airbus had similar problems with its Airbus A380. In fact EADS, the Airbus

· 521 ·

M16_GATT6818_03_SE_C16.indd 521

2/24/15 3:57 PM

Dynamic Supply Chains

parent company, reported that ‘its net income d ­ windled to €99 ­million in 2006, from €1.68 billion a year earlier. This was due largely to €2.5 ­billion in charges directly related to a two-year delay in A380 ­deliveries’.20 Another high-profile disruption occurred in Japan at Riken Corp., a supplier to all eight of Japan’s automakers. It caused the ­suspension of production, which resulted in widespread customer d ­ isruption. Hendricks and Singhal have since released (2012) more recent figures on the three-year impact on ­shareholder returns, and things are getting worse, i.e., −38.40 per cent ­average reduction in shareholder return!21 Perhaps the most high-profile disruption of the last decade occurred in Texas City in 2005 when the BP Refinery exploded, killing 15 people and injuring 170. This event was so serious that it has been the subject of drawnout legal proceedings and an official inquiry22 and was one of the contributory factors in the resignation of Lord Browne, BP’s CEO.23 More recently, we have witnessed the sudden and dramatic disruption to world commerce (and supply chains) caused by the eruption of Mt. Eyjafjallajökull, the Icelandic volcano. With the frequency and level of disruptions seemingly on the increase, the only solution is to ‘design redundancy into supply chains wherever possible’, according to Jim Thomas of CEM Axiom Manufacturing Services.24 Thankfully, because of the increasing awareness of disruptions and their negative impact over an extended period on the affected enterprise, a lot more attention is now being given to risk mitigation and building resilience into enterprise supply chains.25 This process is likely to continue for the foreseeable future. A company that does this well is Walmart, as evidenced by the way it responded to the Hurricane Katrina disaster.26

Issue 21: Big data analytics (new) The quality of data is a perennial challenge for supply chain management, but that challenge has become a whole lot bigger. The outright failure of conventional ERP systems such as SAP and Oracle to deliver transactional data in a consistently intelligible form suitable for managing supply chain operations has highlighted the pressing need for companies to build new data analytics capabilities in-house, and urgently. Indeed, my experience with various clients over the last few years where we have been endeavouring to collect data in order to build network optimization models, reminds me of the Dilbert cartoon featured in Figure 16.3. Say no more!

· 522 ·

M16_GATT6818_03_SE_C16.indd 522

2/24/15 3:57 PM

The new world order

Figure 16.3 ◆

Dilbert on data

Source: DILBERT © 2014 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights.

According to Andrew White, ‘Good data leads to efficient ­supply chains, allowing resources to be spent on innovation rather than on ­coping with problems.’27 How true this is. The accessibility and especially the ­consistency of a firm’s master data is an essential building block for enhanced supply chain performance and performance monitoring. Add to this, a veritable deluge of transactional data coming at the Firm from all sources (video and social media; mobile signals; purchase transactions; point-of-sale; mapping and GPS; and sensors in all formats), and you have the makings of what is being called ‘big data’. The good news is that we now have the technologies and analytical tools to extract new and valuable insights from this veritable sea of data. By harnessing these newly available technologies we can drive productivity increases along the entire length of enterprise supply chains. So the relatively new phenomenon of digital disruption has arrived ­suddenly and unexpectedly, through the rapid convergence of ­technologies that can amass and speedily process huge quantities of data via cloud ­computing; the development of new data visualization tools to i­nterrogate and interpret this data for decision-making purposes; and the rise of m ­ obility platforms. The latter makes supply chains more responsive to ­customers and end-consumers through the real-time receipt of signals from the ­demand-side, facilitating real-time re-allocation of human resources and track-and-trace of materials. All this adds up to an ability to build p­ redictive capabilities and therefore manage contemporary supply chains far more proactively than in the past, where previously managing by exception and ‘alerts’ were best practice.

· 523 ·

M16_GATT6818_03_SE_C16.indd 523

2/24/15 3:57 PM

Dynamic Supply Chains

Indeed, the findings of a 2013 data analytics review and research report, published by MIT Sloan Management Review, found that: organizations’ capture and use data is changing the way we work and live. This big idea . . . reflects a growing belief that we are on the cusp of an analytical revolution that may well transform how organizations are managed, and also transform the economies and societies in which they operate.28 This is already happening. ‘Companies that are leading the analytical ­revolution are already making data and analytics a source of competitive differentiation.’29 The key to success is to develop an ‘analytical mind-set [culture] that supports the use of data and analytics across a wide range of corporate activities’.30 Organizations with a data-oriented culture have three distinct ­characteristics. They:31 ◆

recognize analytics as a strategic asset;

◆

have strong leadership support for analytics; and

◆

make insights from data widely available within the organization.

Tom Davenport32 is right when he says that supply chains are ‘pioneers in the early use of data’.33 Indeed, it is hard to imagine how any Firms with over say $1 billion in revenues, can be managed without the s­ ystematic c­ ollection and analysis of data (internal and external) relating to their b ­ usiness. Yet, as we speak, relatively few Firms have recognized this reality, and this in turn is one reason that so many are struggling with rising complexity in the new volatile operating environment. James E. Powell reports that 93 per cent of C-level executives he surveyed believe their enterprises are losing an average of $71.2 million in revenue because they can’t fully leverage the information they collect.34 Richard Sharpe at Competitive Insights is one person determined to help executives ‘demystify the subject [of big data and data analytics] and explain why mastering big data is worth the effort’.35 In his view, ‘big data is all about taking information from a variety of different sources, both structured and unstructured, and using that information to make fact-based, meaningful decisions’.36 The emphasis here is on ‘fact-based’, rather than the usual ‘emotional-based’ conventional decision-making. Such has been the rise in importance of this new digital era that we are seeing the emergence of the Chief Digital Officer (CDO) in firms, reflecting · 524 ·

M16_GATT6818_03_SE_C16.indd 524

2/24/15 3:57 PM

The new world order

Big data

Information

Decision support

Knowledge

Optimization

Time

Nil

Periodic

Hours

Seconds

Milliseconds

Calculations

Nil

Simple

Pattern recognition

Optimization

Dynamic optimization

Figure 16.4 ◆

Big calculations

The data value spectrum

Source: Adapted from a presentation by Jeffrey Vail, CMO, Quintiq, at Quintiq World Tour event, Singapore, 23 June 2014

‘the digital reality of business today, and the needs businesses have for blending digital and business savvy’.37 Firms such as Starbucks, Best Buy, and McGraw-Hill are among some 500 companies worldwide (across all sectors) who are expected to have adopted the new role by the end of 2013. McKinsey & Company are also bullish about this trend, with a 2013 global survey showing that 30 per cent of the respondents already had a CDO on their executive team, which had resulted in greater progress in securing their ‘digital vision’ according to the respondents.38 And yet there is more insight needed than just coping with the deluge of Big Data. Dr Victor Allis, CEO of modelling firm Quintiq, has coined the phrase ‘Big Calculations’, which he describes as ‘the act of optimizing your business in real-time to achieve fast and efficient results’.39 He, along with colleague Jeffrey Vail, developed the data value spectrum depicted in Figure 16.4. The implication is that most enterprises have a long way to go to realize the benefits of big data converted via big calculations into optimal business results.

Issue 13: Learning to manage inherent complexity in supply chains One of the major factors contributing to the unmanageability of enterprise supply chains has been the rise in network complexity, which in turn is due to unfettered organic growth, M&A activity and the failure of ERP systems to deliver on their early promise of ‘one version of the truth’ involving transactional data. · 525 ·

M16_GATT6818_03_SE_C16.indd 525

2/24/15 3:57 PM

Dynamic Supply Chains

Our experience has demonstrated the crying need to introduce new a­ nalytical techniques into the firm to aid in the collection and cleansing of data from across multiple legacy systems or a smaller number of newer ERP systems. Once the data is sorted out, network optimization models can be designed and built from the data and data relationships inherent in the firm’s operations, and once validated become a powerful strategic tool to rapidly test a range of possible scenarios that will help define the direction the firm will take in serving its customers over the ensuing five years or so. Or at least until the next big change in the business. The two outstanding software providers in the network optimization modelling space are LLamasoft, based in Ann Arbor, Michigan, USA, and Solvoyo, based in Istanbul, Turkey. Our consulting company has used both providers with spectacular success. I doubt if you or any other senior executive today will dispute my c­ ontention that ‘complexity’ is increasing, in some cases, exponentially. C ­ omplexity comes in many forms, but to mention a few, there is the p ­ roliferation of SKUs; shorter product life cycles; demands by ­customers for ever quicker service; external factors such as increasing oil prices; an i­mbalance of channel power in many industries; sourcing from distant global locations; big data; and the list goes on. Where can we go for some ­respite from this multi-headed, ­accelerating band-wagon which is ­practically ­unavoidable in today’s world order? Our problem is that complexity will define today’s and tomorrow’s world. As they say, you can run but you can’t hide! Let’s turn to scientific theory for some guidance on how to cope with this issue of complexity. Ashby’s Law of Requisite Variety40 is one of the laws ­common to all systems. To paraphrase, it says that as systems become more complex through increased variety, then the corresponding complexity-­ resolution devices have to become correspondingly more sophisticated. In effect, to manage complexity in supply chains – and remember our ­fundamental point that supply chains are living systems – we have to absorb ‘variety’, otherwise the whole system is likely to become unstable, and at worst, collapse, in some cases catastrophically. To overcome potential ­instability, systems have to be designed with in-built redundancy to allow them to suffer and absorb unexpected shocks of the type we have been ­discussing in this and earlier chapters. If we try to eradicate all redundancy, such as in the pursuit of ever lower cost structures and leanness, supply chains are likely to become brittle and fail. We have to embed ­redundancy in certain

· 526 ·

M16_GATT6818_03_SE_C16.indd 526

2/24/15 3:57 PM

The new world order

types of supply chains, in particular agile and fully flexible ­configurations, if they are to be flexible and resilient enough to cope with extremely volatile market conditions. In light of this thinking, perhaps we have brought a lot of complexity upon ourselves by trying to squeeze too much out of our current very limited supply chain designs. They are simply not equipped to cope with rapidly changing demand patterns. This realization only reinforces the need to recognize and implement the concept of multiple supply chain alignment. And this is a dynamic situation – because different supply chain configurations will need to operate either in parallel or in some linear combination. The future world will look like this, whether we like it or not. Update: This issue is being addressed by companies with varied degrees of success. I have moved the issue down into the ‘crisis’ box, because things are only getting worse with time. If it goes untreated it will surely go deeper into the ‘crisis’ zone during the next five years. My philosophy on this issue is very clear: tackle complexity at source, i.e., the marketplace, and work back from there. If you try to tackle it at some later point, say inside the business, you will find yourself always in reactive mode; this is very inefficient and wearing on everyone involved.

Issue 7: Tapping talent inside and outside enterprises Growing or acquiring talent is likely to be one of the biggest strategic issues for the most successful (and unsuccessful) businesses over the next ­decade. For some, especially the large global consultancies, they see this as already at crisis-point and in some cases is holding back the growth in certain firms. Perhaps an even bigger crisis for enterprises, and supply chain ­management alike, is how to develop leadership talent to execute the types of ­strategies suggested in this book. Unfortunately, many executives believe that ­leadership development is a job for the human resources department. This is the worst possible misconception.41 Update: I originally had talent acquisition in the ‘monitor’ category in my first edition, then in ‘planned /quick response’ in the second edition, and now I am moving it further down into the ‘crisis’ category because this subject is reaching crisis proportions. Attracting talented people is one of those areas where we should be applying supply chain principles to the problem. If we want talent ‘on demand’, we have to approach the issue this way.42 In this situation, talented personnel are the stock that we must work to retain, even

· 527 ·

M16_GATT6818_03_SE_C16.indd 527

2/24/15 3:57 PM

Dynamic Supply Chains

during downturns, if we want our businesses to grow when market ­conditions improve. This is the required method of management in volatile times. Companies that clearly do a good job with acquiring and retaining ­talent are IBM, GE, EDS, Dow Chemicals, Capital One, Citibank, C ­ orning, ­Johnson & Johnson, Procter & Gamble and PepsiCo; and they all have ­different but effective approaches. The other factor that has emerged following the financial crisis and ­subsequent global recession and recovery is that Boards in major companies around the world are already looking for new leaders to replace the existing incumbents. Why? They are betting on the need for a very different kind of leadership style over the next decade from that we have witnessed during the past decade, one that can handle increased volatility. And they are right.

Issue 8: Learning to design and manage multiple organization formats Where to from here with your organization design? Clearly, a ­simple, ­straightforward format of days past will not provide the appropriate ­underpinning for the mix of supply chain configurations needed to respond effectively to the disparate preferences of today’s customers. Your supply chain performance will depend on your ability to design and manage three or four organizational formats within your current structure. This sounds like a complex task, and it is. But if we accept that the marketplace for most product/service categories is fragmenting, then we must also accept that this shift will have to be reflected in the way organization structures are ­configured. This book has stressed that customers exhibit several dominant buying behaviours; now you will need at least five matching types of organizational clusters to cover these primary behaviours, as depicted in Figure 16.5. No doubt maintaining the coexistence of up to five sometimes ­opposing organization formats inside a single enterprise is something you have ­studiously avoided in the past. But it’s become obvious that the singular formats of old cannot possibly respond to the emerging range of d ­ ifferent buying behaviours that today’s customers typically exhibit. Leading ­management thinker Peter Drucker has in effect been saying something similar for decades. In 1974 he wrote that: An organization should be multi axial, that is, structured around work and tasks, and results and performance, and relationships, and decisions. It would function as if it were a biological organism, like the human body with its skeleton

· 528 ·

M16_GATT6818_03_SE_C16.indd 528

2/24/15 3:57 PM

High

Low

Fully flexible

• Multi-disciplinary project team. • All key functions represented. • Emphasis on cost control and finalizing project on time. • Strong management of 3PLs or collection arranged from factory gate ourselves.

‘Project’ cluster

‘Innovation’ cluster • Consists of a relatively small specialist team. • May be either full- or part-time employees. • Emphasis on finding innovative solutions, fast. • Highly cooperative, but individualists respected.

‘Speed’ cluster • Can be relatively multi-disciplinary teams. • All key functions represented. • Emphasis on speed of response. • Some parts of the team can be virtual.

Predictability of demand

Agile

Multiple organization formats within an enterprise

Loose

Campaign

Collaborative

Lean

Source: Adapted from Figure 15.3 in Gattorna (2010), p. 401

F ig ure 16. 5 ◆

Tight

Relationship with customer

M16_GATT6818_03_SE_C16.indd 529

‘Process’ cluster • Multi-disciplinary teams. • Organized around core processes. • Emphasis on refining processes to achieve low costs and reliability. • Stability is a key value.

‘Relationship’ cluster • Multi-disciplinary teams focusing on a single customer or segment. • High degree of internal collaboration. • Sharing of information with collaborative customers. • Retention is key value.

The new world order

· 529 ·

2/24/15 3:57 PM

Dynamic Supply Chains

and muscles, a number of nervous systems, and with circulatory, ­digestive, immuno-logical, and respiratory systems, all autonomous yet i­nterdependent. But in social structures we are still limited to designs that express only one primary dimension. So, in designing organizations, we have to choose among different structures, each stressing a different dimension and each, therefore, with distinct costs, specific and fairly stringent requirements, and real limitations. There is no risk-free organization structure. And a design that is the best solution for one task may be only one of a number of equally poor alternatives for another task, and just plain wrong for yet a third kind of work.43 How prophetic his words were! How do you view organizational structures? I see them acting as the straitjackets in which we put people to work; and work structures have an inordinately powerful impact on the performance of the enterprise as a whole, and supply chains within the enterprise. Hierarchies have thrived for too long and have largely outlived their usefulness. The functional mind-set that dominates so many enterprises needs to be broken down and dispersed into customized clusters, as described in Chapter 6, if maximum value is to be extracted for all stakeholders. Apart from the cluster organizational model I proposed here, other ­variants have been tried in an attempt to align the enterprise with its ­rapidly ­fragmenting market. The McKinsey atom structure,44 which d ­ isaggregated organizations into smaller decision-making units to force greater a­ ccountability at lower levels of the organization, has been briefly reviewed in Chapter 6. Donald Sull reports that Haier, China’s largest home appliance manufacturer, has adopted what he calls a ‘flexible hierarchy’ structure.45 This is ‘an ­organizational form in which top executives set top-down priorities for the organization, but allow middle managers and employees great latitude in negotiating their specific objectives and autonomy in executing them’.46 This sounds very much like a version of the organizational clusters depicted in Figure 16.5. Whatever the case, the point is to recognize the importance of organization design in ­achieving alignment of the enterprise and its supply chains with the marketplace, and focus enough of your thinking and resources to radically improve current practices. As you’ve probably gathered by now, this is a crucial area where much work remains to be done in the next decade. Update: I need say no more about organizational design, except that the sense of urgency to get a suitable fix is accelerating, year by year. This is why

· 530 ·

M16_GATT6818_03_SE_C16.indd 530

2/24/15 3:57 PM

The new world order

I have re-positioned the issue down in the ‘crisis-response’ zone, because the urgency and impact are taking on crisis proportions. Let’s see if enterprises take up some of the ideas outlined in Chapter 6 over the next few years. It won’t be an easy transition, but it will surely be a winning move! Without a doubt, poor organization design is holding back any sustained improvement in supply chain performance.

Issue 20: Harnessing omni-channel retailing (new) This is one of the six new issues I have added in this edition; it is positioned in the ‘crisis’ box. The new era of digitization (Issue 18) has led directly to today’s omni-channel world, where ‘. . . the journey has more stages than ever, with the customer deciding not only where, when, and what to buy, but which channel to use and the role each will play’.47 ‘The linear route through the classic purchasing funnel has morphed into a fluid and dynamic process as boundaries between marketing and selling online and offline blur – and often disappear entirely.’48 Associated with these practices, is the rise of so-called ‘e-influence’, whereby consumers use the Internet to monitor prices in real time, which in turn drives their buying decisions. This in turn is driving retailers towards ‘dynamic pricing’, involving price ­adjustments multiple times each day. For the back-end supply chain, all these relatively new practices are driving experimentation ‘. . . with automated picking technologies at DCs, exploring variations on “click and collect” formats, and working with ­suppliers on new online-friendly packaging that emphasize sturdiness and protection rather than attention-grabbing graphics’.49 In summary, there is a lot of learning to do in this area, not least being to organize dedicated teams, and deciding on what technology to use to drive productivity. And there is little time to waste as the issue is already upon us.

Issue 3: Future outsourcing business models It is becoming clear that outsourcing is not a simple task, for either the outsourcer or outsourcee. Enterprises outsource for one main reason (see Chapter  14): to access required capabilities, and do so at speed and a known cost. Unfortunately, many companies that have either outsourced

· 531 ·

M16_GATT6818_03_SE_C16.indd 531

2/24/15 3:58 PM

Dynamic Supply Chains

the manufacture of key products and components, or outsourced logistics functions, have not had a happy experience. Management consultancy firm Booz & Company (now part of ­PricewaterhouseCoopers) reported in 2001 that high-tech companies such as Cisco, Sony, Hewlett-Packard, Apple and Philips had found that outsourcing their production had not met their expectations and had in fact caused them complications in their operational and ­financial ­p erformance. 50 The report highlighted one of the major flaws in ­outsourcing: the inevitable and fundamental conflict in objectives between the original equipment manufacturers (OEMs) and contract equipment manufacturers (CEMs) who actually make the product. In short, OEMs such as Cisco need ‘flexibility’ to meet sudden changes in demand; and CEMs such as Solectron and Jabil Circuit need ‘predictability’ rather than flexibility for their production schedules. Never the two shall meet! This remains a big issue today, which is making supply chains rougher rather than smoother to manage. A study by Deloitte Consulting highlights that some of the world’s largest organizations have started to recognize ‘the real cost and inherent risks in outsourcing’.51 The report argues that ‘organizations looking for differentiated growth solutions should avoid outsourcing when based solely on cost saving’. Further, ‘companies should outsource only commodity functions to guard against a loss of knowledge and should plan for short-term outsourcing to prevent vendor dependency’.52 Zara (part of global fashion retailer Inditex) does just that; in fact, it keeps the difficult work inside and only outsources the simple routine tasks. Do any of the problems and issues highlighted by Deloitte sound ­familiar to you? I believe the new business models proposed in ­Chapter 14 (confined to 3PL; lead logistics provider; and 4PL and its variants such as a joint service company) will deliver a more successful approach to outsourcing for the next generation of the economy and associated labour markets. These models bring together companies that want work done along their supply chains, with other parties that have the particular capabilities to best carry out such work. The organizational format can be a partnership or, better still, equity-based consortia. All parties in a ­consortium should be able to make good returns, but most importantly, the principals (OEMs or retail distributors) which own the business

· 532 ·

M16_GATT6818_03_SE_C16.indd 532

2/24/15 3:58 PM

The new world order

should retain control of their business, and be rewarded for creating scale in operations and knowledge. The dynamic alignment model provides ­useful guidance in these circumstances because it helps to ensure that ‘rapid alignment’ is achieved in the new joint venture style organization structure, highlighting how to make the objectives, culture and leadership of all the parties compatible. When I worked in the Australian office of Accenture, our ­consulting assignments certainly revealed some of the best and the worst of ­outsourcing arrangements operating at the time. Accenture has listed its top five ­considerations in achieving better outsourcing53 and it is useful to ­discuss these here because they reinforce the features of the joint services ­company model introduced earlier in Chapter 14. Get these features of the o ­ utsourcing arrangement right and the benefits will flow. 1 Have a partnering approach to outsourcing: Your selection of the right partner is crucial, and is now regarded as one of the new ­competences that enterprises must internalize. Once the selection is complete, you have to commit to each other in virtually a ‘professional marriage’, and managing the relationship becomes the key to success. It’s important that partners be compatible in terms of both competency and culture. Key attributes to look for in a partner are: ◆

demonstrated leadership, capability and a track record for delivery in outsourced activity;

◆

flexibility in approach, and willingness to shape a contract that works for both parties;

◆

willingness to take on a business risk-reward contract structure – ­business is of a strategic nature to the supplier as well as the buyer; and

◆

willingness to be transparent in working towards mutual trust as well as risk and reward.

So, flexibility, team approach, trust, shared objectives and compatible culture are all vital ingredients of success in outsourcing deals. For these to occur, all parties in a consortium need to share similar relationship values and ­business objectives. The cultures need to mesh so that everyone is in ­agreement about what end results to focus on. The dynamic alignment model will be a useful tool to achieve this. A study of IT outsourcing arrangements conducted in the period 2008–11 between Bulgarian

· 533 ·

M16_GATT6818_03_SE_C16.indd 533

2/24/15 3:58 PM

Dynamic Supply Chains

vendor organizations and their clients is revealing.54 Strong evidence emerged from this study indicating success in IT outsourcing partnerships is due to the following factors: ◆

commitment of top management [correlation +0.82];

◆

establishment of common aims and objectives [correlation +0.68];

◆

effectiveness of bi-directional transfer of knowledge [correlation +0.64];

◆

degree of achievement of contracted goals [correlation + 0.88]; and

◆

degree of effective communication between partner organizations [correlation +0.73].

2 Use outsourcing to drive strategic change: A significant success ­factor is to use outsourcing to achieve enterprise-wide strategic impact on the buyer’s organization, rather than outsourcing to accomplish lower ­operational costs or higher process efficiencies. The outsourcing ­relationship should be used to achieve business objectives that ­cannot be accomplished by the buyer organization without leveraging the strong points of the service provider’s organization. This point is listed by EY as one of the top 20 issues to be considered before outsourcing is ­undertaken.55 But some organizations go in the opposite direction for good reason. One such example is Zappos, which kept its customer service call centre in the USA (rather than outsourcing to India), and went all out to find personnel that best fitted their customers’ needs.56 3 Use risk-reward structures to motivate performance: ­Incentive-based pricing structures pay significant dividends. As usual it is a case of ‘the greater the risk, the greater the reward’. The reward is not paid to the ­service provider unless they achieve the specified desired result of the buyer organization. Incentive-based pricing or risk-reward structures are always evident in successful outsourcing arrangements. These ­structures provide an effective way to motivate providers to achieve ­challenging goals that will greatly impact the buyer organization’s a­ bility to c­ ompete. One of the best examples of project-level gain sharing is at ­Microsoft, which contracts for global financial and accounting services with A ­ ccenture. The two companies agree to gain-share allocation in advance for each innovation project. Specifically, they agree on how much Microsoft’s bill will be reduced and how much Accenture’s profit margin will increase.57

· 534 ·

M16_GATT6818_03_SE_C16.indd 534

2/24/15 3:58 PM

The new world order



Other examples of risk-reward structures include the following: ◆

gain share on savings achieved in operating costs;

◆

a reward for improved performance;

◆

a combination of the above; and

◆

a reward for achieving a unique objective, such as target cost-to-serve, or percentage movement in share price.

4 Adopt a beneficial deal structure: You should be prepared to spend time up-front on developing joint objectives. Structure the deal using business principles that are beneficial to both parties. Due diligence is also a critical step and should be used to establish the governance ­structure, joint business objectives, and commercial payment structure. You should also clearly articulate the desired business outcomes and key success factors and measures.

Partnership ‘operating principles’ should be built into the programme. Agree working principles that ensure a win–win relationship. Share ­information openly to secure a robust business case. And spend time understanding each other’s company philosophy.

5 Avoid outsourcing problems: Poor due diligence or assessment can have a negative impact on the outsourcing arrangement. Some of the problems include: ◆

Buyer not properly prepared at various stages of the process, e.g., value of assets may not be known; lack of resources through transition and implementation phases.



Recommendation: you need to work with the partner to capture ­baseline data, and assign dedicated resources to work on the deal to clearly identify business objectives, desired outcomes and potential risks.

◆

Buyer has unrealistic expectations, e.g., buyers often do not understand their roles and responsibilities during and post-transition.



Recommendation: agree business principles and roles and ­responsibilities early during discussions with outsourcing partner.

◆

Buyer makes poor judgements, e.g., ineffective service level specifications; lack of linkage of contract to business outcomes.



Recommendation: agree business outcomes and link service level agreements to outcomes.

· 535 ·

M16_GATT6818_03_SE_C16.indd 535

2/24/15 3:58 PM

Dynamic Supply Chains

Update: I have moved this issue down into the ‘crisis’ zone because I think the situation has worsened in the last five years. 3PLs have just not matured as expected, and performance is predominantly less than expected by shippers. This is leading some shippers (e.g., Unilever) to take matters into their hands and start developing their own supply chain control towers to more tightly manage their asset-heavy 3PL contractors. The towers are central organizational and technology hubs that capture and use data; they are an emerging model for companies to use as in-house transport management systems. In terms of life cycle, it seems that the outsourcing experience is still in its early stages. There has been some tendency for a ‘myopic pursuit of low-cost country sourcing’,58 but this cost-mitigation strategy is coming to an end as today’s low-cost production countries become tomorrow’s higher-cost emerging markets. That changes a lot of things. In summary, there is a lot of learning to do in this crisis response area, not least being to organize dedicated teams and decide on what technology to use to drive productivity. There is little time to waste as the issue is already upon us.

Group 2: Significant impact – could pounce at any moment, 2015 to 2017 We will now review the four issues which have the potential for less, though still significant, impact. They have pressing urgency and are all situated in the ‘planned/quick response’ box. The issues are numbers: 17 (continuous improvement), 15 (financial links), 12 (innovation), and 16 (knowledge management).

Issue 17: Developing a subculture of continuous improvement The reason for this issue is that we simply won’t be able to extricate ourselves from the complexities we are dealing with in enterprise supply chains in the near future – unless we have more Firms switched on to a continuous improvement subculture. Indeed, this issue goes hand in hand with Issue 12. Innovation, and the corresponding entrepreneurial subculture, is the only thing that will save us now. It’s time to pour the necessary resources into addressing this issue, which needs the will of the Board and CEO to fix. No one else has command of sufficient resources to get the task done, or the leadership clout to produce the required change in mind-set to shape an entrepreneurial ­subculture. Now is the time to embrace ‘disruptive technologies’59 in an effort to catch up for ground lost over the last several decades.

· 536 ·

M16_GATT6818_03_SE_C16.indd 536

2/24/15 3:58 PM

The new world order

Update: Disappointingly, I can see little improvement on this issue during the past five years. Indeed, few companies I am aware of, except of course Inditex in Spain, have seriously taken on board the need for continuous improvement. Action must be taken soon if this issue is to be resolved and contribute to broader performance improvement.

