Wringing Value from the Supply Chain - The Case for Business Integration

Putting the supply chain at the core of the business allows the right combination of understanding and cost control while optimizing customer service and satisfaction.

By Tony Verlezza, Equus Group LLC

Industry Week, June 26, 2012

tony verlezzaLooking at the current manufacturing business landscape, we continue to see a tug of war within companies on how best to position their supply chains. As they become more global, and search for the best operating model to streamline and consolidate business units, concerns for consistency around functional direction can lead to structures that provide clarity on cost drivers while at the same time negatively impact performance.
 
In recent months, we've seen companies that choose to segment the supply chain as a very independent, internal "wing" of the organization, charged with the manifestly clichéd lowest cost objective. But we've also worked with firms that believe their supply chain is a core component of the firm, and strive to include and derive value from that group.

How should a company position its supply chain? Depending on the situation, companies will sometimes "partition" what were once referred to as "line" functions, sales and supply chain operations, away from the core business in order to focus on brands and brand building. In that model, brand management drives the agenda, while sales are expected to execute the strategy in the marketplace, and the supply chain is expected to provide finished product to satisfy the demand. This model can often be seen as using a multi-layered matrix management structure to maintain communication within the organization, adding value stealing complexity.  As such, the interaction between strategy and execution can be less than effective, with sales holding the primary communication lever to the external marketplace, with the supply chain becoming the business's internal arm, often struggling to maintain marketplace and brand interaction.

In that scenario, the supply chain becomes isolated from the "business" and can become less efficient in completing its mission with the company. While it can appear that this independent approach would drive the supply chain to greater focus on cost and productivity attainment, it can lead to all manner of negative ramifications.

The reasons for failing to capture all the value from the supply chain stem from a variety of factors.  A few of them are:
•Improper Demand Forecast
   -Supply management and purchasing / MRP  inefficiency
    -Finished goods inventory in the wrong place geographically
    -Wrong product mix
•Improper Supply Plans
     -Sub-optimal production line scheduling / line utilization
     -Increased material waste and conversion loss
•Sub-Optimal Manufacturing Productivity / Output

Each of the these links in the supply chain have a cost, sometimes poorly  quantified, but costs nonetheless.  Isolating the supply chain from "the business" does not reflect the reality of how best to obtain all the value possible from the enterprise. By fully integrating the supply chain into the business, a company opens up the prospect of achieving the optimal cost and customer service result.

Why is That So?
In an era of JIT, vendor managed inventory, and resource constraints, excess costs via waste can make a significant difference in company performance and customer perception.  Integration of the supply chain into the business model provides a platform for overall success in a way that isolating the function cannot. When the entire company understands the linkages between business capabilities, innovation objectives, and customer requirements, it stands to reason that superior decisions and direction will be taken. It also provides for a clearer view of risk taking and risk management.

A business operates in two key dimensions: internal and external.  In neither dimension should a company allow itself to get out of balance. A focus on brand building should not force the company to forego the opportunities derived from technology or manufacturing advantages. Nor should a focus on cash and working capital work against the optimal flow of materials and labor that make for a high performance supply chain.

Sales volume growth that requires unbudgeted overtime or unplanned capital expense takes value from a business, its owners, or shareholders. Working capital objectives that force poor planning decisions can hurt the long term potential of the company with service levels that fails to meet customer expectations.  And supply chain inflexibility that limits brand building and innovation can and will impact the long term business position in the marketplace.

The supply chain, its capabilities and limitations, should never by itself dictate to the business. It is by weaving the supply chain into the fabric of the business that a company can wring the most value from its internal workings to enable on-going external and financial performance initiatives. Putting the supply chain at the core of the business allows the right combination of understanding and cost control while optimizing customer service and satisfaction.  A company should strive for functional excellence, but not at the expense of co-existing departments.

Just as we emphasize the view that a business who integrates its supply chain directly into its operating model stands the best chance to optimize its overall costs by improving communication and forecasting, while buying, scheduling and utilizing its manufacturing network most efficiently, so too do we believe that the best model for supply chain success is to fully integrate all its components into one comprehensive set of intimately linked processes.

Tony Verlezza is a former supply chain executive for Unilever, and is an associate partner at Equus Group LLC, a supply chain advisory services company based in New York and Sao Paulo.