CSCMP Annual Conference: Can We Talk?
Discussed in general sessions and overhead in the hallways: Shippers are focused on reducing risk and managing volatility, developing supplier relationships, and creating supply chain resilience.
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For an event the size of the Council of Supply Chain Management Professional’s (CSCMP) annual global conference, held Sept. 26-29, 2010 in San Diego, the view depended on where you stood. But wherever you went, attendees were talking supply chain risk, volatility, disruption, and visibility.
That’s not surprising, given the events of the past few years. Major disruptions have occurred as a result of both natural disasters and human error. These disruptions taught companies how little they actually knew about what was happening in their supply chains, and they realized an enterprise focus is not the same as an end-to-end view of the supply chain. These visibility gaps have renewed a corporate emphasis on connecting more of the supply chain with improved processes, practices, and technologies.
CSCMP attendees were also discussing supplier relationship management, and IT types were talking cloud computing.
Technology such as cloud computing, however, is only one enabler. Companies are giving more attention to building relationships and trust all along the supply chain to arm themselves with a resilient and responsive weapon against the uncertainty that will dominate a volatile economic recovery.
The following highlights from the CSCMP conference convey the tone of attendees and offer some insight into what supply chain management practitioners and philosophers predict for the future.
Transaction vs. Transformation
Who among us isn’t guilty of sometimes chasing a shiny new technology without fully considering whether it has value or contributes substantially to a better lifestyle or personal well-being? If you’re considering the latest smart phone, the consequences of a wrong choice are minimal. But if your technology decision is part of your company’s strategy to achieve market advantage, stop and reconsider.
“Technology has a tremendous allure. Everybody wants it, and they want it to change the way they do business,” says Dr. Stanley Fawcett of the Marriott School of Management at Brigham Young University, Provo, Utah.
And, while collaborative planning, forecasting, and replenishment (CPFR) has helped information replace inventory, allowing companies to increase sales while reducing inventory and taking time out of the supply chain, many companies are stuck on the transactional side. They miss out on the true transformation that technology can enable.
“The goal of many companies has been to reengineer processes and focus on customers and collaboration, but they aren’t looking at what technology can do for them,” Fawcett notes. “Instead, many companies are taking a defensive approach to adopting technology, and focusing on what it can protect them from rather than what it can actually do.”
Why is this happening? In part, because companies tend to hold two views of technology: first that it is the answer to all problems; second that it merely enables us to do certain things better— a small part of a broader solution.
Many firms consider technology a solution rather than an enabler. When technology fails to make a problem disappear, they are likely to blame the implementation for being over budget and under-performing. From there, they often go back and criticize the technology supplier for over-promising and under-delivering.
“We won’t enable better solutions until we think about technology as ‘information sharing‘ rather than ‘information systems,’” says Fawcett. “To achieve this we need an investment in technology and a willingness to share.”
Many companies are reluctant to share information, however, because they believe transparency makes them more vulnerable. But the two critical dimensions of technology— connectivity and willingness to share— are complementary. Some firms with a strong attitude about sharing information have been able to improve with very little technology. Others have experienced some improvement as a result of adopting technology in an increasingly open environment. When connectivity and willingness to share information happen together, the company outperforms its competition.
It comes down to a matter of corporate culture, explains Fawcett. “Companies must develop a culture that recognizes investing in technology to collect and disseminate information is necessary to achieve collaboration. That all depends on a willingness to share,” he says.
The technology needs to be mapped to capabilities you are trying to build, not simply used to improve efficiency. Instead, “use technology to transform processes and improve relationships,” Fawcett recommends.
Relationships: People Power
Humberto Florez, president of aerospace and technology for global third-party logistics provider Exel, Westerville, Ohio, supports the CSCMP discussion thread about the importance of relationship management in logistics and supply chain operations. Some companies in the technology space don’t have many actual practitioners; instead, they have people who manage relationships with vendors and third-party logistics providers. “We are their practitioners,” Florez notes.
When logistics managers hear the name of a 3PL company, they don’t necessarily think “practitioner,” even though the scale of what the 3PL does for its customers includes many of logistics and supply chain management’s tactical elements, adds Fred Takavitz, senior vice president of business development for Exel’s Retail Sector-Americas.
Given the importance of relationships in supply chain management, Florez expresses concern that some companies view a logistics contract the same way they do a contract for parts, components, or manufacturing materials. “You can’t buy supply chain execution like any other service,” Florez says, “because you must consider some inherent risks.”
Many companies share a misconception about what outsourcing means. “Some companies think if they pay a third party to perform a service, they no longer bear any of the risks, but that’s not true,” says Florez. “The company may not be the negligent party— the one that causes a supply chain failure— but it is responsible for at least some of the risk.”
Here’s an example: selecting an airline for travel. Travelers can review a carrier’s rules governing lost or damaged baggage. The active choice of a carrier includes the amount of risk the travelers will bear on a baggage claim versus what risk they expect the carrier to assume.
Another issue that many procurement people don’t fully understand is consequential damage. Florez cites a photographic film maker who sets a clear limit on damages for each product, and states the manufacturer is responsible for replacing the film if it fails. It won’t, however, replace your Hawaiian vacation so you can go back and shoot the photos again. The film manufacturer limits its responsibility to the things it controls, similar to what logistics service providers seek to do. For instance, a third-party provider can’t deliver parts on time if the parts aren’t available because of a sourcing arrangement executed by the customer.