Issue 15: Financial links in enterprise supply chains This too is another issue to watch for on the horizon. I have moved it sideways to the left because the major credit crunch caused by the GFC has subsided a little. The issue has several dimensions: ◆

Making real the clear connection between supply chain execution and financial performance.60

◆

Using new financial ratios such as CFROI and TRS to assess real performance of enterprise supply chains.61

◆

The emergence of tax considerations in the so-called tax-aligned supply chains.62 Arshiya International, the Indian 3PL/4PL®, has designed its entire strategy around the advantages of using free-trade zones for its warehousing and rail transport network. China has announced its intention to develop a new FTZ in Shanghai for the same reason.63

◆

Innovative ways to link finance and the physical flow of product and information in supply chains. As mentioned in Chapter 14, DHL has attempted to develop this area in conjunction with GE Finance but growth has been hampered by the Sarbanes–Oxley legislation, or at least the way business interprets this act.

Update: The issue of financial links in supply chains may seem to be vexed as we recover from the GFC, but, surprisingly, the issue has untapped potential to deliver future value. Perhaps the most up-to-date perspectives on the topic are contained in the report by EY which surveyed 423 CFOs and heads of supply chains to assess what is changing at the finance/supply chain interface.64 Some of the results of the survey are instructive: ◆

70 per cent of CFOs and 63 per cent of supply chain leaders say that their relationship has become more collaborative over the past three years.

◆

Companies with evidence of strong business partnering between the CFO and supply chain leaders report better results than those with a traditional

· 537 ·

M16_GATT6818_03_SE_C16.indd 537

2/24/15 3:58 PM

Dynamic Supply Chains

finance model in place, i.e., 48 per cent of the close r­ elationship model report a growth in EBITA of 5 per cent over the past year compared with just 22 per cent of the more traditional type. ◆

Allocate time for the supply chain: results indicate that business partner CFOs spend an average of 25 per cent of their time working with the ­supply chain whereas those in traditional relationships spend around 12 per cent of their time.

◆

Engage in global supply chain integration activities.

The smart players will be members of enterprise supply chains which ­engineer new financial structures and prevent the tightening of credit from stymieing their plans. Watch this space! I have positioned it in the ‘planned/ quick response’ box because it represents a genuine area of value extraction for enterprises over the next decade. The sooner they get started the better.

Issue 12: Innovation, product design and product life cycles Variability of supply and demand are the two big killers of smooth and ­efficient supply chain operations. However, you can reduce some of the ­variability in supply through smart design that allows for ease of ­manufacture and assembly (postponement). You will need to have quality assessment routines in place, particularly in the early stages of a new product launch. Innovation will also be vital, not just in the product ­development stage but throughout the supply chain itself. Today, many enterprises favour ­innovation in product and product design rather than innovation in ­manufacturing and the supply chain. On the demand-side of the supply chain, you can avoid variability by strategically stocking product at various locations across the supply chain network, essentially building capacity ahead of demand. This also means ensuring contract manufacturers build manufacturing capacity and trained people capacity, ahead of demand. This idea may run c­ ounter to some lean principles, but if a specific product requires unrelenting ­agility, then ­embedding redundant capacity is the only answer. The cost has to be weighed against the potential for lost revenue by keeping to more ­conventional ­cost-based methods in managing the supply chain. Finally, in some p ­ roduct/supply chain combinations, complexity rises exponentially, quicker than the growth in product sales, and in this situation significant

· 538 ·

M16_GATT6818_03_SE_C16.indd 538

2/24/15 3:58 PM

The new world order

innovation is usually required at process, technology and people levels. To achieve dynamic alignment, continuous improvement (Issue 17) and ­innovation (Issue 12) must be pursued in all five generic supply chain types, although here again the subcultures that underpin innovation are not ­naturally present in collaborative and lean supply chains, and therefore the task is all the more difficult. Update: The innovation issue has moved to the right because its p ­ otential impact has increased. There is no shortage of new ideas – the problem is to convert ideas into action on the ground. It takes courage, leadership, ­tenacity, and resources. Ideas matter, but conversion into practice matters even more. Increased focus on implementation is mandatory.

Issue 16: The role of knowledge management in developing intelligent supply chains This issue was originally an integral part of Issue 7 (tapping into the talent of your organization), but the growing importance of knowledge has led me to make it an issue in its own right. Going hand-in-hand with talent is the requirement to help key talent in the enterprise with personal knowledge management. These managers will need help to keep track of, and ­manage, the information they encounter in their daily working lives.65 In fact, today’s organizational designs are particularly difficult for knowledge workers or professionals because of the complexity involved in moving information across functional boundaries.66 John Mangan and Martin Christopher have provided a comprehensive review of the knowledge areas, competences and skills that tomorrow’s supply chain managers will need to possess, at a ­minimum.67 It reads like a general manager’s job description. Surprised? I don’t think so. Update: The reality is that knowledge is a strategic resource in supply chains, and we must find ways to make the most of it.68 The first, most important element of corporate knowledge is to ‘know your customers’. For this you will need to undertake regular research along the lines ­suggested in Chapter 2, and support this with a customer relationship management (CRM) system – that is where you start the journey towards the ‘­intelligent supply chain’. Kate Andrews has devised categories for the different types of knowledge required for four of the five generic supply chains.69 Her f­ramework provides an excellent guide to ensuring your company’s

· 539 ·

M16_GATT6818_03_SE_C16.indd 539

2/24/15 3:58 PM

Dynamic Supply Chains

intellectual resources ‘fit’ your firm’s customer segments just as much as the subculture and leadership. Knowing your customer – intelligently – is the way of the future. There’s a gold mine to be found and tapped! I have repositioned this issue because I feel it is becoming progressively more important, and recognized as such. Thankfully, the emergence of data analytics is helping to convert data into insights, so there is discernible progress, but much more needs to be done, fast, before we are all overrun with a deluge of transactional data.

Group 3: Major impact – should be on your radar, 2017 to 2020 Now we turn to the five issues positioned in the ‘planned/delayed response’ field, covering issues number: 1 (1a. sustainability and 1b. corporate social responsibility), 18 (digitization), 4 (service enterprises), 6 (collaboration), and 23 (trade flows).

Issue 1: Sustainability in supply chains In the 2006 edition of my book I joined ‘sustainability’ and ‘corporate social responsibility’ together. However, although the two topics are inextricably intertwined, they deserve to be treated separately as follows.

1a. Sustainability Sustainability is a big issue, looming large in the minds of all types of enterprises, public and private. Rising community pressure over human rights and globalization first brought sustainability to prominence in the 1990s. Business was forced to ‘take a closer look at sustainable development, particularly its social dimension,’ writes Charles Holliday in his book Walking the Talk: Companies such as Shell, Nike, and BP were unprepared for consumers’ ability to get their concerns into the boardrooms. In a globalized and transparent world, managing a company’s reputation becomes a central element in managing a corporation.70 Sustainability is therefore a relatively new concept, albeit a complex one. When supply chains, also underdeveloped as a concept, are added to the mix, complexity increases. ‘Nevertheless, this is where business, value

· 540 ·

M16_GATT6818_03_SE_C16.indd 540

2/24/15 3:58 PM

The new world order

creation and sustainability meet reality, in difficult-to-manage and increasingly globalized and commoditized supply chains,’ a report on sustainability in the supply chain points out. ‘Sustainability in the supply chain is fundamentally about identifying problematic social, environmental and health and safety issues throughout the supply chain, assessing their impacts and risks, and then trying to improve them.’71 Investors and fund managers are not only increasingly scrutinizing companies for their supply chain performance, but they are also looking at the enterprise’s performance on sustainability issues, including the environment, human rights, occupational health and safety, ethics and social responsibility. Australian funds manager AMP Capital Investors is one such firm. Senior Research Analyst Dr Ian Woods reviews company performance against sustainability criteria in order to decide whether or not to recommend investment in such firms. The reason for doing so is clear, says Woods: ‘sustainable companies in the end will outperform other enterprises’.72 AMP and other firms have mounted a sustainable future funds research effort to understand if there are any risks associated in investing in these companies, beyond the normal financial analyses. A recent article in Fortune magazine seems to reinforce this trend to look beyond the bottom line and demand corporate social responsibility from the Fortune Global 100 and others.73 This subject is being treated more and more seriously. Update: You only have to follow the events leading up to and during the Copenhagen Climate Change Conference in December 2009 to know that this topic, particularly as it affects climate change, the environment, and national economies, is getting hotter by the month. But the reason I moved it up and to the right is that I feel it has nevertheless come off the boil a bit, even as its potential impact increases. A solution, or at least a consensus on the way forward, is still several years away, for both developed and developing nations. And a solution must be found, if not, the Earth’s environment will be damaged irreparably. The question to be answered by all stakeholders is: ‘Is sustainability a problem or an opportunity?’ An Australian perspective on this critical question is provided in a short report prepared following key meetings in Melbourne and Sydney with industry leaders.74 Companies at the forefront of sustainable practices along the length of their supply chains are Hewlett-Packard and Walmart, simply because they have consistently focused resources on this area over several years. One of Asia’s leading 3PLs, Linfox Logistics, has also achieved a reduction in

· 541 ·

M16_GATT6818_03_SE_C16.indd 541

2/24/15 3:58 PM

Dynamic Supply Chains

average annual energy consumption of around 5 per cent a year with its Linfox Energy Efficiency programme. The Australian Research Institute in Education for Sustainability (ARIES) at Macquarie University in Sydney conducted extensive research into how enterprises could move towards more sustainable business ­practices, and developed the following six insights.75 ◆

adopt a clear, shared vision for the future;

◆

build teams, not just champions;

◆

use critical thinking and reflection;

◆

go beyond stakeholder engagement;

◆

adopt a systemic approach; and

◆

move beyond expecting a linear path to change.

These six insights or principles are equally applicable to enterprises everywhere. Ultimately, the adoption of sustainable practices by business ­enterprises will largely depend on the weight of consumer demand, and this is g­ radually building. Indeed, it is possible that we are seeing the formation of two ­sub-segments inside the more conventional ‘collaborative’ segment, i.e., Ia, where the values point to maintaining a ‘relationship’ with the environment, and Id, where the values point to introducing innovations that ­support the idea of protecting the environment. Supply chain designers inside ­enterprises will need to keep these emerging developments in mind as they think about their supply chain configurations in the future. And as activism in all its forms increases around the globe, Firms have to be much better prepared to respond, proactively.This involves ­consciously ­seeking a ‘social license to operate’ among the community and other ­stakeholders for a project or business to exist. As Katherine Teh-White explains, ‘there is often a significant difference between what organizations think they are responsible for and what the community holds them accountable for’.76 The palm oil industry in particular is under close scrutiny at the moment as plantation owners/producers and downstream manufacturers of FMCG products struggle with legal, environmental, social and a­gronomical ­compliance issues. The Roundtable on Sustainable Palm Oil (RSPO) is attempting to introduce accreditation for all participating parties in the

· 542 ·

M16_GATT6818_03_SE_C16.indd 542

2/24/15 3:58 PM

The new world order

channel in order to raise standards and achieve traceability throughout. This is proving a complex task because it in effect requires the manufacturing sector to cross-subsidise some of the costs incurred at the producer end, when the power in the channel resides with the manufacturers! Something more than a ‘one-size-fits-all’ set of standards across the board is required in this situation if a breakthrough is to be achieved.

1b. Corporate social responsibility (CSR) Putting in place sustainability policies, and often public reporting of the results, is paying off for enterprises such as BP, BT, Intel, Procter & Gamble and Tesco; they have all been acknowledged and admired for their stand on corporate social responsibility.77 Interestingly, they all have strongly ­performing supply chains integral to their businesses. While not ­suggesting there is a causal link here, the same sound thinking that drove them to ­pursue sustainable growth policies is also likely to be the same as their approach to their supply chains. This demonstrates an ability to think and behave in the face of ­complexity. The pharmaceutical company Novo Nordisk’s approach to ­sustainable s­ upply chain management is firmly rooted in the twin p ­ rinciples of ­company values and risk management. The company has developed its own self-evaluation programme which it administers to suppliers, and if ­necessary it requires its suppliers to submit to social and environmental audits. As always, it’s the best companies that come to the fore. At Nokia, CSR involves acknowledging that the business has an impact on society at large and the environment, so it behaves accordingly. Another company that sees things a little differently from many others is IKEA. Göran Carstedt, former Volvo and IKEA senior executive, thinks the leadership challenge ‘is to stop treating companies like machines that need to be driven’, and as his friend Arie de Geus wrote over a decade ago in The Living Company, ‘accept that a company is a community with all the complexity of a living o ­ rganism’.78 His attitude to sustainability is summed up as follows: It’s so sad when people think the purpose of business is shareholder value alone. That’s like saying the purpose of life is oxygen. Of course it’s needed, but it’s the customers, co-workers, and the organization’s place in society that create that value, and that’s why they have to come first.79

· 543 ·

M16_GATT6818_03_SE_C16.indd 543

2/24/15 3:58 PM

Dynamic Supply Chains

Unsurprisingly, there is a cost to sustainability – a real cost in terms of the financial and human resources required, with no immediate prospects of payback. But it’s becoming a prerequisite of doing business, just as occupational health and safety (OH&S) is now part of every business. The companies that don’t move forward with sustainability initiatives will in the end be forced to do so by government policy. If they wait until they are coerced, the danger is they will be well behind their competitors. Leading companies are acting to ensure they are ahead of the regulatory game. Witness the environmental policies that are now commonplace – clean air requirements to reduce air pollution, environmental impact assessments for new developments and reporting on greenhouse gas emissions. Interestingly, Walmart was widely criticized for its operating practices and attitude to labour in 2005, but has since developed a new set of priorities that signals a substantial shift (for the better) in its stance on both environmental and social issues.80 No firm is too big to ignore the growing demands for more sustainable practices. Several companies are committed to extending sustainability ­principles across their supply chains. Nestlé Philippines, Inc. (NPI) launched a ­Greening of the Supply Chain (GSC) initiative involving 42 of its upstream ­channel partners.81 The GSC initiative involves educating business ­partners on environmental management. The initiative has improved performance and relationships between NPI and its suppliers. Adidas-Salomon, the footwear and apparel company, which outsources most of its production to more than 500 factories around the world, demands that all its suppliers adopt self-governance on the sustainability issue. Adidas-Salomon has implemented a system of scoring and monitoring suppliers’ performance on social and environmental matters.82 Major competitor Nike, the global footwear and sports clothing company, was the first in the industry to disclose its supplier base in its new corporate social responsibility report. Nike believes ‘the potential benefits to industry and factory workers outweigh the possible competitive risks’.83 The issue is not going away and indeed will loom larger in the next d ­ ecade, particularly for those companies falling behind in this area. ­Application of dynamic alignment principles will help to pinpoint and understand the areas of potential misalignment between the stakeholders in particular industry supply chains and more broadly – remember, dynamic alignment, first and foremost, applies to the whole enterprise, not just to the supply chains they

· 544 ·

M16_GATT6818_03_SE_C16.indd 544

2/24/15 3:58 PM

The new world order

are part of. However, it can be used to guide the formulation of strategies to close identified gaps where sustainability is the focus, and the benefits that flow from this action to stakeholders will vary. Update: From what I can observe, CSR as a business philosophy has not developed as fast as might have been expected over the last five years. For this reason I have moved it out in time, albeit at a higher potential impact. For some companies it has taken a crisis to get their CSR practices sorted out; look at Mattel,84 which initially dragged its feet when the first accusations emerged about the toys they manufactured in China being contaminated with lead paint. After a slow start they are now one of the leaders in CSR. Two companies that have caught my eye in the past few years are both Brazilian – Marcopolo S.A. and Natura. Marcopolo manufactures bus bodies and components, and holds about 43 per cent share of the domestic Brazil market, and 6 to 7 per cent of the global market. Marcopolo’s shares are listed on the São Paulo Stock Exchange (BOVESPA). The company has made a very successful transformation from a family-owned and managed business to a company with widely dispersed ownership and a high level of corporate governance, as evidenced by several awards for its social responsibility.85 Natura is the leading company in the Brazilian cosmetics sector. It is ‘committed to the quality of its relationship with stakeholders, [and has] established a sustainable business model, focused on constant innovation and improvement of its products’.86 Another cosmetics company, L’Oréal, led by Chief Purchasing Officer Barbara Lavernos, ‘is sold on the value of investing time and money in ­long-term supplier relationships and corporate social responsibility’.87 Meanwhile, the British retail giant Tesco, which buys much of its manufactured merchandise in poor countries, is under continual pressure to adhere to high labour standards. This is an ethical issue that concerns consumers, and is likely to become stronger over time. Indeed as ‘fast fashion’ becomes a reality, store chains such as Topshop, Miss Selfridge and Gap are struggling with this conflict between business competitiveness and the need to provide fair pay and conditions to the people working in the factories where their merchandise is made. Chocolate is another product where the same issue exists and is still unresolved despite pleas to the contrary. Then there’s the situation at Pacific Brands in Australia where the ­former CEO, Sue Morphet, controversially retrenched 1,850 workers and sent their

· 545 ·

M16_GATT6818_03_SE_C16.indd 545

2/24/15 3:58 PM

Dynamic Supply Chains

jobs offshore in 2012. This was seen as a desperate measure at a time the company was bleeding revenue and profit. While extreme action might seem justified by some, was it ethical? Are shareholders the only stakeholder to be considered here? What about the workers? A reflection of community sentiment was expressed by one major newspaper, when, upon Morphet’s departure, it predicted she would be remembered as ‘the boss who pocketed a hefty pay rise, sacked 1800 textile workers and moved manufacturing of much-loved Australian brands to China’.88 If you listen to Arie de Geus, the answer to the question of whether shareholders are the primary stakeholders is definitely no. But did the Board learn anything after so much controversy? The chairman said on Morphet’s departure that she had done a ‘fabulous job’, particularly in cost-cutting.89 So despite many stories of improvements in CSR during the past five years, I am left with the distinct impression that there is still a long way to go in this critical area of business; hence the need for positioning over the longer term. Perhaps consumers will have the final say, and force companies to adopt CSR polices. Certainly, there is evidence of this as reported in the 2013 Global CSR Study by Cone Echo Communications, which found that 91 per cent of global consumers are likely to switch brands to one ­associated with a good cause, given comparable price and quality; and 88 per cent feel a responsibility to purchase products they think are socially and e­ nvironmentally responsible.90

Issue 18: Emerging era of digitization (new) ‘Driven by a combination of consumer demand and the development of new information and communications technology (ICT), the world is r­apidly transforming. This process is called digitization.’91 It is one of the new issues that we have added to our issues list. As supply chains have evolved from traditional models to inter-connected networks, the ­pressing need for clean data, visibility, and speed along these supply chains has brought about the new era of ‘digitization’. Perhaps the most vivid e­ xample of this new ­digitization is in retailing where firms have moved from a ­single ­customer channel, to an omni-channel which enables a single shared view of c­ ustomers across several channels. All the former ‘islands’ of digital information have been integrated to provide a single seamless view, ­end-to-end, from ­customers back to suppliers, and everything in between, and technology is

· 546 ·

M16_GATT6818_03_SE_C16.indd 546

2/24/15 3:58 PM

The new world order

the enabler. As an example, both Amazon.com and Walmart are offering customers an online ordering facility, with pick-up from lockers in local stores. Walmart will surely be the winner here as they have a network of 4,000 stores to choose from! The digitization trend has enabled Firms to move away from the flawed concept of one-size-fits-all supply chain design, to the new multiple ­supply chain design configurations variously called ‘tailored’ or ‘dynamic’. Now customers can not only access products and services through several ­different channels, they can also be physically fulfilled through a matching array of different supply chains according to their particular need at the time and propensity to pay. The result: happier customers, serviced to their satisfaction; and happier enterprises because the new finely tuned alignment allows them to achieve better margins while serving customers (through lower costs-to-serve and higher sales revenues). One company that has been successful in connecting its supply chain to the store shelf is Kimberly-Clark.92 It generates shipment forecasts based on point-of-sale data, and the result has been a reduced supply chain network footprint and correspondingly lower inventory, but higher service levels. As digitization increases across companies and along supply chains and the value networks they are part of, the result will be enhanced workplace automation and productivity, and the emergence of new business models in every sector of global economies, from healthcare to climate change. And perhaps most importantly of all, digitization will raise many questions about options and trade-offs in companies. What data must be tracked – and what can be ignored? How open must they be to outside innovations or new information about customers? What old tasks and technologies have been made obsolete? What information should be kept secure?’93 So this fusion of real-time data, event management, and advanced ­analytics and modelling, is set to provide multi-enterprise visibility along ­supply chains in a manner previously thought impossible. To get on board this amazing new phenomenon, companies must install smart (mobile) devices along their supply chains, clean up their master data files, and fully integrate their systems. Those that don’t do this will be left behind by ­competitors that do. One company that has already digitized its supply chain is the New York based women’s and men’s fashion apparel firm, Liz Claiborne Inc. Its brands are available in over 30,000 retail locations worldwide. It uses the GXS

· 547 ·

M16_GATT6818_03_SE_C16.indd 547

2/24/15 3:58 PM

Dynamic Supply Chains

cloud service to transact electronically with major retailers and ­suppliers. They have also developed an electronic global product catalogue to ­manage more than half a million SKUs that are generated each ­season, and ­communicate product information to retail customers. All these i­nitiatives have allowed Liz Claiborne to reduce cycle times in stunning fashion, and provide ­decision-makers with practically real-time information. However, in 2011 Liz Claiborne was acquired by JCPenney and its ­business has suffered as a result of the department store’s executive neglecting to focus sufficiently on the brand. In 2012 it changed name to Fifth & Pacific, narrowing to just three brands, and in 2014 it again changed name to Kate Spade & Co., shedding underperforming brands and focusing on its namesake handbag line. Things are now finally looking better as sales begin to pick up. With digitization comes the age of ‘virtual logistics outsourcing’, as companies set up Control Towers to manage their asset-based third-party logistics providers, or alternatively the non-asset-based logistics outsourcing providers (4PLs or LLPs) managing their asset-based counterparts. Either way, improved productivity and asset utilization is expected as a result. One such example is UPS, the global logistics company, which has been an early adopter of analytics to streamline the daily delivery of 16 million packages. The use of advanced digital technologies such as Big Data analytics (Issue 21) offers significant potential for overall operations. This is particularly true when organizations embrace them fully rather than embarking on piecemeal deployment. One company – UPS – is rolling out a route optimization system, ORION (On-Road Integrated Optimization and ­Navigation), to derive insights and drive efficiency in its delivery operations. In the last four years, ORION has been rolled out to around 50 UPS sites and it will be rolled out throughout the organization in the next five years. So far UPS has saved about 85 million driven miles per year, which equates to 8.5 million gallons of fuel saved. The on-board sensors installed on UPS trucks help calculate when the truck should be turned on and off during the delivery process, reducing 1.6 million hours of truck idling time.94 Macy’s, Rio Tinto, Kimberly-Clark and Intel are also referenced in the same report as pursuing digital initiatives. Of course an extreme example of digitization at speed is described by Michael Lewis in his latest book, Flash Boys,95 where high frequency ­traders (HFTs) in some of the world’s biggest banks on Wall Street are using

· 548 ·

M16_GATT6818_03_SE_C16.indd 548

2/24/15 3:58 PM

The new world order

blinding speed to gain an unfair advantage over investors and other traders in the post-GFC equity markets. This is the dark side of digitization!

Issue 6: The rise of genuine collaboration in supply chains I have probably said enough about this issue in Chapter 7, but it concerns me that seller enterprises continue to throw resources at buyer enterprises, when there is clearly no chance of ever achieving equitable collaboration. You can talk about trust and governance all you like, but if the buyer enterprise doesn’t have deeply embedded collaborative values, you can forget about collaboration. The task for management in the future is to read the situation earlier in the cycle of the buyer-seller relationship, and make a call whether or not you are in the zone of collaboration. In the meantime, let’s cut the rhetoric! Update: In the intervening five years between editions there has been a lot of noise surrounding collaboration, but I’m not sure the message has got through that we are only talking about requisite collaboration after all. Requisite collaboration involves responding in a requisite way: not too much or too little, but just enough. Despite the fact that there hasn’t been much progress or learning going on, the potential impact has increased, but the sense of urgency is lesser, hence I have repositioned the issue to the right and slightly up in the same box. Sooner or later enterprises have to clarify their view on how to handle collaboration in their supply chains – today and into the future. I have given my prescription in Chapter 7.

Issue 4: Service industry’s adoption of supply chain ‘principles’ Service enterprises vary in only one respect from product enterprises: their product is intangible. Everything else is the same. They still have networks of nodes, all of which contain some form of processing, or dispensing point for their services. And those nodes where all the activity takes place are usually tied into some form of electronic network. Banks, indeed all types of financial services institutions, are enterprises that have multiple supply chains or pathways running through them. And yet very few of these institutions have systematically adopted supply chain principles to shape their responses to the marketplace. They are years behind FMCG and electronic hi-tech companies in this respect, and the gap continues to widen. A great

· 549 ·

M16_GATT6818_03_SE_C16.indd 549

2/24/15 3:58 PM

Dynamic Supply Chains

opportunity awaits discovery for those prepared to experiment and learn from other industries. Update: I have relocated the position of this issue upwards and to the right in the ‘planned delayed response’ zone. The issue is looming larger for financial services institutions, particularly following the global f­inancial crisis, but the timeframe is realistically also moving out. Given the ­pressure coming from regulatory authorities and consumers alike, this issue can no longer be ignored by service companies. It would be safe to say that there are billions of dollars in value locked up in financial and other s­ervices ­institutions that will only be extracted when supply chain principles are systematically deployed. This is why I have written a new chapter (­Chapter 15) in this book on the topic of service supply chains.

Issue 23: Bilateral import/export trade flows (new) This issue is the last of the six new issues included in this edition, and is based on my work with the Fung Global Institute in 2012/13.96 Essentially, the issue addresses the impediments to world trade across country borders. The solution here is not more government regulation – quite the opposite. Instead, the suggestion is to map the major bilateral flows between pairs of major trading countries, and seek to apply some of the dynamic ­alignment thinking featured throughout this book – at the macro-trade level. Figure 16.6 is indicative of what we mean. Tax, transfer pricing in ­multinational ­corporations, and customs reforms will all be integral to the ­sweeping changes that will be required if world trade is to be ­unshackled from current impediments. It is a serious issue because it is materially ­affecting growth in many economies that are trying to raise the living ­standards of their ­respective populations.

The rest: Still significant – 2017 to 2020 Issues 2 (oil prices), 9 (networks), 10 (whole-of-enterprise mind-set), 11  (co-opetition), 14 (pricing regimes), 19 (requisite automation) and 22 (­re-shoring) all fall into the monitoring category. However, like all issues, it is possible that some of these too will move into the high-priority (shaded) area of Figure 16.2 and require resources and direct action in the years ahead. In the meantime, a parting word on each.

· 550 ·

M16_GATT6818_03_SE_C16.indd 550

2/24/15 3:58 PM

SG

stm

ore

ain Gr s

al c oal

m Touris

CHINA

JAPAN

n chi ery

JAPAN

T

EH M

m. s Do ance pli p a

USA

ent

GER

ce

pa

s ro Ae

GER

Bilateral import/export trade flows by key major product/service category

Source: Adapted from Figure 9.8 in Elms and Low (2013), p. 240

Fi gu re 16 .6 ◆

KOR

ry

ne

hi ac

KOR

M

e tiv

o om

t Au

y er

n hi ac

Au

ive

ot

m to

USA

M

• Break each category down into monthly buckets and look for patterns • Look for cost-to-serve/unit between pairs

AUS

CHINA

Education

AUS

ne ry

SG

e Inv

Destination country

Origin country

rm The Ma

ery

T

EH

ch in

Iron hi ac

Ma

otive Autom

M16_GATT6818_03_SE_C16.indd 551

Grains

FR

re no Iro

FR

BR

BR

SG

SG

INDICATIVE ONLY

The new world order

· 551 ·

2/24/15 3:58 PM

Dynamic Supply Chains

Issue 2: Impact of oil prices on cost-to-serve No one quite knows where the oil price will go over the next decade, but high oil prices will clearly have a negative impact on the global economy, and therefore on the supply chains that link national and regional economies. If, for instance, rising oil prices cause a shift in customer buying behaviours throughout supply chain networks, it may mean each party in the network has to change their emphasis. High oil prices in the $75 to $100 per barrel range will significantly affect both the energy input costs for manufacturing and the fuel costs for all types of transport. To stay aligned with any shifts in customer preferences, enterprises will need to watch markets very carefully, and adjust inputs to production, production processes, and transportation arrangements. If you do this, you will postpone any rise in cost-to-serve for as long as possible. Update: When I prepared my initial critical issues assessment in 2006, the oil price was hovering between $60–70 per barrel. No one could foresee that it would hit over $140 per barrel in July 2008. By January 2010, with the world’s major economies still in recession, the oil price fell back to $80 per barrel, but by December 2014 it had fallen to around $65 per barrel. One thing we can be fairly sure of is that energy in the future will be expensive compared to previous decades, whether it is carbon-based or renewable. The days of cheap energy are gone forever. I have moved the issue back into the ‘monitoring’ zone because we are learning to live with high oil prices as a matter of life, but it still needs to be closely watched for potential price spikes.

