How to rethink supply chains – the experts' view

Breakthrough Supply Chains is a book that seeks to help businesses leaders rethink supply chains to increase both profits and global benefits

This week sees the publication of an important new book about supply chain. Breakthrough Supply Chains will be available from May 26.

The book is a guide to rethinking and reinventing supply chains using breakthrough thinking, so that business leaders can benefit their organisations, the economy and the world

It is written by four distinguished experts in the field:

The following is the second edited extract ... 

Rethinking the Supply Chain

So, how do companies determine how their supply chains will look and operate in the short-term and in the longer-term future? Terms such as 'transformational thinking' and 'innovative thinking' are thrown around, but these are often just consultants’ terms for doing something different.

It is true that companies need to rethink their supply chains in terms of structure, priorities, objectives, and operations. They must do so within financial, environmental, and national security guidelines and 'guardrails.'

These guardrails are briefly discussed below. As a point of note, some consultants and analysts recommend starting with a blank sheet of paper to design the supply chain of the future. In our experience, this results in a lot of wishful thinking.

A far better strategy than a blank sheet is to focus on specific conditions and capabilities – such as existing structure, major critical suppliers, guidelines, and guardrails – and then develop tailored supply chain strategies. 

One such set of conditions is the type of supply chain – and there are two types to consider. 

Producer-driven supply chains  As for semiconductor chips and electronic equipment – which requires high capital investment, significant product and manufacturing technology capability.

Buyer-driven supply chains  Example include textiles and agrifood products, characterized by relatively low product and manufacturing technology requirements, and so ideal for outsourcing and requiring a core competency in design and inventory management. 

These two types of supply chains demand different physical networks, priorities, cost and financing structures, demand-supply and inventory management approaches. 

It is no accident that the 'top' supply chain companies identified by several institutions are all very large and exercise a great deal of power in their extended supply chains. 

Furthermore, their rankings are often based on people’s opinions, and on somewhat irrelevant metrics on the environment. Such companies can get over problems through brute force – for example, by forcing suppliers to hold inventory, extend payment terms, and provide preferred supply, and obtain best rates. 

Using the 'leading practices' employed by these companies may not be the best strategy for smaller companies - smaller companies cannot always do what these behemoths do.

Companies’ strategies are constrained by their ability to finance investment, operations, and working capital. Large and dominant companies can usually obtain better financing rates and more financing. 

The key question is, what sort of financing is realistically available, and how can this be increased through innovative supply chain financing deals with institutions, suppliers, and customers?

Key questions

A core question needs to be addressed: Who are our customers and what do they need? We must take into account our channels and what the competition offers (for example, low cost, two-day delivery for which we can charge them, free five-day delivery, selection, order tracking, returns). Also, what does each channel demand (trade spend, inventory, returns) and how much does it cost?

Product characteristics

Product characteristics are typically looked at in three distinct ways: the type of product – 'functional' with high volume, predictable demand with cost efficiency being the prime driver, or 'innovative,' for which time to market is critical – defined by factors such as cost, proprietary technology or design, product 'clockspeed' (the speed at which technology and components change), product changes, and manufacturing complexity; the lead time for replenishment—long, short, with its associated variability; and the customer demand patterns—predictable, stable, variable.

Government environmental mandates

A lot of this depends on the company’s senior executives, its board of directors, and actual government mandates in the country of operation. The guardrails range from the altruistic 'I believe in doing good' to 'it’s mandated by law so I must comply.' 

But always, it comes down to cost – and its impact on margins and working capital – and return on investment. After all, a company’s obligations are to its shareholders first, then to its workers and the community, and then to the nation (all are stakeholders). The decisions encompass sourcing, transportation, product design and materials, and manufacturing.

National security requirements

Historically, national security requirements are the most ignored in many Western economies but are now increasingly becoming the most important. This involves an analysis of bills of material, reducing sourcing in currently or potentially unfriendly and risky countries, restricting obtaining financing from, and developing partnerships with, companies that are controlled by adversarial foreign governments, and supplying certain types of products to these countries. 

We must adopt what other countries have long realized, a 'whole of country' approach to supply chain management and product development. Contrary to what many seem to believe, shareholder value and executive compensation do not trump national security. 

Current contracts and investments

Lots of companies have made large capital investments in facilities and supplier networks. Many of these decisions and investments have been made in hostile and risky foreign markets, while contracts have been inked with other suppliers who may prove to also be risky because of environmental issues. Moving away from these facilities and suppliers will require planning and time.

Working within these guardrails requires trade-offs in terms of increased short-term costs, access to markets, certain business priorities, and impacts on certain countries. But every company must deal with these trade-offs in order to ensure national security.

Breakthrough Supply Chains

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