Risk: Playing the Odds
Risk has become a recurring and dominant theme at supply chain management events, and the CSCMP conference was no exception. Concern over supply chain disruptions runs high.
Consider what happened to Wichita, Kansas-based Hawker Beechcraft Corporation, a leading manufacturer of business, special-mission, and trainer aircraft. The company went quickly from having a three-year backlog on orders to fighting for position as orders for general aviation aircraft were cancelled or postponed when the economic downturn hit.
“Relationships are the key to surviving not only the downturn, but also the recovery,” notes Brent Edmisten, vice president of supply chain operations for Hawker Beechcraft.
The company quickly began scheduling regular conference calls between its CEO and its suppliers’ senior management. “In the aerospace industry, suppliers are critical and not easily replaced,” Edmisten says. “It was important for us to maintain those relationships and help ensure the viability of our suppliers during the difficult times so they are still a vital part of the supply chain when markets recover.”
As the economy rebounds, Hawker Beechcraft is boosting supplier relationship management, according to Edmisten. The pricing paradigm has changed, and Hawker Beechcraft is trying to avoid a margin squeeze, relying on its global footprint and technology, and sizing the business to what it expects demand will be in the post-recovery market. That means becoming a smaller, leaner company, he says.
“We had a good handle on risk,” says Edmisten. “Of the 300 suppliers that account for 95 percent of our spend, only one company went under in the past few years.” Others in the industry saw suppliers fail every week, he adds.
The contracts Hawker Beechcraft had weren’t supporting the new conditions in a smaller market, so it went back to its suppliers and renegotiated conditions that were beneficial both to the company and its supply base. Relationship management was key to managing the risk, according to Edmisten. It took communication and a collaborative approach to build trust.
A collaborative approach is also important in other areas of risk, including security. Judy Whipple, Michigan State University, cites research on food supply chain risk that highlighted communication, process management, infrastructure management, and relationships with customers and suppliers as among the top security competencies. “Risk is any unintended consequence or outcome,” Whipple explains. “Levels of risk range from minor to catastrophic, but perhaps the hardest part of risk management is determining the likelihood of any given hazard occurring.”
Consequences may be easier to predict based on actual history. Dan Burges, director of consultancy and intelligence for FreightWatch International, a logistics security solutions provider based in Austin, Texas, addresses one catastrophic scenario in which a major pharmaceutical company incurred a $76-million theft loss. The total loss to the company was four or five times that number, including a drop in the company’s stock price.
But while the consequences can be quantified, the probability of any given scenario occurring is infinitesimal. “With no additional security, the risk of your cargo being stolen is 0.024 percent,” Burges notes.
That’s an overall number, he points out, and the actual risk will rise or fall based on the type of product, its current market, and its value. Thieves are stealing what consumers want to buy, Burges says, so the latest Apple iPhone, for example, carries a high theft risk.
Regional factors also come into play with theft risk. In Mexico, cargo theft is almost always a violent crime, while in the United States, less than two percent of cargo thefts are violent crimes. But the value of cargo stolen in the United States is $500,000, and closer to $10,000 per theft in Mexico. The United Kingdom and Western Europe also experience a higher rate of theft, but the value is smaller still— €$3,000 to €$4,000, says Burges. “Those crimes tend to be slash-and-grab thefts from curtain-sided vehicles or pilferage from distribution centers or at ports,” he adds.
With lean supply chains, disruptions of any sort can have a greater consequence. Weighing risks and determining which countermeasures to put in place, and at what cost, is a difficult decision. If you reduce risk by spending on countermeasures, you reduce shareholder value and operate at a higher cost than a competitor who does not, according to Walter Zinn, professor of logistics at Ohio State University.
“If you don’t spend on countermeasures and a catastrophic event happens, you will be judged on the quality of that decision— after the fact,” he adds.
Resilience: Contending With Volatility
Responding to channel volatility that is a result of market conditions, not a hazard, carries equal significance for supply chain management. Among the priorities for companies seeking better control are shorter order cycle times, faster new product introductions, improved demand management, and the ability to accelerate globalization, says Richard Douglass, global director, industry marketing for manufacturing and logistics/distribution, at IT solutions firm Sterling Commerce, Dublin, Ohio.
While collaboration is an important strategy, it is more often manual or ad-hoc than it is automated, Douglass notes.
Transactional areas such as shipment status, inventory, and delivery information are likely to be automated, and larger companies with higher revenues are typically more automated. The amount of turbulence still affecting the economy is causing significant concern for supply risk, Douglass points out, and is leading companies to move from sole sourcing to multiple suppliers.
It is increasingly important to have the analytics that enable better decision-making, says Douglass. But an area where supply chain managers need to improve is scenario planning— assessing different alternatives based on risks.
“It’s like having different playbooks with different response profiles for different contingencies,” Douglass explains.
According to a recent Sterling Commerce/ IBM survey, companies have already cut costs and inventories and will begin to focus on agility and visibility. Visibility of real-time demand data and supplier risk information are “black holes” topping the list of concerns expressed by many executives who responded to the survey (see chart, page 50).
The emphasis on supplier relationship management and other priorities indicates that external processes are the greatest source of volatility risk, says the survey. That came across at many sessions and discussions during CSCMP’s conference. Reducing risk and managing volatility in the supply chain has become more than an enterprise approach, and efforts may finally be shifting to the supply chain— from end to end.