Issue 19: Requisite automation (new) Automation in all its forms has been on our minds for the last two ­decades at least. Some companies jumped the gun and over-engineered their p ­ roduction and logistics processes in the 1980s and 1990s, and the equipment involved inevitably ended up as an embarrassing white elephant. But as labour costs have continued to rise, even in previously low-cost economies such as China, the subject is again coming back on to corporate radars. Indeed, Ralph Lauren changed plans in 2011 because of this very point. Previously, the plan was to divert more of their globally sourced volume

· 552 ·

M16_GATT6818_03_SE_C16.indd 552

2/24/15 3:58 PM

The new world order

through Asia, and build a new distribution centre (DC) in Shenzhen, near Hong Kong, to cater for this. However, on closer inspection, it turned out that it was more cost-effective to continue to ship products from all global sources direct to their main DC in North Carolina, and distribute to their US store network from there. So the question is: ‘How much sophistication and cost should be invested in new automated processes as volatility rises and companies ­struggle to c­ ontain costs and service customers?’ We are well aware that previous attempts at introducing greater automation have on occasions led to ­disruption in the business through problems with the IT systems. Both J Sainsbury, the UK grocery chain, and Webvan, the start-up grocery ­delivery chain on the west coast of the USA, found this out to their cost in the early 2000s. In the case of J Sainsbury, a major automated ­warehouse/ depot ­project was launched in 2003, and was finally abandoned as a ­failure in 2007, writing off $526 million in investment. J Sainsbury suffered badly(in the form of out-of-stocks on the shelves) as it struggled to overcome the damage from this over-automation failure, losing its position as the premier supermarket chain in the UK to its great rival, Tesco.97 Webvan, established in 1996 by Louis Borders, set out to build and operate in 15 markets in the USA. By July 2001 it was bankrupt, and the main reason was the enormous capital investment made in automated DCs at a time when margins on groceries were very tight. The economics of big investment, low capacity utilization, and small volumes just did not stack up.98 What we do know is that the designs of contemporary warehouses and DCs will necessarily have to change to accommodate the new more volatile trading conditions being experienced. Previous designs based on lean principles to maximize space and equipment utilization just do not work anymore. Look at what Inditex is doing with the designs of their Spanish-based global DCs. Conventional wisdom is being turned on its head as companies seek to embed greater flexibility in their operations, caused mostly by changing customer buying patterns, e.g., from boxes of widgets to single units! Clearly, there are many degrees of automation, so the decision to ­automate DC operations in particular must be fully aligned with a c­ ompany’s ­overall business strategy, and its reading of demand patterns in markets being served. Back to the ‘outside-in’ principle mentioned in e­ arlier c­ hapters. The conclusion from all this previous experience is to closely ­monitor and

· 553 ·

M16_GATT6818_03_SE_C16.indd 553

2/24/15 3:58 PM

Dynamic Supply Chains

seek to understand any variations in volume of product over time, and design warehouse and DC processes accordingly. And flexibility will reign supreme, sometimes at a cost, but this is acceptable if the ­decision is taken for ­competitive and/or strategic reasons. The right solution will always be a hybrid of labour and equipment automation, and the only factor that will change this equation will be the cost and/or availability of suitable labour as national populations grow older on average. When it comes to discussing the possible introduction of automation in China, the answer is not straightforward. In strictly economic terms, ‘. . . none but the most basic automation makes sense in China, and we do not expect that to change in the next five years’.99 But there is already a lot of automation in China, and this has been justified on the basis of storage density, security, throughput, cold storage, management ease, and limited sized plots of land.100

Issue 9: Coping with the national, regional and global spread of supply chain networks The globalization of supply chain operations is well established for the ­leading players in several industries, from electronics high-technology and fashion to automotive and third-party logistics. But for many other ­companies the wave is just breaking over them. What to do? My advice is to look and learn from the supply chain experiences of enterprises that have gone before you, irrespective of your industry. Update: According to a recent survey, executives perceive ­globalization of logistics networks as one of six significant logistics and supply chain trends.101 Also noted in the same report is the growth of Africa as a region for global expansion. Along Africa’s Atlantic coast in particular, garment factories are giving up African couture to assemble scrubs, aprons, and lab coats; that’s diversity! The switch comes as global suppliers seek out Africa’s low-cost, English-speaking labour and ports that are 10 days closer than Asia’s garment factories to the US eastern seaboard. According to author Stephen DeAngelis, ‘the future of globalization and supply chains may very well be characterized by how well companies learn to overcome the ‘last mile’ challenges associated with the bottom billion consumers’.102 He argues that regionalization within the broader framework of globalization is going to characterize much of the trading and other supply activities in the future.

· 554 ·

M16_GATT6818_03_SE_C16.indd 554

2/24/15 3:58 PM

The new world order

Regionalization, however, isn’t sounding the death knell for globalization. Most multinational corporations understand that their best ­opportunities for growth are going to be found in emerging markets among new global middle class consumers. Robert J. Bowman, Managing Editor of SupplyChainBrain, cites an Ernst & Young study that ­concludes that ‘the Biggest opportunity for merchandisers in years to come is the emerging consumer in China, India, Brazil, Eastern Europe and other places far from US shores’.103 Bowman also quotes Josh Green, co-founder and CEO of Panjiva, who said, ‘. . . the defining economic event of the 20th Century was the rise of the American middle class. For the 21st Century, it’s the rise of the global middle class’. In other words, what regionalization means is that global corporations are going to have to learn to think globally but find a way to act locally (or regionally). According to Bowman, ‘Manufacturers will still need to be in China – but to serve the Chinese market. The same goes for growing demand in those other emerging economies.’

Issue 10: Adoption of the whole-of-enterprise mind-set in managing supply chain operations This might seem a long way off, but I hope that one of the outcomes of this latest book is that more enterprises will realize the value in taking a whole-of-enterprise approach to their business. One day, I hope we can sound the death knell of the narrow myopic view of the supply chain that has characterized the slow development of logistics and supply chains over the past five decades. Perhaps no more telling is the realization that supply chain management today is a strategic business issue requiring top management attention. As US supply chain ‘guru’ Clifford Lynch said in a keynote speech delivered in Athens, ‘in a globalized business environment, with goods without country, the only true Supply Chain Manager in a corporation is the CEO, because nobody else has full control of the cradle-to-grave process’.104 Update: This issue is gradually moving down in the matrix, and c­ oming under increasing focus. The best-of-the-best enterprises are realizing at the very top that their supply chains are tantamount to a central nervous ­system, and are working hard to spread this understanding throughout their ­respective businesses.

· 555 ·

M16_GATT6818_03_SE_C16.indd 555

2/24/15 3:58 PM

Dynamic Supply Chains

Issue 11: Co-opetition – competitor collaboration Collaborating with competitors (otherwise called co-opetition) is difficult for two reasons. First, most executives cannot cope with the ambiguity of collaborating with a competitor in the supply chain, and at the same time competing in the marketplace. Well, get used to it, as the ambiguity is set to increase to new, higher levels in the next decade. In some parts of the world, collaborating with competitors is the only way to achieve the scale to compete on a level footing with major international players that have more natural scale at their disposal. The automotive industry is a good example in point. Three of the world’s major manufacturers (Aston Martin, ­Jaguar Land Rover, and Toyota Motor Europe) have formed an ­automotive ­‘community’ aimed at creating collective protection from risks in their respective supply chains.105 And second, how do you draw the line between collaboration and ­collusion anyway? That’s tricky, especially when your reputation is at stake over any ‘unfair’ or restrictive trading practices. In the future you will see that companies have to manage the strict requirements of certain ­government anti-competition bodies that have been expressly set up to stop the ­domination of a few industry players over the majority of smaller players. We mentioned this issue in Chapter 14, but it’s a long way from being resolved. Perhaps some education of the regulatory agencies about the modern supply chain is in order! Or at the very least, getting them involved in the supply chain design discussions at an early stage. Update: This issue is being re-positioned to the right and upwards into the ‘monitor continuously’ box. The reason is that the issue is gradually growing in its potential negative impact, but at the same time actions to resolve the associated problems seem to be slipping further out into the future. Perhaps some more enlightened enterprises will adopt some of the new business models suggested in Chapter 14.

Issue 22: Re-shoring of manufacturing (new) Recently, there have been moves by Firms in advanced economies to bring back to their home base a large number of manufacturing tasks that have been offshored for decades. This is being driven, in part, by rising wages in China and India, the lack of scale and efficiency in other low-cost

· 556 ·

M16_GATT6818_03_SE_C16.indd 556

2/24/15 3:58 PM

The new world order

destinations (for  example, Vietnam and Indonesia), as well as stagnant wages in the USA and Europe which has meant a narrowing of the gap between home and offshore markets.106 We will watch the progress of this issue with interest over the next few years.

Issue 14: Performance impact of pricing regimes This issue will have a big influence on the performance of enterprise ­supply chains going forward, but the realization is taking time to dawn on management. For this reason I have repositioned it in the ‘closely ­monitor’ space. The important point here is that the pricing regimes associated with the four generic supply chain types will all be very different. Why? Just as customers have different values that dominate and drive their respective buying behaviours, pricing will also be a related influence. Pricing is one of the attributes in customer preference hierarchies that has an impact on customer behaviour. The task for us is to take conventional knowledge on pricing mechanics, converge it with our new understanding of customer preferences, and use these insights to shape differential value propositions and corresponding operational strategies. Chung Chee Kong has perhaps gone the furthest of any researchers in making the connection between behavioural segmentation and pricing.107

What now for the future? One of the dangers in undertaking a detailed review of strategic issues is that rather than equipping you to sort through them and develop sensible actions, you become overwhelmed. That’s understandable. But succumbing to this very human response is not leadership. Leaders with their heads in the sand will feel problem free for a while, but they will slowly perish, that’s for certain. The rise of big challenges such as big data do not have to mean disarray and disaster; they need to be prioritized and understood first, then you can decide how to respond. The most important thing is to get started, sooner rather than later. You have to start thinking about the future, now. Tomorrow might be here sooner than you think.

· 557 ·

M16_GATT6818_03_SE_C16.indd 557

2/24/15 3:58 PM

Dynamic Supply Chains

Key ideas 1 Your world will be full of Exocets (or issues) coming at you from every direction over the external horizon, or from inside the firm. The trick is to see them coming early, and prepare. 2 Select the issues that are likely to have the biggest impact on your business, and allocate resources according to the prioritization you have developed. 3 The strategic issues won’t necessarily have a damaging impact. Once you understand the precise nature of the challenge, you can turn them to your own competitive advantage. 4 After a while, if you follow this prescription the incidence of crises in your enterprise supply chains will almost surely diminish. You will then have more thinking time for continuous improvement initiatives and the introduction of performance-enhancing innovations.

Your challenge Have you identified the critical issues that are impacting (or likely to impact) on your business over the next 10 years? If so, have you prepared any contingency plans to manage them?

· 558 ·

M16_GATT6818_03_SE_C16.indd 558

2/24/15 3:58 PM

Chapter 17

Joining the dots to create dynamic institutions How to move from an operations mindset to full ‘business transformation’

A

ccording to Art Kleiner, ‘one of the most coveted management skills is the ability to ‘connect the dots’: to see patterns in seemingly unrelated phenomena, and thus make better decisions’.1 Baseball player turned General Manager Billy Beane did it when he transformed the rules of player selection through his Moneyball games analysis;2 golfer Paul Azinger did it when he ‘cracked the code’ and led the American Ryder Cup team to victory in 2008.3 In this book I have sought to do it too – to help you see through the minutiae of everyday business and instead ‘read the patterns’ of today’s operating environment, as only then can we produce superior designs for contemporary supply chains. In the process I have had to cut through all the barriers and impediments posed by confusing terminology, conflicting metrics, functional isolation, and a general lack of progress in organization design thinking. All of these can only confound or too easily distract us. We have to join the dots if we’re to succeed in today’s ultra-volatile global markets – our ‘new normal’. It is possible! So what have we learned in our journey of exploration throughout this book? Simply, that we badly need a new model of the firm that will explain and inform how it should interact with an increasingly dynamic operating environment, where our interactions are multiplying exponentially, not only with suppliers and customers, but with a myriad of stakeholders across our supply chain networks. These demanding requirements are met by the

· 559 ·

M17_GATT6818_03_SE_C17.indd 559

2/24/15 3:59 PM

Dynamic Supply Chains

dynamic alignment heuristic, which has allowed us to move beyond the old thinking of one-size-fits-all, and given us a formula for selecting just how many and what types of supply chain configuration we need in this new world order. Achieving a finer alignment, and connecting with our customers, suppliers and third parties is in itself a tremendous breakthrough. My goal has been to help you, as the leader of your enterprise, to ‘see the patterns’ in our complex landscape, using the new understandings and insights revealed in this book. Indeed, my approach to finding a fundamentally new formula for conceptualizing and designing contemporary supply chains has overtones of the ‘Medici Effect’, which Frans Johansson describes as ‘exploring the intersection between different disciplines and cultures, [to] discover the next groundbreaking ideas’.4 Dynamic alignment is a shining example of this, working at the intersection of multiple disciplines and connecting apparently unrelated dots, to achieve breakthrough innovation. The theme of ‘connecting the dots’ is continued by Karen Butner in her work on what she calls ‘smarter commerce’. 5 The central theme of her approach is to put the customer at the centre of the firm’s operations, something I have been actively proposing throughout this book, and indeed, through my own fieldwork and experience over the last quarter century. In Butner’s view, this ‘requires synchronizing your entire value chain to deliver consistent and predictable outcomes and necessitates improved collaboration and visibility for your customers and partners’.6 Easy to say, but much more difficult to achieve in practice. Indeed, I suggest that this result is impossible to achieve in the relatively narrow context of corporate supply chains per se. Instead, we must by definition encourage the whole firm to embrace a supply chain philosophy to have any chance of success at all. I call it a philosophy because it requires a belief that transformation can occur, based on a holistic understanding of your enterprise, and its place within a network of networks. One-dimensional commitment only – or wishful ­thinking – won’t get you where you want to go! Indeed, Peter Senge, one of the world’s most renowned management thinkers, joins with colleagues to state that ‘nowhere is it more important to understand the relation between parts and wholes than in the evolution of global institutions and the larger systems they collectively create’.7 Their book Presence points to the observation made by Arie de Geus that ‘the twentieth century witnessed the emergence of a new species on Earth – large

· 560 ·

M17_GATT6818_03_SE_C17.indd 560

2/24/15 3:59 PM

Joining the dots to create dynamic institutions

organizations, notably global corporations’.8 De Geus continues: ‘This is a historic development. Prior to the last hundred years, there were few ­examples of globe-spanning institutions. But today, global institutions are proliferating seemingly without bound, along with global infrastructures for finance, distribution, supply, and the communications they create.’9 Clearly, these global institutions require the delivery capability, speed, agility, and performance made possible by a global network of supply chains. Extrapolating this logic, Parag Khanna envisages ‘global networks of ­producers, suppliers and manufacturers [are becoming] so vast and so ­complex, their power rivals that of sovereign nations’.10 Khanna says: In a globalized world, national boundaries have less meaning and ­sovereign governments less power. Instead, power resides with the new sources of e­ conomic might. That could mean a city, an investment pool or a ­multinational corporation. Deeply entwined with all of these is a more amorphous, sprawling authority: the supply chain.11 Hence the dawn of the ‘Independent Republic of the Supply Chain’.12 ­Consistent with this view, Khanna introduces the notion of the info-state, which is in effect a city-state that governs as much through data and ­knowledge as it does politically, and operates virtually. Examples of such states are Singapore, Dubai, New York City, Silicon Valley, and various industry conglomerates in Switzerland. How the world has changed! So the term ‘country of origin’ on goods is now practically meaningless in today’s multi-dimensional supply chain world, as are existing ways of measuring trade deficits and surpluses. The ‘real’ economy has moved on. Even if you are not a global business, no organization on Earth can ­isolate itself from this emerging phenomenon. Trying to segment your ­business according to single customers and targeting each and every one of them is simply not feasible. Now more than ever we need to understand how people behave and interact as groups within these extended supply chains, ­irrespective of geography. The dynamic alignment model we have ­articulated in this book seeks to give you the tools to identify, design and execute the most common supply chain configurations – and the c­ orresponding d ­ ominant buying behaviours that they serve. As Peter Senge’s title Presence suggests, supply chains are omnipresent and pervade our lives; they may be unseen, seemingly operating in subliminal ways, but they underpin the ­conduct of all enterprises and the way we as customers

· 561 ·

M17_GATT6818_03_SE_C17.indd 561

2/24/15 3:59 PM

Dynamic Supply Chains

and consumers demand and receive goods and services. As humans, our behaviour is s­ haping and driving these modern extended supply chains; not the other way around. If events go as predicted, the presence of dynamic supply chains, and all that they encompass, will loom large in all our lives in the years and decades to come. So let’s draw all the threads together. In this book we have traversed some of the old ways of thinking about supply chains and found them wanting at best, flawed at worst. We can see now that contemporary supply chains are pervasive. And they are so much more than warehouses, transport and technology hardware. Supply chains are by their very nature living and dynamic organisms, ever evolving in response to their surrounding operating environment. Understanding supply chains in this way means we can configure and re-configure them, just like any cellular structure in nature. Paradoxically, it is going to make the task of managing the enterprise much simpler and more rewarding in the future. With your supply chains forming part of a much broader business ecosystem, you can survive and thrive by designing and operating supply chain configurations that have dynamism embedded within them. The notion of ‘embedded’ is critical here. Reaching dynamic alignment is not a once-only exercise; embedding dynamism will facilitate on-going dynamic alignment between the enterprise and all its stakeholders. How to do this? The dynamic alignment model and the supply chains described throughout this book show you how to group processes, assets, capabilities, and people into modular structures or ‘clusters’ that can be quickly re-configured and re-aligned to changing customer buying behaviours. As in nature, the secret is to have simple building blocks that are endlessly re-configurable to create sophisticated ‘life forms’. This means your enterprise will need to develop or acquire multiple capabilities that can be compartmentalized, combined and unwound at speed, something akin to ‘cellular manufacturing’. But unlike cellular manufacturing, alignment is likely to occur in a much less controlled operating environment, so maintaining all the elements in synch is a much more difficult task over a sustained period. But if dynamic alignment principles are followed, it is still possible. We know – because we have done it! And so have others. Businesses such as Apple (USA), Unilever (NL), Inditex (Esp), Li & Fung (Hong Kong), Fonterra (New Zealand),

· 562 ·

M17_GATT6818_03_SE_C17.indd 562

2/24/15 3:59 PM

Joining the dots to create dynamic institutions

Schneider Electric (Fr), ELGEKA (Greece), Dell (USA), Procter & Gamble (USA), Walmart (USA), CBH Group (Aus), DKSH (Sw) and a growing band of enlightened enterprises are leading the way towards this exciting new world. The key is having the vision and ‘leadership’. Remember, success is all about understanding customers’ buying behaviours, developing matching value propositions and underpinning these with an organization design that flexes according to customers’ needs. And any and all of this will only happen if the leadership of your enterprise is in harmony with the target market. Are you in harmony? After understanding customers, leadership is the most important ingredient for successful alignment. With the right leadership, the best strategies for identifying and targeting customers in separate supply chains will surely follow – breathing even more life into your dynamic supply chains. The other learning emphasized in this book has been to identify the emergence of networks of supply chains, and escape the old ways of thinking of supply chains as simple linear pathways. Indeed, networks are a reality of life that we are just coming to grips with. They can be a source of ‘contagion’, such as in the GFC of 2008, or a source of value,13 such as in eBay, Google, Facebook, YouTube and Twitter. Particularly on the supply-side, companies (Airbus and Boeing) are learning to manage complex arrays of global suppliers. On the customer-side, there is no such clear trend evident, yet, that is where it all has to start. And while all this is going on in a network of supply chains, individual enterprises must ensure their own survival by developing all the necessary internal capabilities to counter the external forces pressing in on them from the external operating environment, and keep these forces in dynamic equilibrium. The renowned twentieth century inventor and visionary, R. ­Buckminster Fuller,14 coined the term tensegrity for this phenomenon of ‘tensional integrity’, and Colin Benjamin has developed the concept further, describing how it could be applied to strategic thinking.15 The choice is between adopting many of the ideas in this book; or simply staying with the status quo, and risk missing out attracting the best customers, the best suppliers, the best talent and everything else that goes along with winning in today’s ultra-competitive world. I have offered you, the reader, a genuinely new framework; it is now up to you to run with it and become part of a global groundswell that is building towards improved

· 563 ·

M17_GATT6818_03_SE_C17.indd 563

2/24/15 3:59 PM

Dynamic Supply Chains

alignment within and between enterprises around the world. Despite the disgruntlement I’ve expressed in parts of this book about the lack of progress in supply chain design, I remain an optimist. A lot of talented people are out there, and they’re dealing with a level of complexity we could not have even imagined two decades ago. They will grapple with the latest set of challenges and the next. In effect, the challenge I am giving the readers of this book is to consciously go out there and ‘disrupt’ your enterprise with this new model of the Firm and its constituent supply chains. Be like Honda and Virgin, they have created extreme value through disruptive thinking. Don’t be like Sun Microsystems and, more recently, Toyota who have suffered because they failed to disrupt their previous success formulae as markets shifted. As Adam Hartung says, ‘Teachers may tell you to sit still, but if you want your business to succeed, you had better start disrupting.’16 We started in the Introduction with the end in mind when I shared with you Figure I.1. We are now ending with an enhanced networked version, Figure 17.1, which is what the real world looks like in practice. Our challenge is to adapt according to this new reality and transform our enterprises to cope with and thrive in the ‘new normal’. In attempting to do so, please do not be one of those leaders who becomes hopelessly lost in the maze of complexity pictured in Photo 17.1. Remember, in all walks of life, the difference between success and failure is very small, even infinitesimal, even when it seems you’re in a maze and on a pathway to extinction. It is possible, with the right tools at hand, to lead your enterprise to a different future.

A final word The ideas outlined in this book are a living, breathing example of ‘design thinking’, and very much follow the principles espoused by Roger Martin in his book, The Design of Business.17 Martin contends that businesses place far too much emphasis on (left-brain) analytical thinking when they are seeking (right-brain) innovative ideas and solutions. He advocates that an intuitive way of thinking, which includes less measurable or rational things such as a ‘flash of insight’ or ‘gut instinct’, will drive far greater creativity

· 564 ·

M17_GATT6818_03_SE_C17.indd 564

2/24/15 3:59 PM

M17_GATT6818_03_SE_C17.indd 565

Fi gu re 1 7.1 ◆

CEO

The enterprise

Market

Functions/business units/geographies

CEO

The enterprise

Strategy

Marketplace

Logistics strategies

Logistics strategies

Sales market – all geographies (segments)

Sales market (demand)

From ‘static’ to ‘dynamic’ design of enterprise supply chains in a 3-D network context

Dynamic alignment configuration – multiple alignment (push + pull)

Organizational clusters

COO

Strategy

Technology + infrastructure

Culture

Business enterprise

Leadership style

Business processes

Dynamic alignment model

Logistics

Static configuration – ‘one-size-fits-all’ (push)

IT Procurement Manufacturing Marketing Sales Functions/business units/geographies

Procurement strategies

Procurement strategies

Source market (supply)

Source market – all geographies (segments)

Future

Current

JoiNiNg the DotS to Create DYNAMIC iNStitutioNS

· 565 ·

2/24/15 3:59 PM

Dynamic Supply Chains

and innovation over the long term. Martin’s ‘knowledge funnel’ concept, depicted in Figure  17.2,18 shows how knowledge should be advanced through three stages – mystery, heuristic and algorithm – to lead to a new solution or way of thinking. This book essentially takes you through a similar journey as ­Martin’s knowledge pathway. At the top of the funnel, in our current business world, we have the ‘mystery’ of the market, with all its intricacies, nuances and complexities. Here the task is to observe human behaviour and gather insight, from the ‘outside in’. Then, as depicted in Figure 17.1, we have introduced our dynamic alignment model to reduce complexity, and ­produce a heuristic that is designed to make sense of everything, and in particular to discern any underlying patterns. Finally, at the algorithm level, we have designed the new supply chain configurations that will ensure we systematically align with the majority of our market, dynamically rather than statically. The chapters in this book lead you through this logic and

Ph o t o 1 7 . 1 ◆

The maze of complexity

Source: Getty Images / Floresco Productions / OJO Images

· 566 ·

M17_GATT6818_03_SE_C17.indd 566

2/24/15 3:59 PM

Joining the dots to create dynamic institutions

Mystery

Heuristic

FRAME Observe and collect information from people and other sources

IMAGINE Find patterns and design principles

MAKE Algorithm

Figure 17.2 ◆

Design products to convert principles into routine solutions

The Knowledge funnel

Source: Adapted from The Design of Business, Roger Martin, Harvard Business Review Press, 2009, Figure 1-1, p.8

provide you with a comprehensive, field-tested set of tools. Now you are fully equipped to take on the world and navigate your way through the maze of complexity. Over to you now!

