Straight Talk: Let's Think Differently to Drive Supply Chain Results

"VUCA requires a sensient supply chain," stated a client. "Oh my lord," I thought, and put my head in my hands. I did not voice my dismay, but I instantly reacted to two elements of the statement:

• Buzzword Bingo. Why do business professionals use horrible acronyms like VUCA? To me, the term VUCA sounds like a body's response to an illness. When I hear this type of discussion, I want to ask, "Can can we just talk the language of business without feeling like we have to play buzzword bingo with acronyms? " I hate acronyms. Many times, in supply chain discussions, I feel that it is ready-fire-aim with the three and letter acronyms flying like bullets from an automatic machine gun. ( The term VUCA was first coined by the military, and stands for Variability, Uncertainty, Complexity and Ambiguity and is now used in business.) 
• Impressive Word of the Day. The term sensient is not commonly used in the supply chain leader's lexicon. Many supply chain leaders glum onto sexy words and use them to disarm the audience. 

I love straight talk. As a simple person, when I hear phrases like this, I squirm in my chair. I feel that I need to raise my hand and ask, "Can we just speak the language of business? You know the good old fashioned art of selling more, collecting money, building and selling products people want, managing supply and people working together? Enough, I say! Supply chain is about real people moving real things. It is not about ethereal concepts."

Maybe it is just me. I hate the world of acronyms and long-winded explanations. I am a simple gal. I don't understand why supply chain leaders hang onto a language of geek speak. Here I want to talk about value and how the supply chain leader can improve value through simple strategies that can be executed. Sometimes when I talk to supply chain leaders in meetings, I feel that the gear head is speaking when I would like to have a holistic business discussion. I think that we need to have fewer gear-head meetings.

Shown in Figure 1 is the current state of supply chain volatility and uncertainty. It is clear. Times are tougher, and as a result, only 10% of public companies are making consecutive year-over-year progress on the important metrics of inventory turns and operating margin. Both inventory turns and operating margin correlate to market capitalization. The results are higher if both can be driven together as a portfolio. (In Figure 1, we contrast the severity of the issue by asking supply chain leaders to compare the business environment five years ago and contrast it to their belief for five years in the future. The size of the bubble represents the degree of risk.)

 Figure 1. Supply Chain Risk Management: Past Five Years When Compared to the Future Five Years from Surveys of Supply Chain Leaders

Supplier viability and product quality are closely linked. Supplier development programs help. Only 40% of companies have a supplier development program and only 1/3 believe that they do it well. Alignment between procurement and finance is an issue. Finance is pushing a cost agenda attempting to get blood from the stone, while supplier development is trying to drive joint processes to drive value. Often in organizations the approaches are in direct opposition.

Economic uncertainty and demand volatility are also overlapping circles. Both pose high risk to the supply chain of the future. Demand volatility has steadily risen over the past decade. The answer? It is more than a board room discussion. It requires rethinking core supply chain strategies and processes. To truly sense and use channel demand, the processes must be redesigned to use channel demand. In this evolution, the processes move from inside-out to outside-in. This transition makes most technologies implemented in the last two decades obsolete.  The reason? The processes are built on dependent demand (the order) and not focused on independent demand (the use of channel and customer data at the cadence of the market.)

Confusion reigns. While there is a lot of discussion on demand-driven processes, too few understand it, and most existing technology providers put a demand-driven spin on their current marketing messaging overlooking base requirements. The development of these processes are being tested on the demand side by 20 companies and on the supply side by about 150 companies through the Demand-Driven Material Requirements Planning(MRP) initiatives. The evolution of demand-driven, outside-in processes that are end-to-end are still in evolution; but one thing is clear, the more that supply chains can use the independent demand, or channel data, and apply advanced analytics the better they can sense market changes and drive a more profitable response.

Current State: A Focus on Labor Efficiency

Today, for many operational leaders, the focus is on labor productivity. Over the period of 2005-2015. across 35 industries, revenue/employee improved 5%. The cuts in labor and the improvement in revenue/employee came from the back office (distribution, manufacturing and procurement). Sales and General Administrative expenses, despite the infusion of technology, changed very little. The greatest improvement over the period of 2006-2015 were in the discrete industries of A&D and Automotive. Apparel and consumer electronics went backwards. This occurred despite all the work on outsourcing, and chasing lower cost/labor per unit. The reality is that while we may have gotten a lower labor cost for sewing clothing, that we added labor costs for material handling upstream.

Figure 2. Revenue/Employee by Industry from Balance Sheet Data for the Period of 2006-2015

Based on the research by Robert Gordon in Figure 3, total global productivity stopped with the third industrial revolution in 2004. The second industrial revolution was driven by innovation in the combustion engine and electrical connectivity while the third industrial revolution was powered by the evolution of the semiconductor and the personal computer/mobile phone. In short, while we installed lots of technology, the effective use by operations post recession is an issue. One of the issues that I feel is that we have chased lower labor costs and the delivery of a tightly integrated efficient supply chain without improving the ability of the supply chain--across make, source and deliver--to better serve the customer. I define agility as the ability for the supply chain to deliver the same cost, quality and customer service given the level of demand and supply volatility. The more global the supply chain, the greater the issue.

