By Mahesh Veerina
This year is undoubtedly a challenging one for CSCOs. Never again will anyone question the importance of supply chain management. Fortunately, there are some promising advancements in supply chain technology, such as visibility platforms, that make it possible to create/maintain a competitive edge, improve relationships with your partners, and understand what’s happening across all tiers of your supply chain.
I had the opportunity to speak with Professor Hau Lee, a professor at the Stanford University Graduate School of Business, Co-Director of the Value Chain Initiative, and a member of our Cloudleaf Advisory Board, about what supply chain executives should be thinking about during this challenging time of managing supply chain risk and disruption. Lee has identified some key factors to keep in mind as you navigate the “new normal” with your company, your suppliers, and your customers.
Your Supply Chain Can Be Used as a Competitive Weapon
According to Professor Lee, supply chain management used to be thought of as a “back-office” function. By back-office, he meant that you’re making sure your costs are down, your inventories are down, you have good customer service, and you deliver products quickly. This is really a defensive approach, which doesn’t work well in today’s environment.
If you look at companies with rock-star logistics such as Zara, 7-Eleven Japan, UPS, and Amazon, those companies have recognized that supply chain management is much more than a back-office function—it’s something they have to master in order to stay competitive. They are able to leverage their supply chain management practices to enter new markets, accelerate new product introductions, create new service models, and discover new ways of engaging with customers. Lee pointed out that these companies have realized that by taking an offensive approach instead of a defensive one, they can use their supply chain as an instrument to gain a competitive edge, to differentiate themselves in a crowded market, and to provide premier customer service. That is the value-creation potential of successful supply chain management.
Focus on Rebuilding Supplier Partnerships
When global companies come out of the pandemic crisis, they will effectively be in recovery/restoration mode. Supply chain visibility will become more important than ever. Currently, we’re in the mode of demand disruption. Companies without true supply chain visibility are scrambling to find alternative suppliers, determine the status of their existing manufacturers, and get information about incoming shipments.
Going forward, supply chain visibility will be crucial, according to Professor Lee, and that should be the number one priority for CSCOs. Rebuilding supply chain partnerships will be an important objective. Because of the current COVID-19 pandemic, there are already an abundance of broken partnerships. With companies in survival mode, they may not be able to pay their suppliers, or they might ask for payment extensions or cancel their orders altogether.
The lack of visibility into what a partner/supply is doing breeds mistrust. Is my supplier sticking a knife in my back? Is my supplier treating my competitor better than they’re treating me? Professor Lee cautioned that this lack of supply chain visibility breeds mistrust. Going forward, companies will need to work closely with their suppliers to rebuild trust and long-term collaborative relationships with them.
Supply Chain KPIs: Set Metrics that Incentivize the Right Behavior
Challenges such as COVID-19 and tariff uncertainties highlight the need for visibility into the health and status of your partners and supply chain network. Professor Lee emphasized, “It’s not enough for you to know that your immediate supplier has enough capacity; you must also know the status of your second- and third-tier partners as well.” Look what happened in China as the virus made its way through the country – China completely shut down. Many companies thought they were ok because their manufacturer was in Vietnam, not China. What they didn’t have visibility into was the fact that the manufacturer sourced their materials from China. Without the materials, Vietnamese manufacturers and others in Southeast Asia remained idle.
In terms of metrics, you need to measure what kind of visibility your supplier has. If your supplier has good visibility into the third- and fourth-tier suppliers, they know what level of inventory they have, how they are performing, and what the lead time is. This is why, according to Lee, it’s critical that you look beyond organizational boundaries when developing metrics. End-to-end visibility in your supply chain is essential. With performance metrics, the key is to look beyond your organizational boundaries and understand the importance of setting the right performance metrics that incentivize the right behavior.
Take a Staged Approach to Digitizing Your Supply Chain
Digitizing your entire supply chain is a major step forward, so it’s important to take a staged approach. Gartner and Cloudleaf collaborated to develop a roadmap that details the five stages of supply chain visibility maturity. The initial phase involves identifying key pieces of data that you need, collecting that information in a timely fashion, and understanding how to interpret that data.
The five stages of supply chain maturity, as defined by Gartner at the top, also have specific visibility maturity impacts – notice how the company gains scope and intelligence at every stage.
Lee stated that it’s important to have both sensible and smart visibility. You need to learn how to interpret visibility data in a smart way first, and then you can expand that by extending geographies or incorporating soft attribute data in addition to measuring hard attributes.
Visibility is crucial in the supply chain. Professor Lee coined the terms “sensible sense” and “responsive response,” which are expansions of the concept of sense and response. Sense and response are the foundations of agility in a supply chain; you need to understand exactly what’s going on in your supply chain, and then you have to respond. Lee referred to it as “sensible sense” because you need to make sense out of the sense; when you respond, you must respond quickly, so it’s a “responsive response.”
Keep in mind that information is not just about the quantity or location of a product, but also the condition. That kind of information gives you a much fuller set of attributes for you to measure and gain insight into. Fortunately, information can be captured easily now because of the cloud; you don’t need to store everything on your own server. With the cloud, information can be accessible anywhere, by any part of the supply chain.
It’s clear why gaining intelligent, end-to-end visibility into your organization’s entire supply chain is more important than ever. By understanding the benefits and risks beyond the first tier of your suppliers, you’ll be in a much better position to manage future disruptions.