· 567 ·

M17_GATT6818_03_SE_C17.indd 567

2/24/15 3:59 PM

M17_GATT6818_03_SE_C17.indd 568

2/24/15 3:59 PM

Afterword Ending with the future in mind

I

t’s time for me to make some closing comments, and draw some ­conclusions. It’s also time to gaze at the horizon and ask – now what? With markets, customers and organizations changing at an unprecedented pace, the future appears to be closer than ever before. Surely we must be able to almost grasp it? Before I jump to the future, let me start at the beginning. I first met John Gattorna in Stockholm in 2011, over lunch, just prior to one of his many speaking engagements. I had only briefly read his e­ arlier work Dynamic Supply Chain Alignment (2009), but had been struck by our shared belief that people are the real core asset of a company. John’s discussion of ­organizational design in Chapter 6 of his 2010 book, in particular, had jumped out at me. I was intrigued by how this Australian ­engineer-at-heart had turned to seemingly softer topics, and in the process created his own supply chain movement. I had the book in my hand, and after brief i­ntroductions John and I connected in an instant. We spent the lunch tossing ideas around, and I knew that in our conversation I had glimpsed John’s early ideas that would later shape this book; in doing so I had glimpsed the next level of my own professional insights. The key idea in Dynamic Supply Chains is that successful and ­well-performing value chains and organizations are driven by people – the enthusiastic individuals who are variously engaged, curious, creative and committed. They want to make your business a success. To arrive at that point, you must first achieve alignment in your organization, a force that John describes, with his extra panache, dynamic alignment. True alignment involves everything from strategy, insight on customer behaviour and ­organizational design, to measures, goals and metrics, culture and ­leadership. Alignment is easy to recommend or write about, but harder to achieve. You will have to tackle business up and down the scale of your organizational work-list, from high-level challenges down to daily tasks, from strategy formulation down to

· 569 ·

Z01_GATT6818_03_SE_AFTW.indd 569

2/24/15 4:02 PM

Dynamic Supply Chains

everyday processes, and from tools to the IT landscape. John demonstrates in this his latest book, that the dynamism you need to achieve this lies in the people who drive our supply chains. I know from the experience of designing and leading a high ­performing organization, Centiro, which you’ll learn more about in Chapter 6, is that John’s concepts work. My specialty is aligning organizational design, culture and leadership with strategy and vision; our success is not all about our ­software solutions. Our alignment approach has helped us to achieve outstanding customer satisfaction and a rate of innovation and change that is very high, by any standards. We have been ranked among the top three Great Places to Work in Sweden for five consecutive years. This might sound like bragging, and I am, but my real point is that alignment can bring this type of success to any organization. Wherever you observe e­ xceptional ­performance – look for the harmony, the alignment, because that’s what is delivering the superb results. You can feel it when you enter a high ­performing ­organization, or when you talk to one of their ­representatives. It’s always different. It’s more energized and, well, aligned. The alignment thinking so ably captured in Dynamic Supply Chains marks a welcome departure from the ‘one-size-surely-must-fit-all’ ­paradigm that has prevailed in many corporate landscapes during the past 10 to 15 years. Today, several supply chain configurations are a minimum r­ equirement to perform well and service any given market. Even more importantly – the insight on why you probably need several supply chain types is crucial for survival; and John provides copious knowledge on this front. ­Consumers – private or industrial – are ahead of the game already. They are always ­connected, highly mobile, and armed with global visibility and an ability to compare. The pendulum is swinging from a product-centric view towards a more service-oriented approach to what an organization needs to deliver to c­ reate value for all stakeholders. You will know that this has been h ­ appening in parts of the industrial landscape for some time, with businesses g­ aining more and more insights into customer behaviour, which is inspiring them to develop new models for service. The ‘outside-in’ approach is more ­appropriate to what you need in today’s market; and you’ll find some keys to this in Chapter 14, on outsourcing, and in Chapter 15, on the service sector. But don’t think you can relax. More is set to change in the era of

· 570 ·

Z01_GATT6818_03_SE_AFTW.indd 570

2/24/15 4:02 PM

Afterword

c­ onsumerization that we find ourselves in, where consumers will become even stronger drivers of products and design. In my crystal ball, I see the concept of ownership and who controls assets (supply chains or products, among others) become even more ­challenged. We will see static and asset-heavy enterprises confronted by crowd-sourced and asset-light concepts, where a dynamic network of networks can o ­ utperform static asset-heavy corporations with large overheads.You can already see this happening, everywhere from small e-commerce setups in Africa, where taxis are crowd-sourced for final mile delivery, to global players such as Amazon, who have moved from controlling the product sold, to controlling the assets that facilitate trade, to controlling the networking platform. We’re seeing a new business logic. And it requires new business models. Look at the way that intelligent information technology tools are becoming industrialized and commoditized. The lower price points and greater availability that they are bringing – to everyone and his dog with a mobile device – will level the playing field. Or at least redefine the rules. For sure, we need to update the way we have classically perceived ­barriers to entry and competition in a market place. The speed of change is high and will increase still further. We’re seeing innovation being ­nurtured at an astounding rate as the world becomes simultaneously more global and regional, as economic pressure increases, and the collective will to change the world grows. The seemingly unstoppable growth of the p ­ ost-World War II world, and its upscale model based on push-selling more stuff to the masses, is changing, and has changed, into something different. A  ­‘used-to-be ­five-year’ plan is now valid for 18 months. Tops. This landscape demands that we take a different view on organizations, the way they create value and the way we must create and manage our value chains. I seriously believe we are entering the engagement economy, where the degree of alignment and agility to follow change is critical to becoming successful, and even to existing. In this world, you can consider Dynamic Supply Chains to be the Hitchhiker’s Guide to the Galaxy. The answer is, as we find out in Hitchhiker’s, a given. In John Gattorna’s galaxy, it’s alignment. Fortunately, Dynamic Supply Chains contains more ideas and concepts to get you going, and probably more than you could implement in a lifetime. John arms you with the questions you need to know in order to ­understand

· 571 ·

Z01_GATT6818_03_SE_AFTW.indd 571

2/24/15 4:02 PM

Dynamic Supply Chains

how to bring alignment into your organization. He ensures the content speaks to you directly, tapping into your experiences and activating ideas on how you can transform your own organization. I warn you, you’ll learn ­something every time you pick this book up! I wish you a continued and inspired ­journey – one in which you shape the future. Best of luck. Niklas Hedin, CEO, and Chief Architect Centiro Solutions AB Borås, Sweden

· 572 ·

Z01_GATT6818_03_SE_AFTW.indd 572

2/24/15 4:02 PM

Endnotes

Chapter 1 1 Kocieniewski, David (2013) ‘A Shuffle of Aluminum, but to Banks, Pure Gold’, The New York Times, 20 July. www.nytimes.com/2013/07/21/business/a-shuffle-of-aluminumbut-to-banks-pure-gold.html?hp&_r=3&&pagewanted=print. 2 Gattorna, John (2009) ‘Fix Your Supply Chains & You Fix the Company (and the ­Economy)’, Supply Chain Asia, May/June, pp. 24–25. 3 ‘Thriving in a recession: value chain strategies at work’, AMR Research Value Chain Strategies Team, 16 April 2008. 4 James, David (2006) ‘Leading Edge’, Business Review Weekly, 16–22 November, p. 57. 5 Norman, Archie (2013) ‘Against the odds Wesfarmers has taken Coles to the top of the supermarket tree’, Sydney Morning Herald, 29 January. Sourced from http://www.smh.com. au/business/against-the-odds-wesfarmers-has-taken-coles-to-the-top-of-the-supermarkettree-20130128-2dgvb.html. 6 Simon, Bernard and Reed, John (2009) ‘GM announces rebirth with vow to start listening to its customers’, Financial Times, 11–12 July/Asia edition, p. 1. 7 Ibid. 8 Massy, Charles (2011) Breaking the Sheep’s Back: The Shocking True Story of the Decline and Fall of the Australian Wool Industry, University of Queensland Press, St. Lucia, Qld. 9 Ando, Ritzuko and Rigby, Bill (2014) ‘Microsoft swallows Nokia’s phone business for $7.2 bil.’, Business & Financial News, Reuters.com, 4 September 2013. 10 Rigby, Chloe (2013) ‘M&S launches distribution centre “fit for a multichannel future” as it transforms its supply chain’, Internet Retailing, 10 May. 11 Schwartz, Nelson, D. (2006) ‘One Brick at a Time’, Fortune, June 12, p.27. 12 ‘Lego Group looks to build greener supply chain’, Business Green, 29 November 2013. 13 Moorhead, Patrick (2014) ‘Dell’s PC Growth Strategy – In It to Win It’, Forbes, 22 February. 14 Surowiecki, James (1998) ‘Dark days at Sunbeam’, The Motley Fool, posted 17 April at 12:30am ET, www.slate.com/id/2650. 15 I am indebted to Malcolm McDonald, Emeritus Professor of Marketing, Cranfield ­University (UK) who coined this phrase. 16 CFROI = [(Cash flow from operations/capital − capital charge)], generally expressed as a percentage. CFROI percentage spread correlates positively with share price and market capitalization. 17 Lam, Wayne, ‘Samsung Displaces Nokia as Top Cellphone Brand in 2012 and takes decisive Smartphone lead over Apple’, iSuppli Press Release, 18 December, 2012. 18 The business units that comprised Goodman Fielder at the time were: Ingredients, Meadow Lea Foods, Milling & Baking, Steggles and Uncle Tobys. 19 ‘Australasian food giant Goodman Fielder has returned to profit, netting $A102m ­following two years of restructuring’, Australian Associated Press, 26 August 2013.

· 573 ·

Z02_GATT6818_03_SE_END.indd 573

2/24/15 4:01 PM

Dynamic Supply Chains

20 Kirby, Julia (2003) ‘Supply chain challenges: building relationships’, a conversation with Scott Beth, David N. Burt, William Copacino, Chris Gopal, Hau L. Lee, Robert Porter Lynch and Sandra Morris’, Harvard Business Review, July, pp. 64–73. 21 Lewis, Michael (2003) Moneyball: The Art of Winning an Unfair Game, W.W. Norton & Co., New York, NY. 22 Barra, Allen (2009) ‘Forget 2002 – this year’s Oakland A’s are the real Moneyball Team’, The Atlantic, September. Sourced from http://www.theatlantic.com/entertainment/print/2013/09/ forget-2002-this-years-oakland-as-are-the-real-em-moneyball-em-team/279927/. 23 This is based on Annette’s Clayton’s assessment in her work at Schneider Electric today. 24 Jackson, Tony (1998) ‘Melding of minds to master the intangibles – management sharing knowledge’, Financial Times, 15 June, Online edition. 25 Stocker, Gregg (2013) ‘Unilever: Transformation & the Environment’, Lessons in Lean blog, WordPress.com, 14 July, sourced from http://leadingtransformation.wordpress​ .com/2013/07/14/unilever-transformation-the-environment/. 26 Friedman, Thomas L. (2012) ‘Pass the Books: Hold the oil’, The New York Times, March  10, 2012. Sourced from http://www.nytimes.com/2012/03/11/opinion/sunday/ friedman-pass-the-books-hold-the-oil.html?nl=todaysheadlines&emc=edit_th_20120311. 27 Ibid. 28 Ibid. 29 Friedman, Thomas L. (2005) The World is Flat: A Brief History of the Twenty-first ­Century, Farrar, Strauss & Giroux, NY. 30 Friedman, Tom (2009) Interview with Leigh Sales, Lateline programme, ABC, 26 March, sourced from www.abc.net.au/lateline/content/2008/s2527420.htm. 31 Neuschel, Robert P. (1967) ‘Physical distribution – forgotten frontier’, Harvard Business Review, March–April, Vol. 45, No. 2, pp. 125–134. 32 Stolle, John F. (1967) ‘How to manage physical distribution’, Harvard Business Review, July–August, Vol. 45, No. 4, pp. 93–100. 33 The Internet was actually invented by DARPA, the Defense Advanced Research Projects Agency, a government agency set up during the Eisenhower administration. 34 See Signature Concepts at www.johngattorna.com. 35 Porter, Michael E. (1979) ‘How competitive forces shape strategy’, Harvard Business Review, March–April, Vol. 57, No. 2, pp. 137–145. 36 Quoted in advertisement for a management conference, business life magazine, published by British Airways, September 2004. 37 ‘Siberian Siren’, Sunday Times, Singapore, 11 July 2004, p. 31. 38 Chessell, James (2005) ‘Lion boss eschews champagne tastes’, Sydney Morning Herald, 23 May, p. 34. 39 ‘Lion FY13 result’, Media Release, 13 February 2014, sourced from http://www.lionco. com/media-centre/lion-fy13-result. 40 Bryan, Lowell L. and Joyce, Claudia (2005) ‘The 21st-century organization’, McKinsey Quarterly, No. 3, pp. 25–33. 41 Akumatsu, K. (1962) ‘A historical pattern of economic growth in developing countries’, Japanese Economic History 1600–1962, Vol. 1, pp. 1–23. Akumatsu applied the wild geese analogy to economic theory, specifically the adoption of new technology by Asian nations. 42 Photograph from Getty Images. 43 Coase, R.H. (1937) ‘The nature of the firm’, an essay in 4 Economica NS, pp. 386–405, quoted in Williamson, O.E. and Winter, S.G. (eds) (1991) The Nature of the Firm, Oxford University Press, New York, NY, pp. 19–31. 44 Shiller, Robert J. (2009) Interview with Leigh Sales, Lateline programme, ABC, 4 ­February. Sourced from http://www.abc.net.au/lateline/content/2008/s2482535.htm. 45 Labovitz, G. and Rosansky, V. (1997) The Power of Alignment: How great companies stay centred and accomplish extraordinary things, John Wiley & Sons, New York, NY.

· 574 ·

Z02_GATT6818_03_SE_END.indd 574

2/24/15 4:01 PM

Endnotes

46 Chorn, N.H. (1987) ‘The relationship between business-level strategy and organizational culture’, unpublished PhD thesis, Witwatersrand University, Johannesburg. 47 Gattorna Strategy Consultants Pty Ltd, Sydney, Australia, 1985–95. 48 See Adler, G., Fordham, M. and Read, H. (eds) (1971) The Collected Works of CG Jung Volume 6: Psychological Types (translated by R.F.C. Hull), Bollingen Series 20, Princeton University Press, Ewing, NJ. 49 Adizes, Ichak (1979) How to Solve the Mismanagement Crisis, 1st printing, Dow-Jones-Irwin; 5th Printing (1985), Adizes Institute, Santa Monica, CA. 50 Gerard W. Faust, President, Faust Management Corporation, Poway, CA (previously President of the Adizes Institute). 51 Gosfield, Josh and Lopez, Nola (1996) ‘Levi’s changes everything’, Fast Company, No. 3, June/July. 52 Bergl, Skylar (2014) ‘Most Innovative Companies 2014’, #30. Levi Strauss, Fast Company, 10 February, sourced from: http://www.fastcompany.com/most-innovative-companies/2014/ stats. 53 Hurst, David K (2013) ‘Lessons in failure’, Best Business Books 2013: Company Stories, strategy + business, Booz & Co., December 2, sourced from http://www.strategy-business​ .com/article/00223b?pg=all. 54 Described in his autobiography, Coe, Seb (2012) Running My Life: The Autobiography, Hodder & Stoughton, London. 55 Huckboy, Jamie (2005) ‘Queen B’, Harper’s Bazaar, September, pp. 118–120. 56 Fly-by-wire technology is an electronically managed flight system, which uses computers to make the aircraft easier to handle, while further enhancing performance and safety. More details can be found at www.airbus.com. See also Gattorna, J. (ed.) (1998) Strategic Supply Chain Alignment: Best practice in supply chain management, Gower Publishing, Aldershot, pp. 633–634. 57 An observation frequently made to the author during his research and consulting. 58 Davey, James (2013) ‘Sainsbury’s seven per cent profit rise puts Tesco in the shade’, Reuters.co.uk, 13 November, sourced from http://uk.reuters.com/article/2013/11/13/ uk-sainsbury-results-idUKBRE9AC07L20131113. 59 Russell, Jeffrey (2009), ‘Rapid and sustained cost management: a tool for unprecedented times’, Supply Chain Asia, March/April, p. 17.

Chapter 2 1 Companies such as Dell, Unilever and Schneider Electric. 2 Leahy, Sir Terry (2012), speaking at the Supply Chain 50 Spring Summit, New York, 25–26 April. 3 These additional building blocks include ‘fit’ of personnel in the organizational structure, internal communications, performance measurement regimes and incentives, planning systems, training and development initiatives, recruitment and role modelling. 4 My research can be tracked through my earlier books: Gattorna, John (ed.) (1998) ­Strategic Supply Chain Alignment, Gower Publishing, Aldershot; Gattorna, John (2003) Handbook of Supply Chain Management, Gower Publishing, Aldershot; and Gattorna, John (2006) Living Supply Chains, FT Prentice Hall, Harlow. 5 Holweg, Matthias and Pil, Frits K. (2001) ‘Successful Build-to-Order Strategies Start with the Customer’, MIT Sloan Management Review, Vol. 43, No. 1, Fall, pp. 74–83. 6 DeVine, John and Gibson, Keith (2010) ‘Using behavioural science to improve the ­customer experience’, McKinsey Quarterly, McKinsey & Co, Operations Practice, February.

· 575 ·

Z02_GATT6818_03_SE_END.indd 575

2/24/15 4:01 PM

Dynamic Supply Chains

7 The Standard Industrial Classification is the US Government system for classifying ­industries to enable the analysis of data by different industry types. 8 Davenport, Thomas H., Harris, Jeanne G. and Kohli, Ajay K. (2001) ‘How Do They Know Their Customers So Well?’, MIT Sloan Management Review, Vol. 42, No. 2, Winter, p. 63. 9 Ibid. 10 See http://www.wildmind.org/metta/one/procrustes. 11 DHL Express had this disease in the 1990s. 12 Ings-Chambers, Edwina (2004) ‘In the mood’, Financial Times, 30–31 October, p. W14. 13 ‘Supply-chain segmentation: a new strategy for meeting customer demand’, ­SupplyChainBrain, 10 January 2013. 14 Ibid. 15 Ibid. 16 Nunes, Phil F. and Cespedes, Frank V. (2003) ‘The customer has escaped’, Harvard ­Business Review, No. 81, Issue 11, November, pp. 96–105. 17 Ibid., p. 105. 18 ‘A Quest for Perfection in Luxury Supply Chain’, an interview in Supply Chain Asia, 17 April 2012, pp. 47–49. 19 Fisher, Marshall L. (1997) ‘What is the right supply chain for your product?’, Harvard Business Review, Vol. 75, No. 2, March–April, pp. 105–116. 20 Ibid., p. 106. 21 Ibid., p. 109. 22 ‘Hurricane Sandy response’, Corporate Citizenship Report, Global Stories, Exxon Mobil Corporation, 2014. Sourced from http://corporate.exxonmobil.com/en/community/ corporate-citizenship-report/global-stories/united-states-hurricane-sandy-response. 23 Lee, Hau L. (2002) ‘Aligning supply chain strategies with product uncertainties’, California Management Review, Vol. 44, No. 3, Spring, pp. 105–119. 24 Simchi-Levi, David, Clayton, Annette, and Raven, Bruce, ‘When One Size Does Not Fit All’, MIT Sloan Management Review, 18 December 2012. 25 Opt. cit. p. 119. 26 Johnson, Alan (2004) ‘Decision time for consumer manufacturers’, Manufacturing Monthly, May, p. 26. 27 Booz Allen Hamilton (2003) ‘Smart Customization: Profitable Growth Through Tailored Business Streams’, White Paper, 7 pp. 28 Ibid., p. 1. 29 Byrnes, Jonathan (2005) ‘You only have one supply chain?’, Working Knowledge, Harvard Business School, 1 August. Sourced from http://hbswk.hbs.edu. 30 Ibid. 31 Ibid. 32 Jonathan Byrnes (2013) ‘Profit-based Segmentation, Omnichannel Retailing, and Same-day Deliveries’, blog, 21 November. Sourced from http://islandsofprofitbook.com/2013/11/21/ profit-based-segmentation-omnichannel-retailing-and-same-day-deliveries/. 33 Ibid. 34 A.T. Kearney (2004) How Many Supply Chains Do You Need?, 13 pp., A.T. Kearney, Chicago, IL. 35 Godsell, Janet (2005) ‘Demand chain strategy: the missing link’, Management Focus, ­Cranfield School of Management, No. 22, Spring, pp. 4–7. 36 Ibid., p. 7. 37 Melnyk, Steven A., Davis, Edward W., Spekman, Robert E., and Sandor, Joseph (2010), a short article adapted from ‘Outcome-Driven Supply Chains’, which appeared in the Winter Issue of MIT Sloan Management Review.

· 576 ·

Z02_GATT6818_03_SE_END.indd 576

2/24/15 4:01 PM

Endnotes

38 Perez, Hernan David, ‘Supply chain strategies: which one hits the mark?’, CSCMP Supply Chain Quarterly, Quarter 1/2003, pp. 30–40. 39 Anderson, David (2005) ‘Quick-change supply chains’, ASCET, Vol. 7, 13 September, 6 pp. Sourced from http://supplychainventure.com/PDF/ASCET2005Final.pdf. 40 Ibid., p. 1. 41 Cavinato, Joseph L. (2002) ‘What’s Your Supply Chain Type?’, Supply Chain Management Review, May–June, pp. 60–66. 42 Steven Callender, Professor of Political Economy, Stanford Graduate School of Business, refers to this phenomenon as ‘beyond markets’. 43 Nunes, Phil F. and Cespedes, Frank V. (2003). Op cit. 44 Ibid., p. 100. 45 Hall, Louise, and Robotham, Julie (2009), ‘Hospital to divide and conquer waiting lists’, The Sydney Morning Herald, 29 July, p. 5. 46 Monahan, Sean and Nardone, Robert (2007), ‘How Unilever aligned its supply chain’, Supply Chain Management Review, November, p. 48. 47 Modern Trade is a term used widely in Asia to include supermarkets, hypermarkets, and large chains stores; General Trade is the term used to cover all other store types and wholesalers. 48 As defined by Hofstede, who was one of the first to extensively research the influence of national cultures on work-related values. See one of his early articles: Hofstede, Geert (1983) ‘National cultures in four dimensions’, International Studies of Management and Organization, Vol. 13, No. 1/2, Spring/Summer, pp. 49–74. 49 Catts, Tim (2013) ‘General Electric Turns to 3-D Printers for Plane Parts’, Bloomberg Businessweek, 27 November. Sourced from http://www.businessweek.com/printer/ articles/170126-ge-turns-to-3d-printers-for-plane-parts. 50 Adapted from original work first published by Gattorna Strategy Consultants Pty Ltd, (1991) ‘Pathways to Customers: reducing complexity in the logistics pipeline’, Strategy Spotlight, Vol. 1, No. 2, October, pp. 21–30. 51 Zara (2003) ‘Case study’, written by Ferdows, K., Machuca, J.A.D. and Lewis, M. ­Available from The European Case Clearing House, Cranfield University, England and USA, 15 pp. 52 Lee, Hau L. (2004) ‘The Triple-A supply chain’, Harvard Business Review, Vol. 83, No. 1, October, pp. 102–112. 53 Ibid., p. 112. 54 McAdam, R. and Brown, L. (2001) ‘Strategic alignment and the supply chain for the steel stockholder sector: an exploratory case study analysis’, Supply Chain Management: An International Journal, Vol. 6, No. 2, pp. 83–94. 55 August, B. (2002) ‘Aligning the supply chain to anticipate developing market trends’, unpublished conference paper, delivered at the Kenan Institute, Asia, March. 56 Evans, Simon (2005) ‘New Foster’s unit flexes muscle’, The Australian Financial Review, 30 May, p. 16. 57 Ibid. 58 Gettler, Leon (2005) ‘Foster’s has a big ambition, a very big ambition’, The Age, 28 ­September, p. 14. 59 After Kim, W. Chan and Mauborgne, R. (2005) Blue Ocean Strategy: How to Create ­Uncontested Market Space and Make the Competition Irrelevant, Harvard Business School Press, Boston, MA. 60 Hume, Neil (2013) ‘SAB fosters beer brands in Australia’, FT.com, 26 May. 61 Sanderson, Chris and Raymond, Martin (2003) ‘Watch customers to learn what they want’, The Sydney Morning Herald, August 7, p.27. 62 Coltman, Tim, Gattorna, John and Whiting, Stuart (2010) ‘Realigning Service Operations Strategy at DHL Express’, Interfaces, Vol. 40, No. 3, pp. 175–183.

· 577 ·

Z02_GATT6818_03_SE_END.indd 577

2/24/15 4:01 PM

Dynamic Supply Chains

63 For example, in a market with just a few major customers, each customer in effect can be equivalent to a market. In these situations more sophisticated techniques are required to identify the different buying behaviours present inside each major customer. 64 Prof. Andy Fearne of Kent University (UK) is doing a lot of groundbreaking work in this area. See Felgate, M., Fearne, A., Di Falco, Salvatore and Garcia Martinez, M. (2012) ‘Using Supermarket Loyalty Card Data to Analyse the Impact of Promotions’, International Journal of Market Research, Vol. 54, No. 2, pp. 221–240. 65 Wagner, Stephen N., Bolton, Jamie M. and Nuthall, Linda (2003) ‘Supply chain ­network optimization modeling’, Chapter 2.1 in Gattorna, John L. (ed.), Handbook of Supply Chain Management, Gower Publishing, Aldershot, pp. 89–104; and Jimenez, Sue, Brown, Tim and Jordan, Joe (1998) ‘Network-modeling tools: enhancing supply-chain ­decision-­making’, Chapter 19 in Gattorna, John (ed.), Strategic Supply Chain Alignment, Gower Publishing, Aldershot, pp. 302–324. 66 This pioneering work was conducted by Gattorna Alignment Pty Ltd for Schneider Electric.

Chapter 3 1 Christopher, Martin, Peck, Helen and Towill, Denis (2006) ‘A taxonomy for selecting global supply chain strategies’, International Journal of Logistics Management, Vol. 17, No. 2, p. 277. 2 See my earlier article: ‘The key to successful innovation in enterprise supply chains’, Supply Chain Asia, November/December 2009, pp. 18–19. 3 See Chapter 16 in Gattorna (2009), Dynamic Supply Chain Alignment, Gower ­Publishing, ‘DHL Taiwan: Aligning the express business with customers’, by Stuart Whiting, pp. 221–238. 4 Linfox Logistics, operating in Australia, New Zealand and across 11 Asian countries, has adopted this approach, which has reduced their client base from 312 to 101 companies in the past two years while doubling revenue and profit. 5 The company is ELGEKA SA, one of Greece’s largest FMCG distributors of branded goods. 6 Spivey, Duane (2009) ‘The OODA loop and learning’, Chief Learning Officer, Vol. 8, pp. 30–33. 7 Baker, B. (2006) ‘Timely decisions’, PM Network, p. 20.

Chapter 4 1 Anders, George (2003) ‘The Carly Chronicles’, Fast Company, February, p. 70. 2 Coutts, Louis (2004) ‘Culture clubs’, Business Review Weekly, July 22–28, p. 57. 3 ‘Inside the Kraft Foods Transformation’, a feature article in the Roundtable section of strategy + business, Booz & Company, 2009, p.71. 4 Plewes, Jonty, ‘Change fatigue: the hidden sleeper in change failure’, http://www.morganmckinley.com.au/consultant/jonty-plewes, Australia, 19 March 2014. 5 Jaruzelski, Barry, Loehr, John and Holman, Richard (2011) ‘Why Culture is key’, a feature on innovation in strategy + business, Booz & Company, p. 32. 6 Schein, Edgar H. (2010) Organizational Culture and Leadership, 4th edn., Jossey-Bass., San Francisco, CA, p. 22. 7 Refer: http://blogs.gartner.com/mark_mcdonald/2009/07/02/capability-is-morepowerful-than-process/. · 578 ·

Z02_GATT6818_03_SE_END.indd 578

2/24/15 4:01 PM

Endnotes

8 Refer: http://architectureandgovernance.com/content/business-capability-modelingtheory-practice. 9 Divakaran, Ashok, Neilson, Gary L. and Pandrangi, Jaya (2013) ‘How to design a winning company’, a feature on Organization & People, strategy + business, Booz & Company, p. 45. 10 Ibid. 11 Schein, Edgar H. (2010) Organizational Culture and Leadership, 4th edn., Jossey-Bass., San Francisco, CA, p. 18. 12 Kee, Micah R. (2003) ‘Corporate culture makes a fiscal difference’, Industrial Management, November/December, p.19. 13 Schwartz, Jeffrey, Gaito, Pablo, and Lennick, Doug (2011) ‘That’s the way we [used to] do things around here’, a feature article in the management section of strategy + business, Booz & Company, p. 45. 14 Ibid. 15 Beer, Michael and Eisenstat, Russell A. (2000) ‘The silent killers of strategy ­implementation and learning’, Sloan Management Review, MIT, Summer, Vol. 41, No. 4, p. 29. 16 Ibid., p.31. 17 Ibid., p.32. 18 Characteristics of the ‘dark side’ were prepared for John Gattorna by The Ryder Self Group, and derived from their organizational culture mapping work over the past 20 years. Since 2004, the ‘dark side’ has been clearly differentiated for each of the four generic subcultures. 19 Cameron, Kim S. and Quinn, Robert E. (2000) published details of their Organizational Culture Assessment Instrument (OCAI) in Diagnosing and Changing Culture, Pearson ­Education, Upper Saddle River, NJ. Their framework is very similar to our own P-A-D-I based framework applied to mapping culture, which was developed a decade earlier. 20 Hofstede, Geert (1980) Culture’s Consequences: International Differences in WorkRelated Values (Cross Cultural Research and Methodology), Sage Publications, Newbury Park, CA. 21 Firoz, Nadeem M., Maghrabi, Ahmad S. and Kim, Ki Hee (2002) ‘Think globally m ­ anage culturally,’ International Journal of Commerce and Management, Vol. 12, Nos. 3 and 4, pp. 32–50. 22 Hofstede, Geert & Associates (1998) Masculinity and Femininity: The Taboo Dimension of National Cultures, Sage Publications, Newbury Park, CA. 23 Fonterra behavioural segmentation analysis carried out in 2000–01. 24 First mentioned in a Fortune article by an executive of Texas Instruments in the 1980s. 25 Neilson, Gary L. and Fernandes, Lauren (2008) ‘The Dominant Genes-organizational survival of the fittest’, Booz & Company White Paper, p.1. 26 Ibid. 27 ‘Reinventing Motorola’, Business Week, 9 August 2004, p. 98. 28 ‘Culture change inspires revival’, Leo D’Angelo Fisher interviews Peter Widdows, Business Review Weekly, February 8–14, 2007, pp. 52–53. 29 Neilson, Gary L. and Pasternack, Bruce A. (2005) ‘The cat that came back’, strategy + business, No. 40, Fall, pp. 32–45. 30 Timmons, Heather (2007), ‘Culture blamed for BP blast’, The Australian Financial Review (January 17), p. 9. Reprinted from The New York Times. 31 Petronius, AD 66, Roman Centurion. 32 Azinger, Paul and Braund, Ron (2010) Cracking the Code: the winning Ryder Cup strategy, Looking Glass Books, Inc., Decatur, Georgia. 33 General Accident has since merged worldwide with Commercial Union to form one global company, CGU Insurance Group. 34 Stevens, Greg (2003) ‘Changing a culture to become more innovative – faster than ever before’, inKNOWvations, February, 4 pp. 35 Ibid., p. 2. · 579 ·

Z02_GATT6818_03_SE_END.indd 579

2/24/15 4:01 PM

Dynamic Supply Chains

36 Ibid. 37 ‘Dow Announces new Business Structure and Executive Leadership Appointments’, Dow​ .com, 2012. 38 Balch, Oliver (2013) ‘How Philips is transforming its business model for sustainability’, theguardian.com, 25 September. 39 Evans, Simon (2005) ‘New CEO wants Amcor out of the silo’, The Australian Financial Review, 25 August, p. 19. 40 Refer to Blackmores brochure, ‘People, Product, and Passion’, p. 2. www.blackmores.com.au. 41 I am indebted to Andrea Ehlers for making me aware of this trend. Andrea is Director of a Sydney-based commercial interior design firm specializing in ‘brand and the built environment’. 42 This is quoted verbatim from a conversation the author had with Andrea Ehlers, one of the Watermark Architecture consultants who took part in the AMP project that helped turn the company around. 43 Quy Huy and Shipilov, Andrew, ‘The key to Social media success within organizations’, MIT Sloan Management Review, Fall, 18 September, 2012. 44 Ibid. p.1. 45 Li, Charlene, with Webber, Alan and Cifuentes, Jon, ‘Making the business case for ­Enterprise Social Networks – focus on relationships to drive value’, Altimeter, February, 2012. 46 Richards, Dick (2010) ‘At Zappos, Culture Pays’, in the comment/leading ideas section of strategy + business, p.17, Fuentes, Jon, ‘Making the business case for Enterprise Social Networks – focus on relationships to drive value’, Altimeter, February, 2012.