Figure 3. Total Factor Productivity

Future State: A Need for Supply Chain Sensing

I feel that the future state is supply chain sensing. I hope that this happens without three letter acronyms and complex long-winded discussions.

In short, the supply chain is a complex system (multiple processes with multiple inputs and multiple outputs). The human body is a complex system as well. It adapts through sensing. In the body, there are five primary sensing mechanisms: taste, smell, hear, sight, and touch.

How can a supply chain be agile if it cannot sense? Today's supply chain cannot sense. It responds. The response is often slow and out of step with the market. With the increase in complexity, there is a need to sense. My questions are what could happen if the supply chain could sense? And adapt? To drive a smarter response?

In short, we as supply chain professionals need to come to grips with the fact that most organizations are stuck. To move forward, we need to move past our concepts of the efficient supply chain to redefine the electrons and atoms of the supply chain. Today, with the evolution of new forms of analytics and cognitive learning, we can have both a brain (cognitive learning) and sensing (use of new forms of data with new forms of analytics). To use the human body sensing analogy, supply chain sensing would be:

-Hearing. Cross-functional Listening. Companies yell their messages to the market. The marketing machine starts the drumbeat and hopes that campaigns will stick. Digital marketing teams listen to social sentiment--Twitter, Facebook, federated ratings and reviews, call center data. However, the social signal is not used by the larger organization and most supply chain teams don't even know the digital marketing team at their own company. When teams listen cross-functionally, they can drive a more customer-centric approach getting and using data with little latency. In Figure 4, I share an example of Lenovo listening globally to keyboard and hardware issues. I am tracking nine case studies of corporate cross-functional listening.

Figure 4. An Example of Cross-functional Listening

Sight. Demand Sensing and Market Insights. Visibility into market sales and shifts are essential. There are twenty companies testing pattern recognition of demand signals. Three companies are working multi-tier to sense and translate demand to reduce the bullwhip impact as shown as Figure 5. Slowly, these concepts are gaining traction.

Figure 5. Bullwhip Impact and Demand Translation Across Multiple Tiers

  
Taste. Test and Adaption of Product Strategy. Traditionally, new product launch processes included focus groups, test markets, and shelf audits. These processes were ad-hoc and local. More and more companies are testing product strategies cross-channel to drive test and learn strategies. These concepts are slowly being applied to brick and mortar test and learn strategies. The beauty is that the supply chain is an engine for test and learn.
Touch. Supplier Development and Financial Sensing. Today, 61% of companies monitor most of their first tier supply chain suppliers for financial risk. However, it is usually when the supplier is onboarded into a procure-to-pay initiative. Today, 7% of supply chain leaders are looking at how can they sense risk continuously through new forms of analytics. And, when issues arise, to deploy a team to help. The data in Figure 6 is from our recent research.

Figure 6. Supplier Financial Sensing

Smell. Quality and Warranty Sensing. Today, we listen to the questions that we know to ask. However, did GM listen to hear that the consumer was having ignition switch issues? Was Toyota aware of the issues with the 1.4M vehicles involved in the 2016 recall? Quality sensing allows supply chain leaders to listen to the questions That They Do Not Know to Ask.  The use of unstructured text mining analytics allows companies to sense and respond 6 weeks earlier than getting the information from normal call-center responses.

In short, there are more people wandering the halls today in supply chain organizations debating the efficient supply chain than one that can sense, shape and act. All organizations have a choice. I just know from analyzing the financial data where I would place my bets. It is on value and the use of new forms of analytics outside-in to sense and then drive an adaptive supply chain response. However, making this leap is a foreign to most supply chain leaders and consultants as I felt in Peru last month as an English-speaking native in a Spanish-speaking culture. 

Just as I need to learn Spanish to be a better supply chain leader, most organizations need to realize that they have been living the life of a frog in a beaker as the water slowly gets hotter. Remember the analogy? At first the frog can survive as the water is just a little warm. However, as the heater is turned higher and higher, the frog must jump to survive. I think that it is time. Supply chain leaders must jump to next-generational processes to drive business results. My goal is to build the research insights to help visionaries make this pivot.

Summary

For many people around the world, it is a holiday. It is independence day in the United States and Canadian day in Canada. As my North American friends take holiday, I would like for them to challenge conventional supply chain paradigms. I love the thought of independent thinking on independence day.

This weekend, I am wrapping up four years of research on what drives value in value chains. I have spent the last four years correlating over 6,000 responses to understand what drives price to tangible book and market capitalization improvements. Bottomline-- revenue/employee has little impact while cross-functional horizontal processes built outside-in that sense have strong correlation. However, I will leave the writing on this topic to another day. I have been long-winded enough in this post.

Happy holiday! I look forward to hearing from you and getting your thoughts. 

About Lora:

Lora Cecere is the Founder of Supply Chain Insights. She is trying to redefine the industry analyst model to make it friendlier and more useful for supply chain leaders. Lora has written the books Supply Chain Metrics That Matter and Bricks Matter, and is currently working on her third book, Leadership Matters. She also actively blogs on her Supply Chain Insights website, at the Supply Chain Shaman blog, and for Forbes. When not writing or running her company, Lora is training for a triathlon, taking classes for her DBA degree in research, knitting and quilting for her new granddaughter, and doing tendu(s) and Dégagé(s) at the ballet barre. Lora thinks that we are never too old to learn or to push for excellence.