As part of our Expert Insights series, Supply Chain Nation recently sat down with Rich Sherman, a leading supply chain industry consultant, analyst, and co-founder of the Supply Chain Council and the SCOR® model, to discuss his book, Supply Chain Transformation: Practical Roadmap for Best Practice Results (Wiley, 2012).
SCN: Supply chain transformation is a bit of a nebulous topic—meaning different things to different people. Please give us your definition.
Sherman: That’s an outstanding question because I think transformation is very misunderstood. I like to equate transformation to change. Transformation is moving forward from whatever your current state is to a new or future state, and every company is going to transform. I always say change is inevitable; growth is optional. The reality is you’re going to change, and the question is, is your change going to be determined and intentional, or is it going to be unintentional? Are you going to lead the swim team into the water or are you going to be dragged into the water kicking and screaming? But at the end of the day, transformation is all about change and how you’re going to move your company forward into the future.
SCN: You authored the book Supply Chain Transformation: Practical Roadmap for Best Practice Results. Why was now the right time to discuss this issue? What has changed?
Sherman: I wrote the book as kind of a tale of two cities, if you will. In the “Tale of Two Cities,” Charles Dickens wrote, “It was the best of times; it was the worst of times, the age of wisdom, the age of foolishness.” That sounds like a day in the life of a supply chain manager. The supply chain is the tale of two cities: leaders and laggards. Over the past 25 years the world has changed. Twenty-five years ago I wasn’t carrying a smartphone that connects me to everything, everywhere, at any time. So, all things change. What hasn’t changed in the last 25 years is the performance gap between the leaders and the laggards. The leaders have a two-to-one cost advantage over their median competitors, and in most industries, an almost five-to-one cost advantage over the laggards. Over the last 25 years, we’ve seen lots of theories and concepts. We’ve seen companies embrace change. But leaders continue to maintain that gap.
At the same time, I believe from working with leaders and laggards and working with companies across all industries, that the laggards work just as hard as the leaders. Why are people working to lose? So my thought in writing this book was that we’ve heard a lot about how to change. This book is more about why to change! I wanted to write a book which synthesized all of the changes, all of the advances in technology, into a process by which the laggards could move to leader city by transforming their organization from working-to-lose to working-to-win. So in addition to being a how-to book—it’s certainly a practical roadmap for transformation—it also addresses why to transform. Why is leadership important? Why is transformation the main lever toward performance improvement and performance excellence? The key is why do we need to change, and that’s really the focus of the book.
SCN: You’ve noted that change is continuously going on in the marketplace and within supply chains and that “business as usual has been cancelled,” yet many companies treat supply chain transformation as a project, if they address it at all, rather than as an on-going process. How can companies develop a “culture of transformation,” as you’ve called it, and why is this critical to their success?
Sherman: The key is that change is inevitable. Companies are all going through change whether it’s intentional or unintentional. But there are three levels of change. There’s incremental change, which is where most companies are. They have a process-improvement culture that is focused on cost reduction and gaining efficiencies. This produces incremental improvement. They paddle along and stay with the pack, but they’re generally at the back of the pack.
Then you have other companies who have experienced this change, but they don’t want to change gradually. They want to look at greater opportunities. So they start moving into a step-change culture, and the focus is on more effective management of operations. Instead of focusing solely on how to reduce costs and improve productivity and efficiencies, they want to make fundamental changes in the way they’re executing their processes. Can they actually change processes to get more of a step-change in improvement?
Finally, you have companies that have what I call the transformational culture. These are companies that recognize it’s a journey. It’s the recognition that change is going to occur, and identifying what changes are likely to occur in order to leverage those changes for competitive advantage and transformation. Once you’ve achieved this transformational culture, you’re a best-practices company and your incremental change is now market innovation. Now you’re focused on improving and increasing revenue, on liberating working capital to be able to fund other projects and other capabilities. Companies that are at that transformational state are really in a position to generate capital, to generate savings, and they’re generating the revenue to continue that journey onward.
SCN: You have also stated that transformation is a broader issue than just supply chain. It requires alignment between demand-creating strategies such as marketing and demand-fulfilling strategies embodying operations. Can you please expand on this?
Sherman: Every organization has three major structural components that impact the supply chain—sales and marketing, operations and finance. Systems thinking tells us every change has consequences. For every action, there is a reaction. There are a lot of things that impact the performance of the supply chain. For example, working with JDA Software over the years, you were the pioneers in event-based management. A promotion has a significant impact on product supply and demand fulfillment. Marketing departments create demand to increase market share, to introduce new products, and to increase demand across all the channels.
Of course, everything in the supply chain is highly dependent upon planning. If you’re not planning for those marketing events because they aren’t part of your sales history, then you’re going to get caught by surprise. So if you’re not closely collaborating with your counterparts in sales and marketing, you’re going to live a life of total uncertainty in the supply chain. And if you’re not collaborating with finance, you’re not going to be able to understand the financial impact those processes are going to have. So you’re not going to be able to get the funding to provide the supply necessary for the promotion. Close collaboration is needed between sales and marketing, operations, and finance, which is what sales and operations planning and integrated business planning are for. If we don’t have collaboration across all of those enterprise structures, which is the foundation for systems thinking, we’re going to have some real issues to address in the supply chain.
SCN: Thanks for those insights, Rich. In Part 2 of this blog, launching on November 14, we will get Mr. Sherman’s thoughts on using transformation to “break the rules of the supply chain,” and in Part 3, launching November 18, we will look at enabling technologies for transformation