Chapter 5 1 Hauswirth, Jeff M., van Halder, Han, Walsh, Patrick B., Dawkins, Will, Richard, Bertrand, Rudy, Sharon and Schoppen, Willi (2012) ‘What boards must get right’, Point of View 2012, Spencer Stuart. 2 Kotter, John P. (1990) ‘What leaders really do’, Harvard Business Review, May–June, pp. 103–111. 3 Ibid., pp. 105 and 107. 4 Ibid., p. 103. 5 Deborah Ancona, Thomas W. Malone, Wanda J. Orlikowski and Peter Senge (2007) ‘In praise of the incomplete leader’, Harvard Business Review, February, pp. 92. 6 Ibid. 7 Hanley, Mike (2005) ‘Really, truly – forget charisma. The latest leadership gift is authenticity. And if it doesn’t come naturally, you can learn to be real’, The Australian Financial Review BOSS, May, pp. 52–55. Article discussed the book by Goffee, Rob and Jones, Gareth (2009) Why Should Anyone Be Led by You, Harvard Business School Press, Boston, MA. 8 Bryant, Andrew (2013) ‘Be Authentic this year’, Supply Chain Asia, March/April, p.58. Andrew Bryant is also author of Self Leadership. 9 Ibid., p. 52. 10 Goffee, Rob and Jones, Gareth (2005) ‘Managing Authenticity: the paradox of great ­leadership’, Harvard Business Review, December, p.89. 11 Sir Clive Woodward’s speech at the Chartered Institute of Logistics and Transport (CILT) Annual Conference, Birmingham, 26 June 2007. Refer also article by Dean Freeman, ‘One word: WINNING’, Business Life, September 2004, pp. 32–36. 12 Refer https://www.paddilund.com/files/pdf/SolutionsPress_CliveWoodwardWinning­ WithPaddi.pdf.

· 580 ·

Z02_GATT6818_03_SE_END.indd 580

2/24/15 4:01 PM

Endnotes

3 Refer to http://drsheryllecalder.com/ for more information. 1 14 Grenny, Joseph (2009) ‘Leadership international influence’, Business Week, Special Report, 5 June, p. 1. 15 Ibid., p. 2. 16 Favaro, Ken, Karlsson, Per-Ola and Neilson, Gary L. (2013) ‘Captains in Disruption’, strategy + business, Booz & Co, May, pp. 41–47. 17 Ibid., p.41. 18 Ibid., pp. 44–45. 19 Katzenbach, Jon (2012) ‘The Steve Jobs Way’, strategy + business, Issue 67, May, p.6. 20 Editor, ‘Secrets of the Flux Leader’, Fast Company, Issue 170, November 2012, 16 pps. 21 Ibid., p.4. 22 Ibid., p.7. 23 Ibid. 24 Thomson James, in an article/interview with Jim Collins when he visited Australia in June 2013. The article is titled: ‘Why being great is the “BHAG”’ Business Review Weekly, July 18–24, 2013, p. 17. 25 Refer to article by Miranda Devine, ‘A bureaucratic child of our times’, The Sydney Morning Herald, 24–25 April 2010, p. 7. 26 Fowler, Tom (2013) “Failure at top” led to BP disaster’, The Wall Street Journal, reprinted in The Australian, 28 February, p.20. 27 Clarke, John (2005) Working with Monsters: how to identify and protect yourself from the workplace psychopath, Random House Australia, Sydney. 28 Ibid., pp. 56–57. 29 Cromie, Ali (2005) ‘The Big Profit’ Interview with Chip Goodyear, CEO BHP Billiton, on Business Sunday, Nine Network, Australia, 28 August. 30 Ashlee Vance (2009) ‘A tough second act for the executive that revitalized HP’, I­ nternational Herald Tribune, Business Asia with Reuters, 27 April, p. 14. 31 Mentioned in a review by Brian Bremner (2005) ‘The gaijin who saved Nissan’, Business Week, 31 January, p. 12. Bremner was reviewing the book by Carlos Ghosn and Philippe Ries, SHIFT: Inside Nissan’s Historic Revival, Currency/Doubleday, 2005. 32 ‘Tough Ghosn’, The Economist, 15 September 2007, p. 90. 33 Fisher, Daniel (2012) ‘Recharged’, Forbes Asia, November, p. 118. 34 ‘Haier’s Aim: Develop our Brands Overseas’, BusinessWeek online, 31 March 2003. 35 Hilb, Martin (2005) ‘New corporate governance: from good guidelines to great practice’, New Corporate Governance, Vol. 13, No. 5, September, pp. 569–581. 36 Geoff Colvin (2007) ‘Leader machines’, Fortune, 1 October, 2007, p. 60. 37 Ibid., p. 65 38 Ibid., p. 66. 39 Ibid., pp. 66–67. 40 Ibid., p. 67. 41 Ibid. 42 Ibid. 43 Welch, Dennis (2004) ‘Caterpillar Constructs a Leadership Pipeline’, Gallup Management Journal, 10 June. 44 Schieffer, Alexander (2003) ‘The Essence of Leadership and the Power of Networks: an Interview with Margaret Wheatley’, Reflections, Vol. 4, No. 4, p. 69. 45 Ibid. 46 The Myers-Briggs Type Indicator or MBTI® is the original and best known instrument in its category. It is the registered trademark of Consulting Psychologists Press, California. 47 Another possible instrument is the Predictive Index (PI), but the disadvantage of this is that it then has to be translated into the P-A-D-I code to be of any use in making comparisons.

· 581 ·

Z02_GATT6818_03_SE_END.indd 581

2/24/15 4:01 PM

Dynamic Supply Chains

48 Burrows, Peter (2005) ‘The new broom starts to sweep at HP’, The Australian Financial Review, 25–26 June, p. 30. 49 Burrows, Peter (2001) ‘The radical: Carly Fiorina’s bold management experiment at HP’, BusinessWeek, February 8; online edition www.businessweek.com. 50 Ibid. 51 Salter, Chuck (2004) ‘And now the hard part; JetBlue is cool. Can David Neeleman make it great?’, Fast Company, May, pp. 66–75. 52 Fung, Victor, Fung, William K. and Wind, Yoram (Jerry) (2008) Competing in a Flat World; Building Enterprises for a Borderless World, Wharton School Publishing, Upper Saddle River, NJ. 53 Refer Coe, Seb (2012) Running my Life, The Autobiography, Hodder & Stoughton, London. 54 Lee, Hau L. (2004) ‘The Triple-A Supply Chain’, Harvard Business Review, October, pp. 102–112. 55 Ibid., p.112. 56 Gattorna, John (2010) Dynamic Supply Chains, 2nd edn., Pearson, Harlow: Appendix 5A, pp. 452–455. 57 Ibid., Appendix 5B, pp. 456–459. 58 See Gattorna, John L. and Tang, M. (2003) ‘Formulating a supply chain vision’, Ch. 1.2 in Gattorna, John L. (ed.) Handbook of Supply Chain Management, 5th edn, Gower ­Publishing, Aldershot, pp. 11–35. 59 Lofvers, Martijn, Tuyn, Edwin and Thompson, Sarah (2012) ‘Ensuring the supply chain is at the heart of the business’, an interview with Neil Humphrey, Supply Chain Movement, No.3, Q3, p.13. 60 Van Lee, Reggie, Fabish, Lisa and McGaw, Nancy (2005) ‘The value of corporate values’, strategy + business, No. 39, pp. 1–14. 61 ‘In praise of Peter Drucker’, The Guardian, 17 November 2005, p. 34. 62 Reingold, Jennifer (2004) ‘Man of Mystery’, Fast Company, Issue 79, February, p.78.

Chapter 6 1 Remember what the Japanese General said after the successful attack on Pearl Harbor, which brought the US into World War II: ‘The seeds of tomorrow’s failures are sown in today’s success,’ or words to that effect. 2 Gattorna, John (2006) Living Supply Chains, FT Prentice Hall, Harlow, pp. 30–66. 3 Kim, Soo Wook (2007) ‘Organizational structures and the performance of supply chain management’, International Journal of Production Economics, Vol. 106, pp. 323–345. 4 Gulati, Ranjay (2007) ‘Silo Busting; how to execute on the promise of customer focus’, Harvard Business Review, May, pp. 98–108. 5 Fitzgerald, Michael (2013) ‘Best Buy Battles Back Online’, MIT Technology Review, 20 November. 6 Trefis Team (2013) ‘GE Healthcare targets growth markets and new t­echnologies to drive sales’, 16 May 2013; http://www.trefis.com/stock/ge/articles/186726/ ge-healthcare-targets-growth-markets-and-new-technologies-to-drive-sales/2013-05-16. 7 Carlisle, Candace (2012) ‘Jones Lang LaSalle honoured among Best Places to Work 2012’, Dallas Business Journal, 25 September. 8 Ibid., p. 102. 9 Morgan, Gareth (2006) Images of Organization, Sage Publications, London. 10 I was working in a consulting capacity for Fletcher Challenge at the time and made these observations.

· 582 ·

Z02_GATT6818_03_SE_END.indd 582

2/24/15 4:01 PM

Endnotes

11 Bryan, Lowell L. and Joyce, Claudia (2005) ‘The 21st Century Organization’, The ­McKinsey Quarterly, Number 3, New York, p. 26. 12 Malik, Yogesh, Niemeyer, Alex and Ruwadi, Brian (2011) ‘Building the supply chain of the future’, McKinsey on Supply Chain: Select Publications, January, p.5. 13 Gluyas, Richard, ‘NAB gets real on performance’, The Australian, 16 June, 2014, p.17. 14 Barber, Felix and Morieux, Yves (2005) ‘More than Talent’, Perspectives, The Boston Consulting Group, p. 6. 15 Robertson, Peter W. (2005) ‘Adaptive supply chains: from command-and-control to ­control – commands’, MHD supply chain solutions, May/June, p. 63. 16 Ibid. 17 ‘Disciplined Autonomy: resolving the tension between flexibility and control’, a White Paper, written on behalf of Laserfiche, by the Economist Intelligence Unit, UK, 2008, p.5. 18 Ibid., p.13. 19 Day, George (1999) ‘Aligning Organizational Structure to the Market’, Business Strategy Review, Vol. 10, Issue 3, Autumn, p. 35. 20 Semler, Ricardo (1993) Maverick, Warner Books, London; and Semler, Ricardo (2003), The Seven-Day Weekend, Random House, London. 21 The commendation by Charles Handy appeared in Ricardo Semler’s first book, Maverick. 22 Kastelle, Tim, ‘Hierarchy is Overrated’ (2013) Harvard Business Review Blog Network, 20 November. 23 People and Coaches, Irizar Group, Issue 36, October 2006; http://www.irizar.com/en/ irizar/the-irizar-brand/. See also the Irizar story by Luxio Ugarte (2004) Sinfonia o Jazz, Koldo S ­ aratzaga y el modelo Irizar, Granica, S.A. Barcelona. 24 Cottrill, Ken (2005) ‘It takes a village to run a supply chain’, Supply Chain Strategy, ­Harvard Business Review Publishing, 1 November. 25 Loeb, Walter (2013) ‘VF Corp. has the Midas Touch’, Forbes, 2 April. 26 Hillairet, Dieter, Guillame, Richard and Bouchet, Patrick (2009) ‘The dual management of innovation by the Decathlon Group. A distinctive strategic system on the Sports market’, Journal of Innovation Economics, 3, pp. 189–210. 27 See http://www.aeraenergy.com/ website for more information. 28 Bartholomew, Doug (2009) ‘Leveraging lean to get the oil out’, Lean Enterprise Institute. 29 Ibid. 30 Guidewire (2007) ‘Sprinting to success, a case study developed by IMD’, Lausanne, ­Switzerland, 12 pp. 31 Samuels, Diana (2012) ‘Guidewire CEO “exhilarated” after IPO success’, Silicon Valley Business Journal, 25 January. 32 Refer http://labs.spotify.com/2014/03/27/spotify-engineering-culture-part-1/, a 12 mins. video [Part 1]. 33 Refer to Douglas, M.A. and Strutton, D. (2009) ‘Going ‘purple’: can military jointness principles provide a key to more successful integration at the marketing-manufacturing interface?’, Business Horizons, Vol. 52, No. 3, 19 May, pp. 251–263. 34 Jenkins, Mark (2006) ‘How to win and keep on winning: performance lessons from ­Formula One Motorsport’, unpublished paper, Cranfield School of Management, 4 pp. See also Jenkins, Mark, ‘Performance at the Limit: Business Lessons from Formula 1 Motor Racing’, 2005. 35 Worley, Christopher G. and Lawler III, Edward E. (2006) ‘Designing Organizations that are built to Change’, MIT Sloan Management Review, Fall, Vol. 48., No. 1, p.21. 36 Carter, Phillip L., Carter, Joseph R., Monczka, Robert M., Blascovich, John D., Slaight, Thomas, H. and Markham, William J. (2007) ‘Succeeding in a dynamic world: supply management in the decade ahead’, a joint research initiative of CAPS Research Institute for Supply Management and A.T. Kearney, p. 131.

· 583 ·

Z02_GATT6818_03_SE_END.indd 583

2/24/15 4:01 PM

Dynamic Supply Chains

7 Ibid., p. 95. 3 38 Fletcher Challenge Energy (1996) ‘The integrated energy company’, internal document, 17 December, p. 14. 39 ‘Why Teams Don’t Work’, an interview with J. Richard Hackman (by Diane Coutu), Harvard Business Review, May 2009, p. 103. 40 ‘Secrets of the Flux Leader’, Fast Company, Issue 170, November 2012, p. 9. 41 Ibid. 42 ‘At Cisco, “The Customer is Everything”. No, Really’, SupplyChainBrain, 28 February 2011. Refer: http://www.supplychainbrain.com/content/blogs/think-tank/blog/article/ font-size2at-cis . . . 43 Mintzberg, Henry (1981) ‘Organization design: fashion or fit?’ Harvard Business Review, January/February, pp. 103–116. 44 Ibid., p. 115. 45 Ibid. 46 Fung, Victor K., Fung, William K. and Wind, Yoram (2008) Competing in a Flat World, Wharton School Publishing, Upper Saddle River, NJ. 47 A comment made during a teleconference between the author and Victor Fung on 1 April 2009. 48 Fung et al. (2008), p. 86. 49 Kwok, Donny (2013) ‘Li & Fung cuts 2013 target, focus on key brands’, Business & Financial News, Thomson Reuters, 21 March. 50 Guy, Peter (2014) ‘Li & Fung needs to focus on its core businesses – and get rid of the rest, South China Morning Post, 3 April. 51 What they did is recorded in a seven-minute CD called: ‘The FIFA World Cup 2006 – the ultimate supply chain event’, produced by Adidas and Deloitte, 2007. 52 Media release by Adidas on 7 March 2007 from their headquarters at Herzogenaurach, Germany. 53 First-quarter 2009 pretax profit at Adidas fell 97 per cent to $12 million, for all intents and purposes the break-even level. The earnings were way below expectations and prompted a 9 per cent drop in Adidas shares. http://www.businessweek.com/globalbiz/ blog/­europeinsight/archives/2009/05/adidas_profit_w.html. 54 Smith-Dubendorfer, Jacqueline (2013) ‘A vision turns into reality: the future of window shopping scoops prestigious Cannes Lion Award’, Adidas Group blog, 1 July. 55 Kish, Matthew (2013) ‘With Nike on its heels, Adidas makes big changes in Europe’, Portland Business Journal, 22 October. 56 I would like to acknowledge the quality research work of Wendy Sadler-Moyes in her supply chain management report, ‘Organizational structures – examples and variants’, an unpublished paper prepared for her MBA at the Macquarie Graduate School of ­Management, Sydney, 2009. 57 Larsen, H.H (2002), ‘Oticon: unorthodox project-based management in a “spaghetti organization” ’, Human Resource Planning (USA), Vol. 25, No. 4, pp. 30–37. 58 Ibid. 59 Sadler-Moyes, Wendy (2009), p. 5. 60 Birner, Jack and Garrouste, Pierre (2013) Markets, Information and Communication: ­Australian perspective on the Internet Economy, Taylor & Francis. 61 Kiger, Patrick J. (2006) ‘Small Groups, Big Ideas’, Workforce Management, Vol. 85, Issue 4, 27 February. 62 Weintraub, M. (2006) ‘Transforming the procurement organization for a new era’, Oracle White Paper, p. 2. 63 Schuman, Michael (2014) ‘Zhang Ruimin’s Haier Power’, Time, 14 April. 64 Ibid.

· 584 ·

Z02_GATT6818_03_SE_END.indd 584

2/24/15 4:01 PM

Endnotes

65 66 67 68

Ibid. Fox, Catherine (2012) ‘Howl down the dogma’, AFR Boss, March, p. 32. Ibid., p. 33. This information was personally provided to the author by Niklas Hedin, CEO and Chief Architect, Centiro Solutions AB. He is responsible for this new organization design. 69 Sheffi, Yossi (2012) Logistics Clusters: Delivering Value and Driving Growth, The MIT Press, Cambridge, MA. 70 Ibid. 71 ‘Cluster organizations in the Canton of Berne’, BerneCapitalArea magazine, Business ­section, 2007, p. 4. 72 DHL City Logistics, InsightOn: DHL City Logistics, in-house publication, Bonn, 2012, pp. 44–53. 73 Kotter, John (2014) Accelerate: Building Strategic Agility for a Fast-Moving World, Harvard Business Review Press; refer also to Kotter, John P. (2012) ‘Accelerate’, Harvard Business Review, November, pp. 44–58. 74 ‘John Kotter’s plan to accelerate your business’, HBS Working Knowledge, 10 April 2014. 75 Worley, Christopher G. and Lawler III, Edward E. (2006) ‘Designing organizations that are built to change’, MIT Sloan Management Review, Vol. 48, No. 1, Fall, pp. 19–23. 76 Ibid., p. 21. 77 Ibid.

Chapter 7 1 Clark, Theodore H. (1994) ‘Campbell Soup Company: a leader in Continuous Replenishment ­innovations’, Case Study 9–195–124, Harvard Business School, 14 October, 21 pp. 2 ‘The new retail Collaboration: go big or go home’, A Capre White Paper, January 2011. 3 I am indebted to Bill Gill, former Managing Director of Joe White Maltings, for this ­example of a collaborative supply chain. 4 Gratton, Lynda (2007) ‘Building bridges for success’, in Understanding the Culture of Collaboration, a special supplement in the Financial Times, 29 June. 5 Antony Burgmans, CEO, Unilever, speaking at the 6th ECR (Efficient Consumer Response) Conference, Edinburgh, 2001. 6 Mitchell, Sue (2002) ‘Super market forces’, interview with Roger Corbett in AFR BOSS magazine, The Australian Financial Review, 2 January, pp. 43–44. 7 In Ch. 6 of Living Supply Chains (Gattorna, 2006), I focused on what I called a ‘process’ design; see Figure 6.1, p. 140. The added subtlety introduced in this book is that the process teams are actually multidisciplinary ‘clusters’. 8 Case study: ‘Fresh look at NatWest customers results in more a­ ccurate ­targeting and efficient direct marketing’, by Response One Group; http://www.st-ives.co.uk/about_st_ives/ case_studies/1743_fresh_look_at_natwest_customers_results_in_more_accurate_targeting_ and_efficient_direct_marketing. 9 Prestridge, Jeff (2012) ‘RBS, just dump the charter and sort out your service’, This is Money.co.uk, 29 December; http://www.thisismoney.co.uk/money/saving/article-2254675/ JEFF-PRESTRIDGE-RBS-just-dump-charter-sort-service.html. 10 ‘Dannon takes a fresh approach to VMI with Datalliance’, Datalliance Product Sheet, 2011. 11 ‘Linking CPFR and S&OP – a roadmap to integrated business planning’, Voluntary ­Interindustry Commerce Solutions, September, 2010, p. 5.

· 585 ·

Z02_GATT6818_03_SE_END.indd 585

2/24/15 4:01 PM

Dynamic Supply Chains

2 Ibid. p. 6. 1 13 Barratt, Mark A. (2002) ‘Exploring relationships and information exchange in grocery supply chains: a case study of enablers and inhibitors’, unpublished PhD thesis, Cranfield University – School of Management. 14 Kaplan, Robert S. and Norton, David P. (1992) ‘The balanced scorecard: Measures that drive performance’, Harvard Business Review, Vol. 70, No. 1, January/February, pp. 71–79. 15 Kaplan, Robert S. and Norton, David P. (2005) ‘Managing alignment as a process’, ­Balanced Scorecard Report, Harvard Business School Publishing, July–August, 6 pp. 16 Yammer At IKEA: Collaboration And Innovation At Global Scale – The Yammer Blog, 16 August 2011; https://about.yammer.com/yammer-blog/ yammer-at-ikea-collaboration-and-innovation-at-global-scale/. 17 Humphries, Andrew S. and Wilding, Richard D. (2004) ‘Long term collaborative business relationships: the impact of trust and C3 behavior’, Journal of Marketing Management, Vol. 20, pp. 1107–1022. See also Ch. 3 in Gattorna (2009), ‘Building relationships that create value’, pp. 67–80. 18 ‘Wal-Mart Launches Web-Based Collaborative Planning Portal’, Media release, 26 July 2011. Refer to http://risnews.edgl.com/retail-news/Walmart-Launches-Web-BasedCollaborative-Planning-Portal74546. 19 Black, David (2013) ‘Emirates and Qantas mark launch of alliance’, The National, 1 April. 20 Game-Lopata, Anna (2013) ‘Fruits of Labour’, supplychainreview.com.au, April, p. 22. 21 Ibid. 22 See Lambert, Douglas M. and Knemeyer, Michael A. (2004) ‘We’re in this together’, Harvard Business Review, December, pp. 114–122. 23 Gattorna, John (2006) Living Supply Chains, Financial Times Prentice Hall, Harlow. 24 Santa-Eulalia, Luis-Antonio, de Araujo, Juliano Bezerra, Franciosi, Luis Augusto, Cambiaghi Azevedo, Rodrigo, and Bremer, Carlos Frederico, ‘An essay on green Supply Chain Design and Dynamic Alignment’, Interuniversity Research Center on Enterprise N ­ etworks, Logistics and Transportation, CIRRELT-2009–53. 25 Bradley, Peter (2013) ‘Collaboration bears fruit’, CSCMP’s Supply Chain Quarterly, ­Quarter 2, pp. 34–36.

Chapter 8 1 Vitasek, Kate, Manrodt, Karl B. and Abbott, Jeff (2005) ‘What makes a lean supply chain?’, Supply Chain Management Review, October, pp. 39–45. 2 Womack, James P., Jones, Daniel T. and Roos, Daniel (1990) ‘The Machine that Changed the World: the story of lean production – Toyota’s secret weapon in the global car wars that is now revolutionizing world industry’. Based on the MIT 5-million dollar Study on the Future of the Automobile, Rawsons Associates, NewYork, NY. Refer http://www.amazon​ .com/Machine-That-Changed-World-Revolutionizing/dp/0743299795. 3 Malcolm McDonald is now Emeritus Professor of Marketing, Cranfield School of ­Management, Cranfield University, UK. 4 Black, Cherie (2008) ‘To build a better hospital, Virginia Mason takes lessons from Toyota plants’, Seattle Post-Intelligencer, 15 March. 5 Ibid. 6 2011 Medical Center Highlights – Barcode medication Administration puts patient safety first, Annual Report, Virginia Mason Medical Center, 2011.

· 586 ·

Z02_GATT6818_03_SE_END.indd 586

2/24/15 4:01 PM

Endnotes

7 Bassett, Mike, ‘Initiative can reduce unnecessary imaging of adnexal lesions’, published in FierceMedicalImaging (http://www.fiercemedicalimaging.com). 8 Hill, T. (2004) ‘Designing service delivery systems’, Ch. 5, Operations Management, 2nd ed., Palgrave Macmillan, p. 117. 9 Deshpande, Pradeep B., ‘The importance of making compassionate corporations’, www​ .collective-evolution.com, 17 April, 2014. 10 Chandrasekhar, Ramasastry and Menor, Larry (2004) Dabbawallahs of Mumbai (A), Case 9B04D011, Richard Ivey School of Business, 22 pp. 11 ‘Share my dabba: how Mumbai dabbawallahs will help feed street kids’, FirstPost, 15 May 2013. 12 Comment made by Don Meij, CEO/Managing Director of Domino’s Pizza Australia and New Zealand (16 May 2005) at MGSM Networker meeting, Sydney, Australia; http:// www.mgsm.edu.au/our-alumni/. 13 The app was featured at the International Consumer Electronics Show in Las Vegas in January 2014. Refer article by Kretzmann, David, ‘Domino’s Teams with Ford on new app’, The Motley Fool, 11 January, 2014. 14 ‘Domino’s to let customers order pizza by talking to their car’, Business Review Weekly, 8 January 2014. Link: http://www.brw.com.au/p/techgadgets/domino_car_let_customers_ order_pizza_LX0tVM3kvpHRcPNMMZOoO. 15 Manufacturing Industry Case Study: ‘Chevron drives process standardization and ­efficiency with mobile decision support’, Microsoft Customer Solution, 2008, 6pp. 16 Sales and Operations Planning: how to implement an S&OP ‘Rudder’, SupplyChainBrain, 13 November 2012. 17 SCOR (supply chain operations reference) model was developed by the Supply Chain Council, a not-for-profit organization that commenced in 1996–97. SCOR is a process model designed to improve efficiency and productivity through the use of best practices, standardized terminology, a cross-functional framework along with common metrics. For more information go to www.scor.com. 18 Andraski, Joseph C., (2013) ‘The case for item-level RFID’, CSCMP’s Supply Chain ­Quarterly, Quarter 4, 6pp. 19 ‘Medtronic details benefits and path to success with inventory optimization software’, ­Supply Chain Digest, September 2012. 20 EDLP was a concept developed by Walmart and Procter & Gamble at the end of the 1990s. It has not become a universal practice, although many retail organizations have tried to mimic this arrangement. 21 Isaacson, Bruce, ‘Lessons in pricing strategy from J C Penney’, MMR Strategy Group, 15 May 2013. 22 Ellickson, Paul B., Misra, Sanjog and Nair, Hatikesh (2011) ‘Everyday low prices may not be the best solution for supermarkets’, Stanford School of Business, 17 December. 23 Ellis, Deborah (2007) ‘Support for the difficult supply chain decisions – network ­optimization modeling’, a paper presented at the SAPICS 29th Annual Conference and Exhibition, Sun City, South Africa, 3–6 June, 8pp. 24 I am indebted to my colleague Deborah Ellis, Principal of Carpenter Ellis, for this example, August 2005. 25 Cowley, Mark (2005) ‘BlueScope Steel – a case study in adapting to a global ­manufacturing market’, a paper presented at the Smart Conference, Sydney, 2 June. 26 BlueScope Submission to the Productivity Commission’s Inquiry into the Australian ­Automotive Industry, 2003. 27 ‘Jeffrey Liker: The Thought Leader Interview’, an interview with Jeffrey Rothfeder, ­strategy + business, Issue 51, Summer 2008, p. 107. 28 Ibid., p. 108.

· 587 ·

Z02_GATT6818_03_SE_END.indd 587

2/24/15 4:01 PM

Dynamic Supply Chains

Chapter 9 1 The ‘bullwhip’ effect is where poor information sharing, long lead times and inaccurate forecasts cause ever increasing fluctuations as demand signals move from consumers upstream towards the supply end. 2 Glatzel, Christoph, Helmcke, Stefan and Wine, Joshua (2009) ‘Building a flexible supply chain for uncertain times’, The McKinsey Quarterly, Premium Edition, March, p. 3. 3 See IBM Australia’s advertising campaign, which started in March 2003, to communicate its vision of ‘e-business on demand’ to a wider business community; http://www.bandt​ .com.au/news/87/0c014b87.asp. 4 This is where customer account profitability regimes come in. 5 Fonterra placed embargoes on some production at certain of its processing factories so that production allocated against forecasts for ‘collaborative’ customers would not be interfered with. 6 Henry, Jim (2009) ‘BMW says flexible, not lean, is the next big thing in autos’, BNET Auto Blog, 24 November, p. 1. 7 Ibid., p. 2. 8 Spivy, Duane (2009) ‘The OODA loop and learning’, Chief Learning Officer, Vol. 8, Issue 1, pp. 30–33. 9 Baker, Bud. (2005) ‘Timely decisions’, PM Network, p. 20. 10 A quote from ‘Ship Ahoy’, 60 Minutes, Nine Network, Australia, 21 August, 2005. 11 I am indebted to Professor Donald Sull, London Business School, for this example, ­Chantilly, 7 October 2005. 12 Lai Wei and Lui Cheng (2012) ‘Haier’s innovations win global recognition’, China ­Economic Net, 29 November; http://en.ce.cn/Insight/201211/29/t20121129_23893699.shtml. 13 Sull, Donald N. with Yong Wang (2005) Made in China, Harvard Business School Press, Boston, MA. 14 The companies Sull was referring to would come from the following list: Haier (­appliances, TVs); Lenovo (computers); TCL (TVs, mobile phones); Wahaha (beverages); Gome ­(electronics); Geely (cars); Bird (mobile phones); Tsingtao (beer); Li-Ning (clothing, shoes); and Yonghe King (fast food). We sourced this list from Roberts, Dexter (2004) ‘China’s Power Brands’, BusinessWeek, 8 November, pp. 52–53. 15 Fine, Charles, H. (2005) ‘Are you modular or integral? Be sure your supply chain knows’, strategy + business, No. 39, Summer, pp. 499–506. 16 Ibid., p. 502. 17 Ibid., p. 503. 18 Ibid. 19 ‘Demand Management: Customize Products through the Use of Product Completion Centers’, research report prepared for Logistics Management, and sponsored by Ryder Supply Chain Solutions, August 2013, p.9. 20 Sehgal, Vivek (2010) ‘Postponement as Supply Chain Strategy’, blog, Supply Chain ­Musings, 29 October; http://www.supplychainmusings.com/2010_10_01_archive.html. 21 See Chapter 11 in Gattorna (2009) for more detailed treatment of S&OP, pp. 159–176. 22 Gupta, Vivek and Radlika, A. Neela (2005) ‘Li & Fung: the global value chain c onfigurator’, Case ref. 305–052–1, ICFAI Center of Management Research, ­ Hyderabad, 28pp. 23 The two best models in the world today are Guru by LLamasoft (Ann Arbor, Michigan), and planLM by Solvoyo (Istanbul and Boston). 24 This vision was relayed in a conversation with Alfons van Woerkom in Sydney, 21 ­February 2014.

