As part of our Expert Insights series, Supply Chain Nation sat down with Rich Sherman, a leading supply chain industry consultant and analyst to discuss his book, Supply Chain Transformation: Practical Roadmap for Best Practice Results. In Part 1 of our blog Rich discussed the importance of supply chain transformation and why companies must create a “culture of transformation.” In this blog, Rich will discuss breaking the rules to create a smart supply network.
SCN: A supply chain executive once said that best practices are a recipe for mediocrity, meaning that while it’s important to reach parity with best practices, it’s only by innovating beyond these practices that leadership is attained. You seem to have similar thoughts in your article on “Breaking the Rules in Supply Chain.” How do companies go beyond what you call best-practice maturity?
Sherman: In my book I talk about how the leaders live in a house of excellence. The foundation of the house of excellence is that your performance management is aligned to your business strategy so that everything that you’re doing in supply chain is aligned to that business strategy. This implies that you’ve got collaboration with your demand creation and demand performance functions. The pillars of the performance management house of excellence are process-oriented metrics. When you achieve best practices, you’re doing so by mapping, documenting, defining, and understanding all of your processes, and you’re assigning metrics to those processes based on your supply chain strategy. That gives you the ability to develop a balanced scorecard, the second pillar, which takes into consideration the customer’s requirements, the internal requirements, and a professional development program that’s aligned to those internal and external metrics. As a result, you can create a process-improvement culture, which is the third pillar. And the process-improvement culture is based, most importantly, upon a professional development program.
Joe Andraski, president and CEO of VICS, once said, “The definition of insanity is asking the same people in the same organization with the same processes and the same tools to produce dramatically different results.” You’re not going to be able to change the results without changing the culture. So professional development and skills development create competence and confidence within your people and that gives them the ability to assess and improve existing processes.
The second thing you have to do is create a communication plan and a common vision. Leaders are constantly investing in associates’ development, but they’re also constantly creating a common vision and a common language across the organization. Whether it’s Procter & Gamble, Toyota or Danaher, that performance-management operating system, if you will, which is the roof of the house of excellence, is really based upon that culture—that common vision—because once I have that and I have those processes in place, now I have empowered my people, given them the confidence and competence to look at processes and improve them. Then when I improve a process which is already a best practice, I’m breaking the rules, and I’m also innovating.
Incremental change for a company that’s living in a house of excellence is innovative change to anyone else in their industry and marketplace. This is the reason why the leaders continue to maintain such a performance gap over their median competitors and the laggards.
The leaders are constantly investing early. They’re taking advantage of new technology at the time they can best maximize their ROI and competitive advantage. The laggards are always behind. They’re adopting technology at the point where the ROI is almost impossible to achieve. They’re constantly in a state of catching up. The leaders, because innovation is an incremental change for them, can continue to adopt new technologies without having to rip and replace, because it’s really hard for companies to afford to rip-and-replace systems they have invested millions of dollars to buy and to implement. That’s why the laggards are always behind, always losing. You’ve got to transform your operations to work to win, and the house of excellence will help you do that.
SCN: Although our industry has been talking about the importance of end-to-end supply chain visibility and supplier collaboration for over a decade, most companies have not achieved this state yet. Why is this and what can companies do to create what you call a “smart supply network?”
Sherman: For at least the past 10 years, supply chain visibility has been at the top of every survey list on key issues for supply chain executives. Yet most companies really haven’t achieved that state of visibility and supply collaboration.
The reality is there are a number of companies in every industry that have achieved a pretty sophisticated level of supply chain visibility and collaboration, and the reason they’ve done that is they have a process-improvement, transformational culture. They are consistently adopting new technologies to innovate their supply chain performance.
The biggest issue for companies that haven’t achieved this visibility is not having a transformational culture. They are not looking at their supply chain performance metrics in terms of how they impact the overall financial health of the company. I have a chapter in my book on getting management commitment. It talks about the house of excellence relative to the financial health of the company. You’ve got to associate your supply chain metrics with the overall benefits for creating shareholder value, because at the end of the day, that’s what keeps the CEO and CFO up at night. They don’t care about cost reductions; that’s your job. What they care about is return on invested capital and cash flow. So you have to speak in those terms. And if you’re not, it’s hard to get companies to invest in the type of infrastructure that’s required to create end-to-end visibility.
The supply chain is not a chain, it’s a network of nodes, and many of those nodes have their own systems. So we have to look at it in terms of a system of systems, and how to integrate and interface our systems with all of those other systems. There are technologies today that enable this integration across the system of systems, but it requires not only an investment in those systems, but also a leap of faith that the benefits will be there. If you don’t already have a collaborative culture within your organization and with your customers and suppliers, if you haven’t achieved supply and customer metric integration, it’s really hard to envision supply chain visibility. Companies have to collaborate. They have to understand that supply chain performance impacts the financial health and competitive advantage of the business. They have to take that leap of faith. The capability to implement a system of systems is there. The key is having the type of process-improvement, transformational culture, and the recognition of the strategic impact that supply chain has, to enable implementation of end-to-end visibility.
So it’s not really a technology issue, it’s a cultural issue. And when you have so many companies that are still in medium to laggard performance, it’s just not happening at the rate that we’d like. It is going to happen, and when it does, it’s going to take a lot of companies by surprise.
SCN: Thanks, Rich. In Part 3, launching November 18, Mr. Sherman will cover the technologies that enable transformation.