· 588 ·

Z02_GATT6818_03_SE_END.indd 588

2/24/15 4:01 PM

Endnotes

25 Description kindly provided by Alfons van Woerkom, Supply Chain Director, Unilever Asia. 26 Salter, Chuck (2001) ‘This is one fast factory’, Fast Company, No. 49, August, pp. 32–34. 27 Reeves, Phil (2008) ‘How rapid manufacturing could transform supply chains’, Supply Chain Quarterly, Quarter 4, p. 32. 28 Ibid., p. 33. 29 Ritter, Ronald C. and Sternfels, Robert A. (2004) ‘When offshore manufacturing doesn’t make sense’, McKinsey Quarterly, online journal of McKinsey & Company, No. 4; www​ .mckinseyquarterly.com. 30 CEO Sue Morphet decided to lay off 1850 workers at Pacific Brands’ Melbourne plant and move production of the Bonds product line off-shore, for strictly cost reasons. Pacific Brands is Australia’s largest branded apparel supplier. 31 Op. cit, Ritter et al. (2004). 32 Ibid. 33 Ibid. 34 ‘Haier’s Aim: “Develop Our Brand Overseas”’, Business Week online, 31 March 2004, p. 2; http://search.businessweek.com. 35 Cienski, Jan (2005) ‘Asia forces rethink for Polish clothing makers’, Financial Times, 26 October, p. 4. 36 Bleeke, Joel, A. (1989) ‘Peak strategies’, McKinsey Quarterly, Spring.

Chapter 10 1 US $1.067 trillion was spent in 2008. See Benton, W.C. Jr, and McHenry, Linda F. (2010) ­Construction Purchasing & Supply Chain Management, McGraw-Hill, New York, pp. 128–129. 2 Ibid., p. 25. 3 Ibid. 4 Jameson, P.H., ‘Is modularization right for your project’, Hydrocarbon Processing, ­December 2007 issue, pp. 67–71. 5 The term ‘campaign’ was originally used by the team I worked with at Woodside, the Australian oil and gas producer, to describe their approach to a major maintenance project. 6 My emphasis. See Robbins, Stephen and Thomas, Andrew (2013) ‘Construction logistics: delivering an effective strategy’, Focus, March, p. 69. 7 The Strategic Forum for Construction represents the construction industry in the UK. See its Logistics Group’s report, Improving Construction Logistics, Construction Products Association, London, 2005. 8 Op. cit., p.70. 9 Mossman, A. (2008) ‘More than materials: managing what’s needed to create value in construction’, in a paper for the European Conference on Construction Logistics (ECCL), Dortmund, May. 10 Jang, Hyounseung, Russell, Jeffrey S. and Yi, June Seong (2003) ‘A project manager’s level of satisfaction in construction logistics’, Canadian Journal of Civil Engineering, Vol.30, pp. 1133– 1142, published on the NRC Research Press Website at http://cjce.nrc.ca, 18 December 2003. 11 Ibid., p.1134. 12 Ibid.

· 589 ·

Z02_GATT6818_03_SE_END.indd 589

2/24/15 4:01 PM

Dynamic Supply Chains

13 Shapiro, Lifschitz & Schram (2009) ‘Liquidated Damages Award believed to be largest in US construction industry history’, Washington, D.C., 2 November. 14 Williams, Peter (2013) ‘Chevron asks Qube for help’, The West Australian, 5 September. 15 Guang Jin and Thomson, Vince (2003) ‘A new framework for MRP systems to be ­effective in engineered-to-order environments’, Robotics and Computer Integrated Manufacturing, 19, pp. 533–541. 16 Ibid., p. 533. 17 Hamzeh, Farook R., Tommelein, Iris D., Ballard, Glenn and Kaminsky, Philip M. (2007) ‘Logistics Centers to support project-based production in the construction industry’, ­Proceedings IGLC – 15 July, Michigan, USA, pp. 181–191. 18 Ibid., pp.183–184, under the heading ‘Configuration and Function’. 19 PSAs are a common type of contract signed between a government and a resource ­extraction company concerning how much of the resource extracted from the country each will receive. They are beneficial to governments of countries that lack the expertise and/or capital to develop their own resources, and wish to attract foreign companies to do so (e.g. oil companies). 20 Construction Logistics – Models for consolidation; Innovation – Best Practice – P ­ roductivity, Department of Trade and Industry, UK, 2004, pp. 8, 9. 21 Comments contained in correspondence with Ray Ledford. 22 Swedberg, Claire (2013) ‘RFID, GPS bring visibility to construction of BP Oil platform’, RFID Journal, 8 May. 23 Hobday, Mike (2000) ‘The project-based organisation: an ideal form for managing ­complex products and systems?’, Research Policy 29, Science and Technology Policy Research (SPRU), Complex Production Systems, Innovation Centre, University of ­Sussex, pp. 871–893. 24 Swedberg, Claire, op. cit. 25 ‘River transport saves 20,000 lorry trips from Canary Wharf Crossrail Site’, Media Release by Canary Wharf Group PLC: http://group.canarywharf.com/media/press-releases/ river-transport-saves-20000-lorry-trips-from-canary-wharf-crossrail-site/. 26 Lewis, Gregory and Bajari, Patrick (2011) ‘Procurement Contracting with Time I­ ncentives: Theory and Evidence’, Quarterly Journal of Economics. 27 Sharman, Andy (2014) ‘How Skanska aims to become the world’s greenest c­ ompany’, FT.com, 23 March: http://www.ft.com/intl/cms/s/0/73a1bea4-a61a-11e3-8a2a00144feab7de.html. 28 Case Study: Meadowland, Vela Systems, 2008: https://www.google.com.au/url?sa=t&rct=j& q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CCAQFjAA&url=http%3A%2 F%2Fprojects.buildingsmartalliance.org%2Ffiles%2F%3Fartifact_id%3D3352&ei=K6Cs VPXeKsLVoATxhoHwCw&usg=AFQjCNH-33jVEYcL95Nnq3Dtbzdcu6EoMA&sig2=_ pauxKlIPDFcoJbILHuadg&bvm=bv.83134100,d.cGU.

Chapter 11 1 The concept of two variants in a fully flexible supply chain and their respective ­characteristics and names was developed by Dr Kate Hughes, while a PhD scholar at the Macquarie Graduate School of Management (MGSM), Sydney, Australia. 2 ‘Building supply chain resilience’, Lloyd’s Market News, 8 May 2013. Refer www​ .lloyds.com/news-and-insight/news-and-features/market-news/industry-news-2013/ building-supply-chain-resilience. 3 Snell, Paul (2011) ‘Chain reaction’, CPO Agenda, Summer, pp. 18–23.

· 590 ·

Z02_GATT6818_03_SE_END.indd 590

2/24/15 4:01 PM

Endnotes

4 Neuman, Scott (2014) ‘Search for flight MH370 reportedly largest in history’, The ­Two-Way:NPR, blog, 17 March. 5 For more information about these disasters refer to Michael Whiting’s Chapter 7, pp. 117–119 in Gattorna, John (2009) Dynamic Supply Chain Alignment, Gower P ­ ublishing, Farnham. 6 Van Wassenhove, LN (2006) ‘Humanitarian aid logistics: supply chain management in high gear’, Blackett Memorial Lecture, reprinted in Journal of Operational Research Society, 57, pp. 475–489. 7 For more information on these various phases, see Hughes, Kate, ‘The Evolution of Fully Flexible Supply Chains’, in Gattorna, John (2009) Dynamic Supply Chain Alignment, Gower Publishing, Farnham, pp. 85–95. 8 Chinn, David (2010) ‘Supply chain lessons from Haiti’, Supply Chain Review, Sept/Oct. 9 O’Connor, Mary Catherine (2010) ‘In Haiti, RFID brings relief’, RFID Journal, 8 April. 10 In doctoral studies by Deborah Ellis at MGSM, Macquarie University, Sydney, 2009. 11 Refer https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad= rja&uact=8&ved=0CCIQFjAA&url=http%3A%2F%2Fwww.pepfar.gov%2Fdocuments %2Forganization%2F79658.pdf&ei=dqKsVPXYFdGvogSJr4L4CA&usg=AFQjCNH1v EQWaaDz9VTSkkilV41pOV-e2g&sig2=8ZvlTz6HABe4Q22mY33Vwg&bvm=bv.8313 4100,d.cGU. 12 Ellis, Deborah, ‘The supply network’s role as an enabler of development’, Chapter 9 in Humanitarian Logistics, Tatham, Peter and Christopher, Martin, eds. Kogan Page, ­London, 2011. 13 Steinberg, Jessica (2003) ‘Driving in the valley of the shadow of death’, Fast Company, No. 74, September, p. 88. 14 Borger, Julian (2008) ‘Lives lost through lack of leadership in UN response to ­humanitarian crises, Britain warns’, Diplomatic Editor, Guardian, 7 October, p. 4. 15 Murray, Sarah (2005) ‘How to deliver on the promises: supply chain logistics’, Financial Times – Business Life, 7 January, p. 9. 16 http://www.londonprepared.gov.uk/downloads/lookingbackmovingforward.pdf 17 Sha, Hongxi, ‘Lessons from the 2005 London Terrorist Bombings’, Prout Journal, 22 August, 2012. 18 See Hughes, Kate, op. cit. 19 Ibid., p. 88. 20 Ibid., p. 91. I have altered Kate Hughes’s original order of phases. 21 Ibid., p. 90. 22 Ibid., pp. 93–94. 23 For more information about the diversity of tasks the UN is engaged in, refer to the case ‘Logistics moving the seeds of a brighter future’, by Ramina Samii and Luk N. Van ­Wassenhove (2003) INSEAD, Fontainebleau, p. 23. 24 Dr Chris Morgan was a Lecturer at Cranfield Center for Logistics and Supply Chain Management, Cranfield University, prior to his untimely death in 2008. 25 ‘Tourism hit by Thai unrest’, China Daily-Asia Weekly, January 17–23, 2014, p.11. 26 Daily Yomiuri online, ‘Automakers eye rules on parts buying/quake-caused shortages spur cooperation’, and in Japanese Business Solutions, 15 April, 2011. 27 Kleiner, Art, an interview with Tim Brown: the thought leader, in issues 56, strategy + business, 2009, p. 97. 28 Belfiore, Michael (2010) The Department of Mad Scientists, Harper, New York. 29 Dugan, Regina E. and Gabriel, Kaigham, J., ‘“Special Forces” Innovation: How DARPA Attacks Problems’, Harvard Business Review, October, 2013, pp. 75–84. 30 Stokes, Donald E. (1997) Pasteur’s Quadrant: Basic Science and Technological Innovation, Brookings Institution Press.

· 591 ·

Z02_GATT6818_03_SE_END.indd 591

2/24/15 4:01 PM

Dynamic Supply Chains

31 32 33 34

Op.cit, p.82. Ibid., p.84. Gilding, Paul, The Great Disruption, Bloomsbury Press, New York, 2011. Winston, Andrew (2014) ‘Resilience in a Hotter World’, Harvard Business Review, April, pp. 56–64. 5 Ibid., p.60. 3

Chapter 12 1 Christopher, M., Jia, Fu, Khan, Omera, Mena, Carlos, Palmer, Andrew and Sandberg, Erik (2007) ‘Global Sourcing and Logistics’, Research Report, Cranfield School of ­Management, May, p. 3. 2 Ibid. 3 Taken from a study of 50 C-Suite professionals carried out by advisory firm ­Information Services Group (ISG) and procurement services provider GEP. Summarised in CPO Agenda, Autumn, p.9. 4 Day, Alan (2011) ‘How to be a customer of choice’, CPO Agenda, Autumn, p.40. 5 Ibid., p. 42. 6 Liker, Jeffrey, K., and Choi, Thomas, Y. (2004) ‘Building Deep Supplier Relationships’, Harvard Business Review, December, pp. 104–113. 7 Kearney, A.T. (2004) ‘When your suppliers talk  .  .  .  listen’, Executive Agenda, Third ­Quarter, pp. 29–30. 8 Bueler, Diane (2006) ‘Supplier Segmentation – the Tool for Differentiation and Results’, a paper presented at the 91st Annual International Supply Management Conference, ­Minneapolis Convention Center, Minneapolis, MN, 7–10 May. 9 Dyer, Jeffrey H., Dong, Sung Cho and Chu, Wujin (1998) ‘Strategic Supplier S ­ egmentation: the next “best practice” in supply chain management’, California M ­ anagement Review, Berkeley: Winter, Vol. 40, Issue 2, pp. 57–77. 10 Ibid., p. 58. 11 Ibid., p. 59. 12 Ibid. 13 Puryear, Rudy, Singh, Bhanu and Phillips, Stephen (2007), ‘How to be everywhere at once’, Supply Chain Management Review, May/June 2007, p. 10. 14 Kearney, A.T. (2004) ‘Shifting your supply chain into reverse’, Executive Agenda, Third Quarter, p. 18. 15 Hjort, Klas, Lantz, Bjorn, Ericsson, Dag and Gattorna, John, ‘Customer segmentation based on buying and returning behavior’, International Journal of Physical Distribution & Logistics Management (IJPD&LM), Vol.43, No.10, 2013, pp. 852–865. 16 Ibid., p. 861. 17 I am indebted to my colleague Deborah Ellis for fleshing out this idea of return pathways. 18 Guide, V. Daniel R., Muyldermans, Luc and Van Wassenhove, Luk N. (2005) ­‘Hewlett-Packard Company Unlocks the Value Potential from Time-Sensitive Returns’, Interfaces, July–August, 35, pp. 281–293. 19 Case Study 65: Barts and The London Hospitals, UK; aspects of Sustainability, Skanska AB, February, 2010. 20 Ibid. 21 Joshin, John, Kumar, Sushil, Singh, K.N. and Srivastava, R. K. (2013) ‘Sustainable ­operations in reverse supply chain of shipbuilding business: benefits of green practices’, Independent Journal of Management & Production (IJM&P), Vol. 4, No.2, July–September. 22 Guide, V. Daniel R. and Harrison, T.P. (2003) ‘The challenge of closed-loop supply chains,’ Interfaces, Vol. 33, No. 6, Nov–Dec, pp. 3–6. · 592 ·

Z02_GATT6818_03_SE_END.indd 592

2/24/15 4:01 PM

Endnotes

23 This is the theme that runs all through Thomas L. Friedman’s book Hot, Flat and Crowded, Allen Lane, New York, 2008.

Chapter 13 1 I am indebted to my colleague, Deborah Ellis, of Carpenter Ellis, for many of the examples mentioned in the text. 2 Case studies illustrating The Unipart Way can be found at: http://unipart.oxi.net/Home/ tabid/36/language/en-US/Default.aspx. 3 Perepu, Indu (2008) ‘Benetton’s “Dual Supply Chain” System’, ICFAI Center for ­Management Research, Case Study ref. no. 608–003–1, p. 12. 4 See note by MBA student Vinay Thomas, a former employee of BOC (T2, 2009, MGSM). 5 Op. cit., ICFAI case study (2008). 6 Overdahl, Stian, ‘Will Tower Cranes Rise Again?’ Construction Machinery Middle East, 5 December, 2013. 7 Howell, R. and Heskett, J. (2004) ‘Shouldice Hospital Limited’, Case Study 9–805–002, Harvard Business School, 14 pp. See website www.Shouldice.com. 8 Passariello, Christina (2006) ‘Louis Vuitton tries modern methods on factory lines’, Wall Street Journal, 9 October. Refer to website http://www.post-gazette.com/ pg/06282/­728653-28.stm. 9 Ibid. 10 Kurian, Boby and Singh, Amarpreet (2007) ‘Louis Vuitton plans Asia plant in Pondy’, Times News Network, 9 January. Refer to website http://forums.thefashionspot.com/f57/ louis-vuitton-paris-made-india-52636.html. 11 Sullivan, Paul (2004) ‘Paradigm Shift’, Supply Chain Review, 16 July, pp. 22–25. 12 Comment by Rich Morris, VP BMW Manufacturing Co., in Henry, Jim (2009) ‘BMW says Flexible, Not Lean, is the next best thing in Autos’, BNET Auto Blog, 24 ­November, p. 1. 13 ‘Ship Ahoy’, 60 Minutes television programme, Nine Network Australia, 21 August 2005; reporter Richard Carleton. 14 I am indebted to Terry O’Connor, General Manager Corporate Services Director, ABB Grain, for this enlightening example, 7 December 2005. 15 Plant, Robert, Feeny, David and Mughal, Hamid (2000) ‘Land Rover vehicles: the CB40, a project in nimbleness and flexibility’, Case 600–001–1, Templeton College Publication, European Case Clearing House, Templeton College, Oxford, 19 pps. 16 I am indebted to Mike Bernon of the Cranfield Centre for Logistics and Supply Chain Management for his insights on this project. 17 ‘Unilever’s two hour ice cream delivery service’, SupplyChainAnalysis, 16 July, 2014. 18 Op. cit., CB40 project, p. 1.

Chapter 14 1 Johnson, Mark W., Christensen, Clayton M. and Kagermann, Henning (2008) ‘Reinventing your business model’, Harvard Business Review, December, p. 57. 2 Porter, Michael E. (1990) The Competitive Advantage of Nations, Free Press, New York, NY. 3 For more information about Dubai World Central Logistics City, see Ch. 25 in Gattorna (2009), pp. 347–360. · 593 ·

Z02_GATT6818_03_SE_END.indd 593

2/24/15 4:01 PM

Dynamic Supply Chains

4 A form of 4PL® is taking shape among some leading members of the Australian ­publishing industry. Refer to Report Ad Rem, The Australian Book Industry; challenges and ­opportunities, prepared by Accenture and Industry Sciences Resources, 2001, 32 pp. 5 A 3PL-driven collaborative model exists in Australia to service the retail and wholesale tobacco markets. 6 Sydney Mascot International Airport has a system for aviation fuel where provider ­companies share the cost of infrastructure on a time-share basis. This means natural ­competitors are still competing, while collaborating to reduce costs in a specific area of their supply chains. 7 Hardman, Doug, Messinger, David and Bergson, Sara (2005) ‘Virtual scale: alliances for leverage’, strategy + business, 14 July, Booz Allen Hamilton, p. 1; published online at http:// www.strategy-business.com/resiliencereport/resilience/rr00021?pg=0. 8 Based on my own assessment over the past two decades of consulting. 9 Where the returns generated are consistently greater than the cost of capital. 10 Giesen, Edward, Riddleberger, Eric, Christner, Richard and Bell, Ragna, ‘Seizing the advantage. When and how to innovate your business model’, IBM Global Business Services Executive Report, IBM Institute for Business Value, Somers, NY, 2009, 20pps. 11 Alpha Research Consortium, Characteristics, Strategies and Trends for 3PL/4PL in Australia, University of Wollongong and Logistics Association of Australia, March 2003. 12 ‘3PLs: Between a Rock and a Hard Place’, a survey conducted by market research firm SimplyDIRECT, in December, 2012, sponsored by the JDA Software Group, Inc. 13 Ibid. 14 15th Annual 3PL Survey conducted by Capgemini and Georgia Tech in 2010; refer http://www.scdigest.com/ASSETS/ON_TARGET/10-10-06-1. PHP?cid=3795&ctype=content 15 Gonzalez, Adrian (2013) ‘4 Important Factors to Consider When Evaluating 3PL ­Partners’, Logistics Viewpoints, 3 February. 16 ‘Third-Party Logistics; New CEO of CEVA Logistics Shares Unique Industry Perspective’, SupplyChainBrain, 6 August 2013. 17 In 2012/13, Annette Clayton, EVP Global Supply Chain at Schneider Electric hired Stuart Whiting, ex Global Head of MNC at DHL Express; and Jason Stevens, ex VP Commercial, DHL US, and GM of Offsat, an Omani-based 3PL in the Middle East moving oil rigs. 18 For a comprehensive treatment of this topic refer to ‘Global Supply Chain Control T ­ owers; achieving end-to-end Supply Chain Visibility’, a White Paper prepared by Capgemini Consulting, 16 pp., May 2011. 19 Titze, Christian and McNeill, William (2013) ‘How to Build a Logistics Control Tower for Supply Chain Visibility’, a White Paper prepared and published by Gartner, 29 pps. 20 Ibid. 21 ‘Walmart boosts logistics with acquisitions’, SupplyChainAnalysis, 16 July 2014. 22 For instance, Schneider Electric aims to reduce their 3PL supply base from approximately 1,100 to 350 over time, using selected global LLPs to take over management responsibility. 23 See de Jonge, Bas S. (2011) ‘From a 4PL to an enhanced logistics supply chain model’, unpublished MSc thesis at TiasNimbas Business School, The Netherlands. 24 Then called Andersen Consulting. 25 See Gattorna, John (1998) ‘Fourth-party logistics: en-route to breakthrough performance in the supply chain’ in Ch. 27 in Gattorna, John (ed.) Strategic Supply Chain Alignment: best practice in supply chain management, Gower Publishing, Aldershot, pp. 425–445. 26 1994 Andersen Consulting Survey of 250 UK companies. The industries surveyed were: consumer, retail, oil, gas and chemical, industrial and utilities.

· 594 ·

Z02_GATT6818_03_SE_END.indd 594

2/24/15 4:01 PM

Endnotes

27 Alpha Research Consortium, Characteristics, Strategies and Trends for 3PL/4PL in Australia, University of Wollongong and Logistics Association of Australia, March 2003, p. 86. 28 For more detailed information on the 4PL® model, see Ch. 27 in Gattorna, John (ed.) (1998) Strategic Supply Chain Alignment, Gower Publishing, Aldershot. 29 Gattorna, John (2010) Dynamic Supply Chains: Delivering Value Through People, 2nd ­edition, FT Prentice Hall, Harlow, p. 346. 30 Petroleum Development Oman (PDO) issued such an RFQ in 2003. 31 Menlo Worldwide is a good example of this. See the article in SupplyChainBrain: ‘Menlo Worldwide Enhances Its 4PL Offerings’, 21 May 2012. 32 Vogel, Jochen (2001) 4PL® Report, March, Lehman Bros, London. 33 EV/EBITDA, i.e., economic value/earnings before interest and tax depreciation and amortization. 34 M-co developed after the deregulation of New Zealand’s power industry. Company ­information can be found at http://www.nzxgroup.com/who-we-are/business-overview since M-co got acquired by NZX Ltd. in April 2009. 35 See short case description in Gattorna, John (2006), pp. 214–218. 36 ‘NHS to save Stg 1bn. With new supply chain arrangements’, 5 September 2006. Refer www.theinformationdaily.com. 37 ‘Working the supply chain to benefit the NHS’, Facilities Management Journal, October 2013. 38 Alpha Research Consortium (2004) ‘Characteristics, Strategies and Trends for 3PL/4PL® in Australia’, Logistics Association of Australia, 30 March. 39 Ogulin, Robert (2008) ‘Informal coordination in networked supply chains’, PhD thesis Macquarie Graduate School of Management, Sydney. 40 Ogulin, Robert, Selen, Willem and Ashayeri, Jalal (2012) ‘Determinants of informal ­coordination in networked supply chains’, Journal of Enterprise Information Management, Vol. 25, Issue 4, pp. 328–348. 41 Petroleum Development Oman has attempted to form a 4PL® by tender for the task of moving exploration equipment; the winning company has encountered early d ­ ifficulties, which are now being addressed. 42 For more information, see Barratt, Mark, Savidge, Matthew and Barratt, Ruth (2006) ‘Sarbanes-Oxley: Is it good for your supply chain?’, Supply Chain Management Review, November, pp. 34–40. 43 Trade & Supply Chain Services Information Sheet, Corporate and Investment Banking, J P Morgan, 5 March 2014. 44 ‘Borderlinx – Bringing the World of Shopping Right to your Doorstep’, Insights ON: DHL Case Studies, Bonn, 2011, pp.78–81. 45 This was the experience with the Thames Water–Accenture Connect 2020 venture, which although successful, was unable to attract other utilities to join and bring with them additional volume that would have driven the experience curve down at an even faster rate than was achieved with just the one major principle. 46 For example: CorProcure in Australia; Transora in the USA. 47 Breene, Tim and Nunes, Paul F. (2004) ‘High-performance business – is bigger always better?’, Outlook, Accenture, No. 3, pp. 19–25. 48 Ibid., p. 25. 49 Levine, Ruth, Pickett, Jessica, Sekhri, Neelam and Yadav, Prashant (2008) ‘Demand ­forecasting for essential medical technologies’, American Journal of Law & ­Medicine, Vol.  34, pp. 269–297. See Section B, ‘Create a Global Health Infomediary’, pp. 294–295. 50 Ellis, Deborah, PhD candidate at Macquarie Graduate School of Management, 2009 – Research topic: ‘Evaluating the supply chains supporting insulin-dependent diabetes patients in developing countries’.

· 595 ·

Z02_GATT6818_03_SE_END.indd 595

2/24/15 4:01 PM

Dynamic Supply Chains

51 Refer to interview of Ajay Mittal by Turloch Mooney in Supply Chain Asia, January/­ February, 2009, pp. 27–29 and Ch. 27 in Dynamic Supply Chain Alignment, ‘China and India: Future Giants of Supply Chain Developments in the Twenty-first Century’, by Paul W. Bradley, Gower Publishing, pp. 371–395.

Chapter 15 1 Taylor, Elliott, ‘Differences in supply chain designs for manufacturing industry vs. a service industry’, Demand Media. Refer: http://smallbusiness.chron.com/differences-supply-chaindesigns-manufacturing-industry-vs-service-industry-14610.html. 2 Ibid. 3 Ibid. 4 Ibid. 5 Linton, Ian, ‘Five differences between service and manufacturing organizations’, Demand Media, Chron.com. 6 Ibid. 7 Ibid. 8 Voudouris, C., Owusu, G., Dorne, R. and Lesaint, D. (2008) Service Chain Management: Technology Innovation for Service Business, Springer, p. 1. 9 Tate, Wendy and Ellram, Lisa M. (2008) ‘Services Supply Chain Management: An Untapped Opportunity’, IndustryWeek, 18 March. Reprinted from the California ­Management Review, Vol. 49, No. 4, 2007, 3pp. 10 Case study: ‘Customer satisfaction; Success at the Co-operative Bank’, customer INSIGHT, March 2011, p. 26. Refer: www.customer-insight.co.uk. 11 ‘Fresh look at NatWest customers results in more accurate targeting and efficient direct marketing’, a case study by Response Group. Refer: http://www.responseone.co.uk/ resources/case_studies/120_natwest. 12 Bruno-Britz, Maria (2007) ‘Banks starting to embrace concept of financial supply chain management’, Bank Systems & Technology, 1 January, p.1. 13 Hughes, Marcus (2010) ‘Banking on the Financial Supply Chain’, FX&MM, May, p. 2. 14 De Haas, Henning and Hansen, Anders Peder (2010) ‘Facilities management in a service supply chain perspective’, in Arlbjorn, J.S. (ed.), Logistics and Supply Chain Management in a Globalised Economy, proceedings of the 22nd Annual NOFOMA Conference, June 10–11, University of Southern Denmark, Kolding, pp. 631–645. 15 Ibid. 16 Ziegler, Marco, Schrader, Ulf and Ebel, Thomas (2011) ‘Supply Chain Yoga’, McKinsey on Supply Chain: Select Publications, January, p.19. 17 ‘Key logistics trends in Life Sciences 2020+: A DHL perspective on how to prepare for future growth’, published by DHL Customer Solutions & Innovation, Bonn, 2013, 27 pp. 18 Partridge, Amy (2011) ‘Foodservice Logistics Brings Value to the Table’, InBound Logistics, December, p. 1. 19 Ibid., p. 2. 20 Odoom, Clement K. (2012) ‘Logistics and supply chain management in the hotel industry: impact on hotel performance in service delivery’, UNLV Theses/Dissertations/Professional Papers/Capstones, paper 1339, p. 28. 21 Akkarangoon, Supalak (2010) ‘Supply chain management practices in the hotel industry: an examination of hotel food supply chains in south west England’, unpublished PhD thesis, University of Exeter, October, 288pp., p. i. 22 ‘Insight on: DHL City Logistics’, DHL White Paper, 2012, p. 52.

· 596 ·

Z02_GATT6818_03_SE_END.indd 596

2/24/15 4:01 PM

Endnotes

23 ‘Tesco chief talks of personalised supply chains’, IGD Supply Chain Analysis, 9 October 2012. 24 ‘Largest retailers slow to adapt to needs of omni-channel shopping environment, study finds’, SD Retail Consulting, Supply Chain Brain.com, 7 June 2013. 25 Bigelli, Urs, Gupta, Sanjay and De Pommes, Carlos (2002) ‘CRM in the Air’, McKinsey Quarterly, No. 3. 26 ‘The Information Company: powering the customer-centric Airline with Loyalty ­Management’, Oracle White Paper, 2008, p. 2. 27 Ambe, Intaher Marcus and Badenhorst-Weiss, Johanna A. (2011) ‘Managing and ­Controlling Public Sector Supply Chains’, Chapter 4 in Li, Pengzhong (ed.), Supply Chain Management, Intech, Shanghai, p. 74. 28 Ibid., p. 78. 29 Ibid., p. 77. 30 Smith, Gary A. (2011) ‘Leveraging private sector practices in the public sector’, CSCMP’s Supply Chain Quarterly, Quarter 3, p. 1. 31 Ibid., pp. 3, 4. 32 Ibid., p. 3. 33 Badasha, Kamalpreet (2012) ‘Public sector unprepared for supply chain problems’, Supply Management Daily, 31 July. 34 Drummond, Matthew (2014) ‘Cultural exchange’, The Australian Financial Review, 27 December 2013–2 January 2014, pp. 16–17. 35 Duncan, Ewan and Ritter, Ron (2014) ‘Next frontiers for lean’, McKinsey Quarterly, ­February, 4pp. 36 Ibid., p. 2. 37 Ibid., p. 4.

Chapter 16 1 A phrase first used by Auret van Heerden, Head of the Fair Labour Association (FLA) in a prominent TED Global address in July 2010. Refer http://qz.com/64560/whos-to-blamefor-see-through-yoga-pants-and-horse-meatballs-the-independent-republic-of-the-supplychain/. 2 McGee, Kenneth, G. (2004) Heads Up: How to anticipate business surprises and seize ­opportunities first, Harvard Business School Press, Boston, MA. 3 Fackler, Martin (2012) ‘Nuclear disaster in Japan was avoidable, critics contend’, New York Times, 9 March. 4 Ibid. 5 Gattorna, John L. (1991) ‘Exocets and Equilibrium’, Strategy Spotlight, the in-house ­journal of Gattorna Strategy Consultants Pty. Ltd., Vol. 1, No. 1, February, pp. 8–12. 6 Adapted from Chopra, Sunil and Sodhi, ManMohan S. (2004) ‘Managing risk to avoid supply-chain breakdown’, MIT Sloan Management Review, Fall, p. 54. 7 Ibid., p. 53. 8 McVeigh, Paul (2011) ‘Single-sourcing risks highlighted after Japan earthquake’, ­Automotive News Europe, 1 July. 9 Johnson, Drew (2011) ‘Toyota to stick with single sourcing’, Car News, 26 April. 10 Bowman, Zach (2011) ‘How GM avoided its own disaster after Japanese quake’, Autoblog​ .com, 13 May. 11 Brennan, Paul (2011) ‘Lessons learned from the Japan Earthquake’, Disaster Recovery Journal, Summer, pp. 22–26.

· 597 ·

Z02_GATT6818_03_SE_END.indd 597

2/24/15 4:01 PM

Dynamic Supply Chains

12 The weakest link – UK PLCs supply chain, Zurich Insurance, July 2012, Executive ­Summary, 15 pp. 13 Lee, Hau L. and Wolfe, Michael (2003) ‘Supply chain security without tears’, Supply Chain Management Review, January/February, pp. 12–20. ­ dvantage, 14 Sheffi, Yossi (2005) The Resilient Enterprise: overcoming vulnerability for competitive a MIT Press, Cambridge, MA. 15 Ibid., p. 255. 16 Hendrick, Kevin B. and Singhal, Vinod, R., (2009) ‘Managing disruptions in contemporary supply chains’, Ch. 22 in John Gattorna (ed.) (2009) Dynamic Supply Chain Alignment, Gower Publishing, Farnham, pp. 311–321. See also Singhal, Vinod and Hendricks, Kevin (2007) ‘Disruptive influences’, CPO Agenda, Summer, pp. 58–63. 17 Hendrick, Kevin B. and Singhal, Vinod, R. (2009) ‘Managing disruptions in ­contemporary supply chains’, p. 313. 18 Ibid., p. 319. 19 Ibid., p. 320. 20 Clark, Nicola (2007) ‘Worst year at Airbus hurts EADS’, International Herald Tribune, 10–11 March, p. 17. 21 Refer Figure  1.3, p.6 in Hendricks, Kevin B., and Singhal, Vinod, R., ‘Supply chain ­disruptions and corporate performance’, Chapter 1 in Supply chain disruptions: theory and practice of managing risk, Springer, London, 2012. 22 See Hopkins, Andrew (2009) Failure to Learn: the BP Texas City refinery disaster, CCH Australia, for the full story. 23 John Browne has referred in detail to this event in his memoirs, Beyond Business, 2010, Weidenfeld & Nicolson, London. 24 Jim Thomas, quoted in Manufacturing Business Technology Report, Reed Business ­Information, 9 September 2007, p. 2. 25 Michelman, Paul (2007) ‘Building a Resilient Supply Chain’, Conversation Starter, Harvard Business Online, 14 August. http://blogs.harvardbusiness.org/cs/2007/08/building_a_resilient_supply_ch.html. This article originally appeared in the October issue of Supply Chain Strategy. 26 Hendricks, Kevin B. and Singhal, Vinod, R. (2009) ‘Managing disruptions in ­contemporary supply chains’, p. 318. 27 White, Andrew (2013) ‘Master data! Master data! My supply chain for master data!’, CSCMP’s Supply Chain Quarterly, Quarter 2, p. 29. 28 Kiron, David, Ferguson, Renee Boucher and Prentice, Pamela Kirk (2013) ‘From Value to Vision: Reimagining the possible with Data Analytics’, MIT Sloan Management Review and SAS Institute, Research Report, Spring, p. 2. 29 Ibid., p. 4. 30 Ibid., p.7. 31 Kiron, David and Shockley, Rebecca (2011) ‘Creating Business Value with Analytics’, MIT Sloan Management Review, Fall, p. 62. 32 Tom Davenport is the President’s Distinguished Professor in Management and ­Information Technology at Babson College, MA, and Co-Founder and Director of the International Institute for Analytics. 33 Supply Chain 50 Summit, April 2013, New York. 34 Powell, James E. (2012) ‘Enterprises failing at big data management’, July. Refer: http:// tdwi.org/articles/2012/07/31/big-data-management-failure.aspx 35 Richard Sharpe, quoted in a blog dated 5 August 2013, SupplyChainBrain. 36 Ibid. 37 Michael Fitzgerald (2013) ‘Is the Chief Digital Officer position the new path to the Chief Executive role?’ Blog MIT Management Review, 1 November.

· 598 ·

Z02_GATT6818_03_SE_END.indd 598

2/24/15 4:01 PM

Endnotes

­ cKinsey Global 38 Brown, Brad, Sikes, Johnson and Willmott, Paul (2013) ‘Bullish on digital: M Survey Results’, August. Refer http://www.mckinsey.com/insights/business_technology/ bullish_on_digital_mckinsey_global_survey_results. 39 Contained in a presentation delivered by Jeffrey Vail at the Quintiq World Tour event, Singapore, 23 June 2014. 40 Ashby, W.R. (1956) An Introduction to Cybernetics, Chapman & Hall, London; and by the same author: (1954) Design for a Brain, 2nd edn, John Wiley, New York, NY. 41 Cohn, Jeffrey M., Khurana, Rakesh and Reeves, Laura (2005) ‘Growing talent as if your business depended on it’, Harvard Business Review, October, pp. 62–70. 42 Cappelli, Peter (2008) ‘Talent on Demand: applying supply chain management to ­people’, Knowledge@Wharton, 20 February, pp. 1–5. 43 Drucker, Peter F. (1974) ‘New templates for today’s organizations’, Harvard Business Review, January–February, pp. 45–51. 44 This was a new organizational format that McKinsey & Company tried out with various clients in the early 1990s, but it has not been widely adopted. 45 Sull, Donald N. (2005) Made in China: What Western Managers Can Learn from Trailblazing Chinese Entrepreneurs, Harvard Business School Press, Boston, MA, p. 107. 46 Ibid. 47 Bellaiche, Jean-Marc, Chassaing, Thierry and Kapadia, Sunil (2013) ‘The Omnichannel Opportunity for retailers’, bcg.perspectives, 18 July, p. 4. 48 Ibid. 49 Ibid., p. 6. 50 Booz Allen Hamilton (2001) ‘Out of Sorts with Outsourcing’, New York, 25 July. 51 Deloitte Consulting (2005) ‘Calling a Change in the Outsourcing Market’, April, p. 2. 52 Ibid., p. 3. 53 Internal paper prepared by Ming Tang, Partner, Asia-Pacific Supply Chain Practice, Accenture, 2003. 54 Alexandrova, Matilda (2012) ‘IT outsourcing partnerships: empirical research on key ­success factors in Bulgarian organizations, Management, Vol.17, pp. 31–50. 55 ‘20 issues on outsourcing and offshoring’, Business Briefing Series, Ernst & Young in conjunction with the Institute of Chartered Accountants Australia, Sydney, 2011, pp.32. 56 Hsieh, Tony (2010) ‘Zappos’s CEO on going to extremes for customers’, Harvard Business Review, July–Aug, pp. 1–5. 57 Lacity, Mary C. and Willcocks, Leslie P. (2013) ‘Outsourcing business processes for i­ nnovation’, MIT Sloan Management Review, Spring, 12pp. 58 Ellis, Simon (2008) ‘The case for ‘profitable proximity’, Supply Chain Quarterly, Council of Supply Chain Management Professionals, Quarter 3, p. 56. 59 New ways of doing things that disrupt or overturn the traditional business methods and practices. For example, steam engine in the age of sail, and the Internet in the age of post office mail. Refer: http://www.businessdictionary.com/definition/disruptive-technology​.html. 60 Presutti, William D. Jr. and Mawhinney, John R. (2007) ‘The supply chain-finance link’, Supply Chain Management Review, September, pp. 32–38. 61 In calendar 2009, the Logistics Magazine Top 25 Enterprise Supply Chains in Australian Listed Companies were assessed using CFROI as the main selection criterion. 62 See also Campbell, Brett and Rodi, Alyson (2009) ‘Tax-aligned supply chains’, Ch. 24 in Gattorna, John (ed.) Dynamic Supply Chain Alignment, op. cit., pp. 337–346. See also Irving, Dan, Kilponen, Gary, Markarian, Raffi and Klitgaard, Mark (2005) ‘A tax-aligned approach to SCM’, Supply Chain Management Review, April, pp. 57–61. 63 Chen, George and Yiu, Enoch (2013) ‘New Shanghai free-trade zone to lead push in the future’, South China Morning Post, 10 July. Refer: http://www.scmp.com/business/ commodities/article/1279090/new-trade-zone-lead-push-futures.

· 599 ·

Z02_GATT6818_03_SE_END.indd 599

2/24/15 4:01 PM

Dynamic Supply Chains

64 ‘Partnering for performance. Part 1: CFOs and the supply chain’, part of the Master CFO Collection, Vol. 5, published by EY, 2013, 40 pp. 65 Miller, Ron (2005) ‘The evolution of knowledge management’, November, EContent, pp. 38–41. 66 Lowell, Bryan L. and Joyce, Claudia (2005) ‘The 21st-century organization’, McKinsey Quarterly, No. 3, pp. 24–33. 67 Mangan, J. and Christopher, M. (2005) ‘Management Development and the supply chain manager of the future’, International Journal of Logistics Management, Vol. 16, No. 2, pp. 178–191. 68 Hult, G.Tomas M., Ketchen, David J. Jr., Cavusgil, S.Tamer and Calantone, Roger J. (2006) ‘Knowledge as a strategic resource in supply chains’, Journal of Operations ­Management, 24, pp. 458–475. 69 Andrews, Kate (2009) ‘The importance of intellectual capital and knowledge in the design and operation of enterprise supply chains’, Ch. 26 in John Gattorna (ed.) Dynamic Supply Chain Alignment, op. cit., pp. 361–370. 70 Holliday, Charles, O. Jr., Schmidheiny, Stephan and Watts, Philip (2002) Walking the Talk: the Business Case for Sustainable Development, Case Study 38, Berrett-Koehler Publishers, San Francisco, CA, p. 22. 71 ‘No writing on the wall? Sustainable Development as a Business Principle in the ­Supply Chain’, a discussion paper by The Nordic Partnership, 2003, p. 2. Refer; http://www​ .peacelink.it/consumo/docs/300.pdf. 72 Conversation with Dr Ian Woods at a University of Wollongong Supply Chain Forum, Sydney, 29 June 2005. AMP Capital Investors writes research papers on issues affecting the socially responsible investments (SRI) industry. Refer www.ampcapital.com.au. 73 Demos, Telis (2005) ‘Managing beyond the bottom line’, Fortune, 3 October, pp. 70–75. 74 Sustainability – Problem or Opportunity? A report by Russell Reynolds Associates and Circ Consulting, Melbourne and Sydney, 2008, 8 pp. 75 Shifting towards sustainability; six insights into successful organizational change for ­sustainability (2006) Australian Research Institute in Education for Sustainability (ARIES), Macquarie University, Commonwealth of Australia, 54 pp. 76 Katherine Teh-White is Managing Director of Futureye, a firm specialising in ­assisting large corporates to achieve the required ‘social license to operate’ in often difficult, ­politically charged situations. 77 Fittipaldi, Santiago (2004) ‘When doing the right thing provides a pay-off’, Global Finance, January, pp. 18–22. 78 Hall, James (2005) ‘Designer Companies’, AFR BOSS magazine, Australian Financial Review, January, p. 40. 79 Ibid., p. 41. 80 Birchall, Jonathan (2005) ‘Wal-Mart sets out stall for a green future’, Financial Times, Wednesday 26 October, p. 17. 81 Holliday, Charles, O. Jr., Schmidheiny, Stephan and Watts, Philip (2002) Walking the Talk: The Business Case for Sustainable Development, Berrett-Koehler Publishers, San ­Francisco, CA., pp. 170–171. 82 Ibid., pp. 118–120. 83 ‘The Nike factory challenge’, Ethical Corporation, News Release, 16 May 2005, p. 1. 84 Gapper, John (2007) ‘No reason to put Mattel on the rack’, Financial Times, 17 September, p. 13. 85 For more detail see ‘Marcopolo’, in Case Studies of Good Corporate Governance P ­ ractices, Global Corporate Governance Forum, International Finance Corporation, World Bank Group, 2006, pp. 50–57. 86 ‘Natura’, in Case Studies of Good Corporate Governance Practices, (2006) p. 58. 87 John, Geraint (2008) ‘Because it’s worth it’, an interview with Barbara Lavernos, CPO Agenda, Spring, p. 39. · 600 ·

Z02_GATT6818_03_SE_END.indd 600

2/24/15 4:01 PM

Endnotes

88 Swan, Jonathan (2012), Sydney Morning Herald, 22 August. Refer: http://www.smh.com. au/business/morphet-ends-stormy-stint-as-underwear-queen-20120822-24m1d.html. 89 Urban, Rebecca (2012), ‘Sue Morphet resigns to be replaced by former Fosters boss John Pollaers’, The Australian, 22 August. Refer: http://www.theaustralian.com.au/business/ companies/sue-morphet-resigns-to-be-replaced-by-former-fosters-boss-john-pollaers/ story-fn91v9q3-1226455431399. 90 Global CSR Study, Cone Echo Communications, 2013, 37 pp. 91 Acker, Olaf, Grone, Florian and Schroder, Germar (2012) ‘The Global ICT 50: the supply-side of digitization’, strategy + business, Booz & Company, Autumn, p. 52. 92 Cooke, James A. (2013) ‘Kimberly-Clark connects its supply chain to the store shelf’, CSCMP’s Supply Chain Quarterly, Q1, pp. 42–44. 93 Friedrich, Roman, LeMerle, Matthew and Peterson, Michael (2012) ‘The next wave of the digital economy’, strategy + business, Booz & Company, Autumn, p.41. 94 ‘The missing link – supply chain and digital maturity’, Capgemini Consulting Report, 2013, p.3. 95 Lewis, Michael (2014) Flash Boys, W.W. Norton & Company, Inc., New York. 96 Refer Chapter 9 in Elms, Deborah K. and Low, Patrick, Global Value Chains in a Changing World, WTO Publication, Lausanne, 2013, pp. 221–244. 97 Refer Clark, Lindsay (2004) ‘Sainsbury writes off GBP260m as supply chain IT trouble hits profit’, Computerweekly.com, 25 October. See also Charette, Robert N. (2005) ‘Why Software Fails’, IEEE Spectrum, 2 September. 98 Refer Strom, David (2001) ‘Where Webvan went wrong’, Web Informant. 99 Serstad, Jim, ‘Automation in China: are we there yet?’, LinkedIn, 31 July 2014. 100 Ibid. 101 Handfield, Robert, Straube, Frank, Pfohl, Hans-Christian and Wieland, Andreas (2013) ‘Trends and strategies in logistics and supply chain management-embracing global ­logistics complexity to drive market advantage, BVL International, 84 pp. 102 DeAngelis, Stephen (2013) ‘Globalization and the supply chain’, supplychain247.com, 19 November, 4 pp. 103 ‘Forging the 21st-Century Supply Chain’, EY Report, 23 January 2013. 104 ‘Outsourcing in the new supply chain environment’, Media Release, Supply Chain Management Forum, Athens Hilton, Athens, 25–26 November 2005. See www.scmforum.org. 105 ‘Global car manufacturers launch shared supply chain solution’, case study in Supply Chain, CILT UK, May 2013, pp. 44, 45. Refer: http://connection.ebscohost.com/c/ articles/87686661/global-car-manufacturers-launch-shared-supply-chain-solution. 106 ‘Supply chains and offshoring’, Ch. 3 in Supply chain perspectives and issues, 2013, wto. org, 2013, 206 pps. Use the following link for Part II of the report: http://www.wto.org/ english/res_e/booksp_e/aid4tradesupplychain13_part2_e.pdf. 107 Chung, Chee Kong (2009) ‘Supply chain configurations and the impact of different ­pricing strategies’, Ch. 13 in Gattorna, John (ed.) Dynamic Supply Chain Alignment, op. cit., pp. 189–205.

Chapter 17 1 Kleiner, Art (2012) Editor-in-Chief, in his editorial, ‘Reconnect the Dots’, strategy + business, Issue 66, Spring, p.1. 2 Lewis, Michael (2004) Moneyball: The Art of Winning an Unfair Game, W.W. Norton & Company, New York. 3 Azinger, Paul and Braund, Ron (2010) Cracking the Code: The Winning Ryder Cup ­Strategy, Looking Glass Books, Inc, Decatur, Georgia. 4 Johansson, Frans (2006) The Medici Effect, Harvard Business School Press, Boston. · 601 ·

Z02_GATT6818_03_SE_END.indd 601

2/24/15 4:01 PM

Dynamic Supply Chains

5 Butner, Karen (2011) ‘Connecting the dots for Smarter Commerce: multi-enterprise ­visibility’, IBM Institute for Business Value, May, 8pp. 6 Ibid., p.1. 7 Senge, Peter, Scharmer, C. Otto, Jaworski, Joseph and Flowers, Betty Sue (2005) ­Presence: Exploring Profound Change in People, Organizations, and Society, Nicholas Brealey ­Publishing, London, p. 7. 8 See De Geus, Arie (1997) The Living Company, Nicholas Brealey Publishing, quoted in Senge, P. et al., Presence, op. cit., p. 7. 9 Ibid. 10 Khanna, Parag, ‘I pledge allegiance to the supply chain’, Perspectives, published by World 50, Summer 2013, following his address to members in Singapore earlier in 2013. 11 Ibid. 12 A phrase first coined by Auret van Heerden, head of the Fair Labour Association (FLA), in a prominent TEDGlobal address in July 2010. 13 Kleindorfer, Paul, and Wind, Yoram (Jerry) (2009) ‘The Network Imperative: Community or Contagion?’ The Network Challenge, Pearson Education, Upper Saddle River, NJ, p. 4. 14 R. Buckminster Fuller, renowned 20th century inventor and visionary. 15 Benjamin, Colin (2013) ‘Tensegrity as a framework for Strategic Thinking’, unpublished paper, Melbourne. 16 Adam Hartung (2010) ‘To Succeed You Must Seriously Disrupt’, Forbes online, 1 March. Refer: www.forbes.com/2010/03/01/disrupt-change-innovation-leadership-managing-­ hartung.html?partner=email. 17 Martin, Roger (2009) The Design of Business, Harvard Business Press, Boston. 18 Ibid., p.8.

· 602 ·

Z02_GATT6818_03_SE_END.indd 602

2/24/15 4:01 PM

Selected bibliography

Adizes, Ichak, How to Solve the Mismanagement Crisis, 1st edn, Dow-Jones-Irwin, 1979; 5th edn, Adizes Institute, Santa Monica, CA, 1985. Adler, G., Fordham, M. and Read, H. (eds), The Collected Works of C.G. Jung Vol. 6: Psychological Types (translated by R.F.C. Hull), Bollingen Series 20, Princeton University Press, Ewing, NJ, 1971. Aker, David A., Spanning Silos; the new CMO Imperative, Harvard Business School Press, Boston, MA, 2008. Ashby, W.R., Design for a Brain, 2nd edn, John Wiley, New York, NY, 1954. Ashby, W.R., An Introduction to Cybernetics, Chapman & Hall, Boston, MA, 1956. Avery, Gayle C., Understanding Leadership: Paradigms and Cases, Sage Publications, London, 2004. Avery, Gayle C., Leadership for Sustainable Futures: achieving success in a competitive world, Edward Elgar, Cheltenham, UK, 2005. Azinger, Paul and Braund, Ron, Cracking the Code: The Winning Ryder Cup Strategy, Looking Glass Books, Inc, Decatur, GA, 2010. Bacon, Terry R. and Pugh, David G., The Behavioral Advantage: What the Smartest, Most Successful Companies Do Differently to Win in the B2B Arena, AMACON, New York, NY, 2004. Bahl, Raghav, Superpower? The Amazing Race between China’s Hare and India’s Tortoise, Penguin Books India, New Delhi, 2010. Barker, Joel A. and Erickson, Scott W., Five Regions of the Future: Preparing Your Business for Tomorrow’s Technology Revolution, Penguin, New York, NY, 2005. Beck, John C. and Wade, Mitchell, Got Game: How The Gamer Generation is Reshaping Business Forever, Harvard Business School Press, Boston, MA, 2004. Belfiore, Michael, The Department of Mad Scientists, Harper Collins Publishers, New York, NY, 2009. Benfari, Robert and Knox, Jean, Understanding Your Management Style: Beyond the Myers-Briggs Type Indicators, D.C. Heath, Lexington, MA, 1991. Berger, Andrew J. and Gattorna, John L., Supply Chain Cybermastery: Building High Performance Supply Chains of the Future, Gower Publishing, Aldershot, 2003. Bossidy, Larry and Charan, Ram, Execution: The Discipline of Getting Things Done, Crown Business, New York, NY, 2002. Bourne, Lynda, Stakeholder Relationship Management: a Maturity Model for Organisational Implementation, Gower Publishing, Farnham, 2009. Brooks, Frederick P. Jr, The Mythical Man-Month: Essays on Software Engineering, AddisonWesley Longman, Boston, MA, 1995. Browne, John, Beyond Business, Weidenfeld & Nicolson, London, 2010. Bryan, Lowell L., and Joyce, Claudia (2005) ‘The 21st-Century Organization’, The McKinsey Quarterly, No. 3, pp. 25–33. Byrne, Margaret, Business Success in the Asian Century, UGM, Sydney, 2013. Charan, Ram, Global Tilt: leading your business through the great economic power shift, Crown Business, New York, NY, 2013.

· 603 ·

Z02_GATT6818_03_SE_END.indd 603

2/24/15 4:01 PM

Dynamic Supply Chains

Christopher, Martin, Logistics and Supply Chain Management: Creating Value-Adding Networks, 3rd edn, FT Prentice Hall, London, 2005. Christopher, Martin and Peck, Helen, Marketing Logistics, 2nd edn, Elsevier ButterworthHeinemann, Oxford, 2004. Chu, Chin-ning, The Asian Mind Game: unlocking the hidden agenda of the Asian business culture – a Westerner’s survival manual, Rawson Associates, New York, NY, 1991. Clarke, John, Working with Monsters: How to Identify and Protect Yourself from the Workplace Psychopath, Random House, Sydney, 2005. Coe, Sebastian, Running My Life, the Autobiography, Hodder & Stoughton, London, 2012. Cohen, Shoshannah and Roussel, Joseph, Strategic Supply Chain Management: The Five Disciplines for Top Performance, McGraw-Hill, New York, NY, 2005. Cokins, Gary, Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap), John Wiley, New York, NY, 2004. Collins, Jim, How the Mighty Fall: And Why Some Companies Never Give In, Harper Collins, Publishers Inc., New York, NY, 2009. Collins, Jim and Hansen, Morten T., Great by Choice, Harper Business, New York, NY, 2011. Conner, Daryl R., Managing at the Speed of Change: How Resilient Managers Succeed and Prosper Where Others Fail, Villard, New York, NY, 1992. Conner, Daryl R., Leading at the Edge of Chaos: How to Create the Nimble Organization, John Wiley, New York, NY, 1998. Cranfield School of Management, Supply Chain Vulnerability, Report on behalf of DTLR, DTI and Home Office, 2002. Davenport, Thomas H., Prusak, Laurence and Wilson, H. James, What’s The Big Idea? Creating and Capitalizing on the Best Management Thinking, Harvard Business School Press, Boston, MA, 2003. De Geus, Arie, The Living Company: Habits for Survival in a Turbulent Business Environment, Harvard Business School Press, Boston, MA, 1997. Elms, Deborah K. and Low, Patrick, (eds), Global Value Chains in a Changing World, WTO Publications, Geneva, 2013. Friedman, Thomas L., The World is Flat: A Brief History of the Globalized World in the 21st Century, Penguin Books, London, 2005. Friedman, Thomas L., Hot, Flat, and Crowded: why the world needs a green revolution – and how we can renew our global future, Allen Lane, New York, NY, 2008. Fritz, Robert, Corporate Tides: The Inescapable Laws of Organizational Structure, Berrett-Koehler Publishers, San Francisco, CA, 1996. Fung, Victor K., Fung, William K. and Wind, Yoram, Competing in a Flat World: Building Enterprises for a Borderless World, Wharton School Publishing, Upper Saddle River, NJ, 2008. Gabel, Jo Ellen and Pilnick, Saul, The Shadow Organization in Logistics: The Real World of Culture Change and Supply Chain Efficiency, Council of Logistics Management, Oak Brook, IL, 2002. Gattorna, J.L. and Walters, D.W., Managing the Supply Chain: a Strategic Perspective, Macmillan Business, London, 1996. Gattorna, John (ed.), Strategic Supply Chain Alignment: Best Practice in Supply Chain Management, Gower Publishing, Aldershot, 1998. Gattorna, John L., Handbook of Supply Chain Management, 5th edn, Gower Publishing, Aldershot, 2003. Gattorna, John, Living Supply Chains: How to mobilize the enterprise around delivering what your customers want, FT Prentice Hall, Harlow, 2006. Gattorna, John, Dynamic Supply Chain Alignment: a New Business Model for Peak Performance in Enterprise Supply Chains Across All Geographies, Gower Publishing, Farnham, 2009.

· 604 ·

Z02_GATT6818_03_SE_END.indd 604

2/24/15 4:01 PM

Se l e c t e d b i b l i o g r a p h y

Gattorna, John, Dynamic Supply Chains: Delivering Value Through People, 2nd edn, FT Prentice Hall Financial Times, Harlow, 2010. Gibbs, Richard and Humphries, Andrew, Strategic Alliances and Marketing Partnerships: gaining competitive advantage through collaboration and partnering, Kogan Page, London, 2009. Gilding, Paul, The Great Disruption: How the Climate Crisis Will Transform the Global Economy, Bloomsbury, New York, NY, 2011. Goldratt, Eliyahu M., Theory of Constraints: and How it Should be Implemented, North River Press, Great Barrington, MA, 1990. Goold, Michael and Campbell, Andrew, Designing Effective Organizations: How to Create Structured Networks, Jossey-Bass, San Francisco, CA, 2002. Handy, Charles, The Elephant and The Flea: Reflections of a Reluctant Capitalist, Harvard Business School Press, Boston, MA, 2001. Herzlinger, Regina, E., Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America’s Largest Service Industry, Perseus Books, Cambridge, MA, 1997. Heskett, James, The Culture Cycle, FT Press, Upper Saddle River, NJ, 2012. Hjort, Klas, On Aligning Returns Management with the E-commerce Strategy to Increase Effectiveness, Department of Technology Management and Economics, Chalmers University of Technology, Gothenburg, 2013. Hofstede, Geert, Cultures Consequences: International Differences in Work-Related Values (Cross Cultural Research and Methodology), Sage Publications, Newbury Park, CA, 1980. Hofstede, Geert, Cultures Consequences: Comparing Values, Behaviors, Institutions, and Organizations Across Nations, 2nd edn, Sage Publications, Newbury Park, CA, 2001. Hofstede, Geert and Hofstede, Gert Jan, Cultures and Organizations: Software of the Mind, 2nd edn, McGraw-Hill, New York, NY, 2005. Hofstede, Geert and Associates, Masculinity and Femininity: The Taboo Dimensions of National Cultures, Sage Publications, Newbury Park, CA, 1998. Holliday, Charles O. Jr, Schmidheiny, Stephan and Watts, Philip, Walking the Talk: The Business Case for Sustainable Development, Berrett-Koehler Publishers, San Francisco, CA, 2002. Honold, Linda and Silverman, Robert J., Organizational DNA: Diagnosing Your Organization for Increased Effectiveness, Davies-Black Publishing, Palo Alto, CA, 2002. Horne, Alistair, The Age of Napoleon, Modern Library, New York, NY, 2004. Hopkins, Andrew, Failure to Learn: the BP Texas City Refinery disaster, CCH, Australia, 2009. Hubbard, Glenn and Kane, Tim, Balance; the Economics of Great Powers from Ancient Rome to Modern America, Simon & Schuster, New York, NY, 2013. Ibarra, Hermina, Working Identity: Unconventional Strategies for Reinventing Your Career, Harvard Business School Press, Boston, MA, 2003. Itami, Hiroyuki and Roehl, Thomas W., Mobilizing Invisible Assets, Harvard University Press, Cambridge, MA, 1987. Johansson, Frans, The Medici Effect, Harvard Business Review Press, Boston, 2006. Jung, C.G., Memories, Dreams, Reflections, Fontana Paperbacks, London, 1983. Kaplan, Robert D., Monsoon, Random House, New York, NY, 2010. Kaplan, R.S. and Norton, D.P., The Balanced Scorecard, Harvard Business School Press, Boston, MA, 1996. Kaplan, Robert S. and Norton, David P., Alignment: using the Balanced Scorecard to create Corporate Synergies, Harvard Business School Press, Boston MA, 2006. Kawasaki, Guy, Rules for Revolutionaries, Harper Business, New York, NY, 1999. Khadem, Riaz and Khadem, Linda J., Total Alignment: Integrating Vision, Strategy, and Execution for Organizational Success, Infotrac, Atlanta, GA, 2007. Kim, W. Chan and Mauborgne, Renee, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, Harvard Business School Press, Boston, MA, 2005.

· 605 ·

Z02_GATT6818_03_SE_END.indd 605

2/24/15 4:01 PM

Dynamic Supply Chains

Kleindorfer, Paul R, Wind, Yoram (Jerry) and Gunther, Robert E., The Network Challenge, Prentice Hall Publishing, Upper Saddle River, NJ, 2009. Kotter, John P., Accelerate, Harvard Business Review Press, Boston, MA, 2014. Kræmmer, Michael, and Henriette Divert, Change and Effect; Five Principles for Implementing Real Organizational Change, Implement Press, Hørsholm, 2009. Labovitz, George and Rosansky, Victor, The Power of Alignment: How Great Companies Stay Centered and Accomplish Extraordinary Things, John Wiley, New York, NY, 1997. Lencioni, Patrick, The Five Temptations of a CEO: a Leadership Fable, Jossey-Bass, San Francisco, CA, 1998. Lewis, Michael, Moneyball: The Art of Winning an Unfair Game, W.W. Norton & Company, New York, NY, 2004. Lewis, Michael, The Big Short: Inside the Doomsday Machine, Allen Lane, London, 2010. Lewis, Michael, Boomerang: The Meltdown Tour, Allen Lane, London, 2011. Lewis, Richard D., Finland, Cultural Lone Wolf, Intercultural Press, Boston, MA, 2005. Littauer, Florence, Personality PLUS, 4th edn, Revell, Grand Rapids, MI, 2007. Low, Jonathan and Kalafut, Pam Cohen, Invisible Advantage: How Intangibles Are Driving Business Performance, Perseus Publishing, Cambridge, MA, 2002. Lynn, Barry C., End of the Line: the rise and coming fall of the global corporation, Doubleday, New York, NY, 2005. MacFarlane, Hugh, The Leaky Funnel: Earn More Customers by Aligning Sales and Marketing to the Way Businesses Buy, Bookman Media, Melbourne, 2003. Management Today Series, The Power of Culture: Driving Today’s Organisation, Australian Institute of Management, McGraw-Hill, Sydney, 2004. Mant, Alistair, Intelligent Leadership, Allen & Unwin, Sydney, 1997. Marsh, Nick, McAllum, Mike and Purcell, Dominique, Strategic Foresight: The Power of Standing in the Future, Crown Content, Melbourne, 2002. McGee, Kenneth, G., Heads Up: How to Anticipate Business Surprises and Seize Opportunities First, Harvard Business School Press, Boston, MA, 2004. McQueen, Michael, Winning the Battle for Relevance, The Nexgen Group, Sydney, 2013. Messner, Reinhold, Moving Mountains: Lessons on Life and Leadership, Executive Excellence Publishing, Provo, UT, 2001. Morrell, Margot and Capparell, Stephanie, Shackleton’s Way: Leadership Lessons From The Great Antarctic Explorer, Nicholas Brealey, London, 2001. Nadler, David A. and Tushman, Michael L., Competing by Design: The Power of Organizational Architecture, Oxford University Press, New York, NY, 1997. Neilson, Gary L. and Pasternack, Bruce, A., Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance, Crown Business, New York, NY, 2005. Ouspensky, P.D., The Psychology of Man’s Possible Evolution, Vintage Books, New York, NY, 1974. Pandya, Mukul and Shell, Robbie, Lasting Leadership: What you can learn from the Top 25 Business People of Our Times, Wharton Publishing and Pearson Education, Upper Saddle River, NJ, 2005. Park, Albert, Nayyar, Gaurav and Low, Patrick, Supply Chain Perspectives and Issues: a Literature Review, WTO Publications, Geneva, 2013. Penrose, Edith, The Theory of the Growth of the Firm, 3rd edn, Oxford University Press, Oxford, 1995. Pitelis, Christos (ed.), The Growth of the Firm: The Legacy of Edith Penrose, Oxford University Press, Oxford, 2002. Porter, Michael E., The Competitive Advantage of Nations, The Free Press, New York, NY, 1990.

· 606 ·

Z02_GATT6818_03_SE_END.indd 606

2/24/15 4:01 PM

Se l e c t e d b i b l i o g r a p h y

Quelch, John A. and Jocz, Katherine E., All Business Is Local, Portfolio/Penguin, New York, NY, 2012. Ramo, Joshua Cooper, The Age of the Unthinkable, Little, Brown and Company, New York, NY, 2009. Robbins, Stephen P. and Judge, Timothy A., Organizational Behavior, 13th edn., Pearson: Prentice Hall, Upper Saddle River, NJ, 2009. Roberts, John, The Modern Firm: Organizational Design for Performance and Growth, Oxford University Press, New York, NY, 2004. Rudzki, Robert A., Smock, Douglas A., Katzorke, Michael and Stewart, Shelley, Jr, Straight to the Bottom Line: An Executive Roadmap to World Class Supply Management, J. Ross Publishing, Fort Lauderdale, FL, 2006. Rummler, Geary A. and Brache, Alan P., Improving Performance: How to Manage the White Space on the Organization Chart, 2nd edn, Jossey-Bass Publishers, San Francisco, CA, 1995. Samuels, Martin, Command or Control: Command, Training and Tactics in the British and German Armies, 1888–1918, Frank Cass, London, 1995. Sehgal, Vivek, Supply Chain as Strategic Asset, John Wiley & Sons, Inc., Hoboken, NJ, 2011. Semler, Ricardo, The Seven-day Weekend: a Better Way to Work in the 21st Century, Arrow Books/Random House, London, 2003. Senge, Peter, Scharmer, C. Otto, Jaworski, Joseph and Flowers, Betty Sue, Presence: Exploring Profound Change in People, Organizations, and Society, Nicholas Brealey, London, 2005. Sheffi, Yossi, The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, MIT Press, Cambridge, MA, 2005. Sull, Donald N., Revival of the Fittest: Why Good Companies Go Bad and How Great Managers Remake Them, Harvard Business School Press, Boston, MA, 2003. Sull, Donald N., Made in China: What Western Managers Can Learn From Trailblazing Chinese Entrepreneurs, Harvard Business School Press, Boston, MA, 2005. Sveiby, Karl Erik, The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets, Berrett-Koehler Publishers, San Francisco, CA, 1997. Thomas, David C., and Inkson, Kerr, Cultural Intelligence; Living and Working Globally, 2nd edn, Berrett-Koehler Publishers, Inc., San Francisco, CA, 2009. Towill, Denis and Christopher, Martin, International Journal of Logistics: Research Applications, Vol. 5, No. 3, 2002, pp. 233–309; www.tandf.co.uk/journals. Ugarte, Luxio, Sinfonia o jazz? Koldo Saratxaga y el Modelo Irizar, Granica, Barcelona, 2004. Viguerie, Patrick, Smit, Sven, and Baghai, Mehrdad, The Granularity of Growth; making choices that drive enduring company performance, Marshall Cavendish Business, and Cyan Communications, London, 2007. Williamson, Oliver E. and Winter, Sidney G. (eds), The Nature of The Firm: Origins, Evolution, and Development, Oxford University Press, New York, NY, 1993. Womack, James P., Jones, Daniel T., and Roos, Daniel, The Machine that Changed the World: Based on the MIT 5-million Dollar Study on the Future of the Automobile, Rawsons Associates, New York, NY, 1990.

· 607 ·

Z02_GATT6818_03_SE_END.indd 607

2/24/15 4:01 PM

A word about the author Dr John Gattorna John Gattorna has worked in and round supply chains for almost his entire working life, a period which largely coincides with the life-cycle of this emerging new field of management science. Whilst John has spent short periods in the academic world, researching and teaching, he’s done his best work inside companies, observing and extending the best-of-the-best practices. From these observations he has been able to formulate and test key concepts and frameworks that have materially aided our understanding of the underlying mechanisms in play in contemporary business. This book is the culmination of his life’s work. John welcomes comments and feedback, and can be contacted in the following ways: Email: [email protected] Website: www.johngattorna.com Twitter: @johngattorna

· 608 ·

Z02_GATT6818_03_SE_END.indd 608

2/24/15 4:01 PM

Index

agile supply chains 48, 60, 61, 62, 63, 64, 66, 271–304 buying behaviours 273–5 capabilities required by 283–300 and culture 123 differentiated configurations 451 and fully flexible supply chains 345, 350 hybrid 404, 405, 407, 410–11, 414–15, 416–17, 418–22, 424, 425, 428–9 leadership style 158, 297 and the ODA loop 271, 277–8 and organization design 165 quickness and cost-effectiveness 275–7 and rapid manufacturing (RM) 300–301 subcultures 123–4, 271, 284, 293–300 supply-side 387, 392–3, 389, 398–9 value propositions and strategies 280–83 air transport 502 Ashby’s Law of Requisite Variety 526–7 banking/financial services 489–92 behavioural segments 26, 45–6 campaign supply chains 309–11 collaborative supply chains 209 and culture 125, 126–7 lean supply chains 244–6 and organization design 172–4 researching and identifying 76–80 suppliers 377–81 see also buying behaviours behavioural systems 26–9 ‘best-of-both worlds’ strategy 35, 36 big data analytics 517, 522–5 bilateral import/export trade flows 517, 550, 551 brands and organization design 171–2 BRIC countries 279–80 business event supply chains 341–3, 352 capabilities 359, 367 culture 367–72 customers 346–7, 349

strategy recipe for 354–6 value proposition 353 business process innovation 257 buying behaviours 51, 53–9, 95 agile supply chains 273–5 aligned supply chain value propositions 65–7 campaign supply chains 309–13 collaborative 195, 196–200, 201 lean supply chains 237–9 service sector supply chains 488 and strategy 88–93 see also behavioural segments campaign supply chains 48, 60, 62, 64, 66, 305–38 buying behaviour 309–13 capabilities required by 326–35 construction logistics consolidation centres (CLCCs) 316–19 and culture 123–4 distribution centres and logistics centres 314–16 engineered-to-order environment (ETO) 313–14 engineering, procurement and construction (EPC) 306, 307–8, 321 hybrid 404, 405, 411, 415, 422, 423–4, 425 leadership style 158 organization design 165, 328–30 outsourcing to specialists 321–2 strategy recipe for 322–6 supply-side 387, 393–4, 389, 399 sustainability 335–6 and value propositions 86, 87–8 WMS systems 320–1 Canary Syndrome 125 capability 99–138 eight capability areas 103–4 agile supply chains 283–300 campaign supply chains 326–4 collaborative supply chains 205–25

· 609 ·

Z03_GATT0408_02_SE_IDX.indd 609

2/24/15 4:02 PM

INDEX

capability (continued) fully flexible supply chains 353, 359–72 lean supply chains 244–57 framework 25, 30, 31 outsourcing business models 437 supply-side supply chains 386–95 capacity considerations 91 agile supply chains 282, 283 collaborative supply chains 202, 203 capital construction see campaign supply chains captains of disruption 142–3 Caterpillar 105–6, 130–1 CFROI (cash flow return on investment) 11, 33, 537 channels of distribution 90 agile supply chains 281, 282 collaborative supply chains 201–3 lean supply chains 241, 242 climate and culture 109, 118–19, 135 climate change 15, 376, 541 Coach leadership style 31, 32, 147, 148, 151, 225 collaboration with competitors 556 collaborative buying behaviour 58 collaborative individualism 287, 352–3, 370 collaborative supply chains 48, 60, 61, 62, 64, 66, 195–234 and agile supply chains 287–8, 290 capabilities 204–25 continuum 225 differentiated configurations 451 future of 549 hybrid 404, 405, 406–8, 411–16, 418, 423, 424–5 and leadership style 157 and lean supply chains 236 organization design 165, 186–8 requisite collaboration 199–200, 549 strategy 201–4 real or artificial ‘collaboration’ 225–33 subcultures 123–4, 206, 212–25 supply-side 387, 388–9, 389 value propositions 86, 87, 96 Company Baron leadership style 30–1, 32, 147, 148–50 competitors beating decision cycles of 96–8 collaboration with 556 complexity in supply chains 9–11, 53 learning to manage 517, 525–7 reducing 41–3, 65 configure-to-order (CTO) 49 construction logistics consolidation centres (CLCCs) 316–19

continuous improvement 536–7 continuous replenishment see collaborative supply chains control tower technology 450–2, 453 corporate social responsibility (CSR) 233, 400–401, 515, 543–6 cost-cutting 5, 8, 10–11 crisis issues 511, 512–15, 518–36 CSI (customer satisfaction index) 80, 81 cultural capability see capability culture mapping instrument 6 customers customer segmentation 41, 42, 43–6, 49, 51, 59–60, 95 customer service logistics 37–8 customer-driven organizations 168–9 and the dynamic alignment model 33 and fully flexible supply chains 346–52 institutional segmentation 68–76 matching value propositions to 86–8 optimal pathways to 82–3 watching 19–20 see also buying behaviours Dabbawalas 248-9 data mining 77 decision support systems (DSS) 93 demand chain strategy 51 denial, mentality of 159 digital disruption 523 digitization 517, 546–9 distribution centres (DCs) 314–16, 553–4 dynamic alignment 6, 13, 21, 23–6, 40, 560–2, 569–70 collaborative supply chains 233 and CSR 544–5 and cultural capability 24–5, 102–3, 106–10, 114–18, 128 and customers 41, 42, 55 and flexibility 65 hybrid supply chains 405–6, 431 and leadership 147, 154 lean supply chains 258, 264, 268 and organization design 164, 190 service sector supply chains 481 supply chain alignment 55–6, 67–82 supply-side supply chains 377, 397 Zara 67 dynamic alignment model 6–7, 25–6, 561, 561–2, 565 dynamic flexibility 341–6 framework 29–31, 33–8 and organization design 164 dynamic buying behaviour 58

· 610 ·

Z03_GATT0408_02_SE_IDX.indd 610

2/24/15 4:02 PM

INDEX

effective alignment 7 efficient supply chains 48 emergency response/humanitarian supply chains 339–40, 342–4 capabilities 359–72 changing demands 350–2 collaborative individualism 352–3 customers 348–52 global health 345–6 strategy recipe for 345, 357–8 value proposition 353–4 enterprise supply chains financial links in 517, 537–8 entrepreneurial culture 31, 109, 110, 111, 112, 113 fully flexible supply chains 367, 369–71 ERP (enterprise resource planning) 22, 93, 306–7, 321, 330–1, 522, 525–6 evolutionary change programmes 125, 126 evolutionary strategy 30 Exocets 512–15 external awareness of the market 6, 7 external subcultures see behavioural segments facilities management 492 fast-moving consumer goods (FMCG) 50 financial considerations 92 agile supply chains 282, 283 lean supply chains 242, 244 flying blind 7 FMCG services 493–6 food service 499–500 Fourth Party Logistics Providers (4LP) 444, 454–63 Friedman, Thomas 14–15 fully flexible supply chains 48, 61, 63, 64, 66, 339–74 and culture 123 customers 346–52 differentiated configurations 451 dynamic flexibility 341–46 and future crisis issues 520–21 hybrid 404, 405, 411–12, 415, 417–18, 422, 424–5 and leadership 142–3, 158 leadership style 142–3, 158, 371–2 organization design 183–6, 188, 360, 361–3 strategy recipe for 354–8 subcultures 123–4, 360, 367–2 supply-side 386, 387, 395–6, 400 value propositions 86, 88, 353–4 see also business event supply chains; emergency response/humanitarian supply chains

GenFlux leaders 143 global financial crisis 3–5, 53, 363, 375, 441 global health supply chains 345–6 globalization 554–5, 560–1 Goodman Fielder 71, 75 group cultures 31, 109, 110, 111, 112, 113 and collaborative supply chains 216–25 and failed leadership 143–4 Haiti earthquake 343–4 healthcare industry 71, 74, 79–80, 496–9 heavy industry and agile supply chains 278, 279 hierarchical culture 31, 109, 111, 112, 113 lean supply chains 246 higher education 504–8 humanitarian supply chains see emergency response/humanitarian supply chains Humpty Dumpty effect 441 hybrid supply chains 189, 403–30 agile 404, 405, 407, 410–11, 414–15, 416–17, 418–22, 424, 425, 428–9 campaign 404, 405, 411, 415, 422, 423–4, 425 collaborative 404, 405, 406–8, 412–16, 418, 423, 424–5 fully flexible 404, 405, 411–12, 415, 417–18, 422, 424–5 lean 404, 405, 407, 409–10, 412–13, 415–22, 423, 425, 428–9 impact/urgency matrix 514 Inditex see Zara (Inditex) Infomediary 477–83 innovation and agile supply chains 278–80 innovation emphasis 89 agile supply chains 281, 282 collaborative supply chains 201, 202 lean supply chains 241, 242 institutional segmentation 68–76 Joint Services Companies (JSCs) 444, 464, 465–74 knowledge funnel 566, 567 knowledge management 517, 539–40 lawyers 503–4 Lead Box concept 477, 480–1 Lead Logistics Providers (LLP) 443, 452–4 leadership 139–61 authenticity 140–1 captains of disruption 142–3 creating leaders 146–7

· 611 ·

Z03_GATT0408_02_SE_IDX.indd 611

2/24/15 4:02 PM

INDEX

leadership (continued) creating a winning mindset 141–2 failed 143–6 leaders and managers 152–7 vision and values 159–60 leadership style 25, 30–1, 32, 139–40, 147–52 agile supply chains 158, 297 campaign supply chains 158, 335 collaborative supply chains 157, 222, 224 fully flexible supply chains 142–3, 158, 371–3 lean supply chains 157–8, 256–7 supply-side supply chains 390, 392, 394, 396 lean supply chains 60, 61, 62, 64, 66, 225–70 and agile supply chains 287–8, 290 buying behaviour 237–9 and collaborative supply chains 236 ‘dark side’ of 268–9 differentiated configurations 451 EDLP (everyday low prices) u–9 hybrid 404, 405, 407, 409-410, 412-14, 415-22, 423, 425, 428-9 leadership style 157–8, 256–7 network optimization models (NOM) 261–7 organization design 165, 245, 246–9 origins of 236–7 and services 509 strategies 240–44 subcultures 123–4, 245, 254–7 supply-side 386, 390–401, 389, 398 value proposition for 86, 87, 239–40 Lee, Hau model of supply chains 48–9, 49–50, 68, 158–9 Li & Fung 156, 180–2, 186, 288, 292 life sciences industry 496–8 logistics 15–16, 17, 18, 21, 35 campaign supply chains 307–9, 314–16 clusters 189 reverse 396–402 make-to-order strategies (MOT) 42 manufacturing re-shoring of 556–8 see also product/service spectrum marketing emphasis 90 agile supply chains 281, 282 collaborative supply chains 201, 202 marketplace logic framework 25, 29 Motorola 128–9 multiple supply chains 46–53 alignment 67–82, 157–9, 258 and buying behaviour 53–9

reverse alignment 382–6 Third Party Logistics Providers (3LPs) 450 national/country cultures 119–23 network optimization models (NOM) 82–3, 93 agile supply chains 292–3 lean supply chains 261–7 network services 508–9 nuances in customer segmentation 59–60 oil price impact 516, 517, 552 Oman Petroleum Development 459–61 one-size-fits-all 43–4, 57, 403 OODA loop 85, 96–8, 476 and agile supply chains 271, 277–8 operationalizing supply chains 16–18 organization design 21–2, 42–3, 163–92 adaptive organizations 168 Aera ‘daisy’ structure 175–6 agile supply chains 165, 284, 285–8 atomization of organizations 166–8 best-of-the-best supply chain 180–6 and campaign supply chains 165 campaign supply chains 165, 328–30 clusters 163, 189, 190–1, 529 collaborative supply chains 165, 186–8, 206, 207–9 cross-functional teams 178–9 and culture 131–2, 165 customer-driven organizations 168–9 and demand chain strategy 52 extreme 177 fully flexible supply chains 183–6, 188, 360, 361–3 future 527–31 industry verticals 172–4 lean supply chains 165, 245, 246–9 self-managed teams 169–70 supply-side supply chains 375, 388, 391, 392, 394, 395 organizational culture 99–138 and the built environment 134–6 changing 133–4 ‘dark side’ of 21, 110, 113 defining culture 105–6 and dynamic alignment 24–5, 102–3, 106–10, 114–18 and leadership style 156–7 national/country cultures 119–23 see also subcultures original equipment manufacturer (OEM) 9 outsourcing business models 435–84 design principles for new 475–6 future practices 515, 516, 531–36

· 612 ·

Z03_GATT0408_02_SE_IDX.indd 612

2/24/15 4:02 PM

INDEX

hierarchy of 442–74 industry clusters 437 Infomediary 477–83 performance/capability continuum 439, 440 reasons for new organizational formats 438–40 P-A-D-I coding 27–9, 38, 44 campaign supply chains 310 collaborative individualism 352 collaborative supply chains 214 and culture 114, 123–4 fully flexible supply chains 367 and leadership styles 147–52, 153, 156, 157 P-A-E-I coding 25, 26, 27 pathfinder strategy 30 people factor in the supply chain 11–15, 22 performance and culture 106–10, 130–2 iceberg 107, 159 pricing regimes 90, 557 Prime Asset Providers (PAPs) 442, 443, 445 prioritization matrix 95 product design/life cycles 517, 538–9 product/service spectrum 486–7 supply chain design 487–8 project accumulation 58 protective strategy 30 public sector supply chains 502–3 quick-change supply chains 53 rapid manufacturing (RM) 300–301 rational culture 31 relationship intensity 92 agile supply chains 282, 283 lean supply chains 242, 243 request-for-quotation (RFQ) process 446–9 requisite automation 517, 552–4 resilience and fully flexible supply chains 373 resource allocation priorities 92 agile supply chains 282, 283 lean supply chains 243 responsive supply chains 48 retailing 501–502, 517, 531 returns management (RM) 397–400 reverse alignment 382–6 reverse logistics 396–402 revolutionary change programmes 125–6 risk-hedging supply chains 48

Scholastic supply chains 71, 72 Scrum 176 service emphasis 91 agile supply chains 281, 282 collaborative supply chains 202, 203 lean supply chains 241, 242 service sector supply chains 485–510 examples of 489–506 future of 515, 516, 549–50 and lean supply chains 509 product/service spectrum 486–7 supply chain design 487–8 silo busting 166 social media 136 strategic risk profile 92 agile supply chains 282, 283 lean supply chains 242, 244 strategies 20–1, 85–98 agile supply chains 280–83 aligning procurement to business strategy 376 campaign supply chains 322–6 collaborative supply chains 201–4, 225–33 strategic partnering 228–33 and dynamic alignment 24–5 fully flexible supply chains 354–8 ideal versus actual 93, 95 lean supply chains 240–4 operational 30 turning into operational reality 93–4 value propositions 86–8, 96 strategy logic framework 25, 30 subcultures 26, 99, 104, 109–10 agile supply chains 123–4, 271, 284, 293–300 campaign supply chains 123–4, 327, 334–5 collaborative supply chains 123–4, 206, 212–25 continuous improvement 536–7 fully flexible supply chains 123–4, 360, 367–72 Joint Services Companies (JSCs) 474 lean supply chains 123–4, 245, 254–7 and organization design 165 supply chain blindness 9–10 supply chain management 18, 21 supply chains building responsive 35–8 complexity in 9–11 defining 8–9 design pyramid 94 people in 11–15 see also multiple supply chains

· 613 ·

Z03_GATT0408_02_SE_IDX.indd 613

2/24/15 4:02 PM

INDEX

supply-side supply chains 375–402 capability areas 386–95 returns management (RM) 397–400 reverse alignment 382–6 reverse logistics 396–402 supplier segmentation 377–81 sustainability 515, 516, 540–43 campaign supply chains 335–6 and collaborative supply chains 233 supply-side supply chains 400–401 systems/IT 92, 104 agile supply chains 283, 284, 290–3 campaign supply chains 313, 325, 327, 3230–33 collaborative supply chains 206, 210–12 fully flexible supply chains 365 lean supply chains 243, 245, 252–4 supply-side supply chains 388, 391, 392, 395 talent-tapping 517, 527–8 Third Party Logistics Providers (3LPs) 443, 445–52, 464, 466, 473, third-party providers (3PLs) 482 top management team (TMT) dominant coalitions 154, 155 top-down behavioural segments 76–7 Traditionalist leadership style 31, 32, 147, 149, 150

training and development agile supply chains 297 campaign supply chains 335 collaborative supply chains 222–4 fully flexible supply chains 369–71 lean supply chains 255–6, 257 supply-side supply chains 390, 391, 393, 394 transactional buying behaviour 58 triple-A supply chains 68, 158–9 Unilever 297–300 United States debt crisis 3–4 value propositions 86–8, 96, 201 agile supply chains 280–83 fully flexible supply chains 353–4 lean supply chains 239–40 Third Party Logistics Providers (3LP) 446 Virtual Network Consortia (VNC) 444 Visionary leadership style 30, 32, 147, 149, 150–1, 362–72 whole-of-enterprise mindset 555 WMS systems 320–1 Zara (Inditex) 22, 57, 240, 421–2, 532 agile supply chain 287, 288, 290–2 dynamic alignment 67, 431 hybrid supply chain 426–31 organization design 170–1, 188

· 614 ·

Z03_GATT0408_02_SE_IDX.indd 614

2/24/15 4:02 PM

Z03_GATT0408_02_SE_IDX.indd 615

2/24/15 4:02 PM

Z03_GATT0408_02_SE_IDX.indd 616

2/24/15 4:02 PM