From the Back Room to the Boardroom: Logistics Gets on the Agenda
Supply chain management is no longer a backroom function. It has secured its place at the boardroom table, and greatly impacts corporate success.
Not all good ideas come from the executive suite.
It was a Sunny Delight Beverages Company internal salesperson, for example, who believed Sunny D was missing an opportunity to sell to the dollar-store channel.
So he worked with the company's supply chain managers to explore ways of adapting the juice beverage's packaging, pricing, shelf life, palletization, and distribution to meet the specific requirements of dollar stores. He then presented the idea to senior management.
That was 18 months ago. Today, the dollar-store channel represents a large and growing business segment for Sunny Delight Beverages, thanks to the company's ability to adapt its infrastructure to meet customer needs—and to listen to a good idea, even one that didn't originate in the boardroom.
Creating a culture where employees are comfortable recommending strategic direction to management, and working cross-functionally to make it happen, is a hallmark of a new breed of corporate leaders—those who are aware of supply chain management's impact on the organization.
When the importance of supply chain management pervades an organization, its implications are intrinsic to daily decision-making, and collaboration with partners and customers is the rule. Companies that execute their supply chains well gain market share, profits, and favor with Wall Street.
But it wasn't always that way. For years, supply chain was considered a support function and a cost center; efficiency was its only goal.
"Companies historically viewed an efficient supply chain as a way to save money," says Nick LaHowchic, president of Diannic Ltd., a specialized consulting firm based in Fort Pierce, Fla., and former president and CEO of Limited Logistics Services.
"Today, they are embracing the supply chain for its ability to add value and equity to the brand through the responsiveness, reliability, and/or differentiation it can provide."
The supply chain's star has risen to the point that it gets its share of lip service at the C-level. Some CEOs merely talk the talk, rather than truly walk the walk, and the result is often reflected in the balance sheet. But executives who embrace and internalize supply chain thinking run their organizations differently and see bottom-line results.
Reshuffling the Organization
One example is Spanish retail group Inditex, operator of the Zara chain, which is known for quickly turning out small runs of up-to-the-minute fashion trends that sell out in days, whetting customer appetites for the next hot look.
The company's two-week design-to-shelf production cycle is executed by cross-functional teams shaped around the consumer and product—including design, production, distribution, and sales talent—rather than the traditional, functionally based departmental organization founded in the industrial age.
Most well-run supply chain organizations, however, are not so radically organized. Instead, savvy C-level executives often foster cross-functional sharing while retaining traditional organizational charts.
"A CEO has to get the entire organization to first understand the importance of the supply chain, then live, celebrate, and grow with a supply chain-infused way of thinking," says Scott G. Stephen, executive vice president and general manager for Playboy Online, an entertainment venue that also operates the Playboy Catalog, PlayboyStore.com, and ShoptheBunny.com. Playboy Online is currently in the midst of transforming into a fully supply chain-based organization.
"Executives can't implement supply chain management, but they can educate so the organization can implement," Stephen adds.
At Sunny D, organization takes a backseat to the culture and tone set in the executive suite. Town meetings are among the tools that help bridge the horizontal and vertical lines separating middle and corporate management.
Once a month, C-level executives meet with employees to review the financial statements top to bottom. They also provide a written update on how the company is performing against goals.
One fundamental of the corporate ethos at Sunny D is called "pipe," according to Billy Cyr, president and CEO.
"Pipe is how we source raw materials, our manufacturing capacity and capability, how product moves through the distribution network, and how it reaches the ultimate consumer," he explains.
Sunny D's main pipe is its chilled beverage category. When it tries to stray from that pipe—such as the debut of a shelf-stable line three years ago—it tends not to be as successful. That experience verified the lesson of the pipe: getting product to store shelves the right way is at least as important as the product itself.
"We end up incurring cost or service disadvantages when stepping outside that pipe," says Cyr. "Concern about our core capability is omnipresent as we consider future moves, including international markets."
Transforming from a traditional to a supply chain-infused culture takes time—three to five years, by some accounts—as well as considerable evangelism effort from supply chain visionaries within the organization.
The best way to spread the supply chain gospel, whether it's an executive seeking to redirect the culture or a manager hoping to educate senior management, is by showing how supply chain initiatives align with the company's strategic objectives, says Diannic's LaHowchic.
Use general business instead of supply chain terminology, and express its benefits in terms of the potential impact on sales, cash flow, market share, and competitive advantage, he recommends. Also, look for ways to knit supply chain thinking into the organization, and with suppliers and customers as well.
When he was president of supply chain services for medical technology company Becton, Dickinson and Company (BD), LaHowchic led a transformation from a product-oriented company focused on the design and manufacture of syringes and other medical equipment to a supply chain-oriented one: ensuring customers a steady supply of the right equipment at the right time, delivered to the right place.
One way LaHowchic fueled this thinking was by matching company sales reps with supply chain services salespeople. They made sales calls together and extolled the benefits of BD's ability to maintain inventory of critical supplies, adding to the value proposition of what is essentially a commodity.
Benchmarks and Metrics
Expounding early and often upon the role of the supply chain in attaining corporate goals is a key part of the transformation process, but it doesn't happen in a vacuum.
C-level executives need to implement external benchmarks and internal metrics to more accurately measure progress toward meeting supply chain goals, advise John Mentzer and J. Paul Dittmann, professors at the University of Tennessee, and Reuben E. Slone, OfficeMax executive vice president of supply chain, co-authors of the Harvard Business Review article, Are You the Weakest Link in Your Company's Supply Chain?
The old maxim applies: What gets measured gets rewarded and what gets rewarded gets done, Mentzer says. He and his co-authors advise supply chain leaders to combine those metrics with incentives.
"For example, I serve on the board of one company where three departments were rewarded for fighting with each other," he says. "Purchasing was paid to keep prices down, store operations was charged with selling at a profit, and logistics' job was to move merchandise through the system efficiently.
"The CEO got it," Mentzer continues. "He created a combined metrics system using gross profit dollars. Suddenly, all three departments became interested in supply chain management."
Swing Your Partner
Suppliers and customers can also be brought in to such a plan, sharing the benefit of working collaboratively to attain pre-set goals. It's an arrangement that pays for itself through mutual savings.
At Sunny D, for example, Cyr meets at least once a year with the company's top 20 to 25 supply chain partners, including Transplace, its third-party logistics provider. The ability to truly work collaboratively with partners is a hallmark of an organization's supply chain skillset.
Technology also plays a key role in transforming to a supply chain-oriented culture. The advancement of technology means that everyone in the organization has the information they need, when they need it. That enables them to make decisions in real time, and to make multiple decisions across departments, rather than in silos.
Working that way requires a different style of management and an organization that's comfortable with a multi-tasking business model. It's easy to tell when the corner office lacks that kind of perspective.
"Look at organizations that are not represented well by their supply chains," says LaHowchic. "Market share isn't what it could be, consumer regard is low.
"Many classically trained and experienced CEOs have never seen the supply chain as a way to better connect to and deliver improved value to the consumer, or as a bridge across trading partners," he adds.
CEOs can exert a positive or negative influence on the supply chain in several key areas, according to Are You the Weakest Link in Your Company's Supply Chain?
- Picking the right leaders.
- Initiating benchmarking and the correct metrics.
- Setting incentives.
- Keeping up with technology and trends.
- Factoring supply chain management into business plans.
- Resisting the tyranny of short-term thinking.
Savvy companies are increasingly seeking out supply chain talent to maximize the benefits of a supply chain-oriented focus. Supply chain is increasingly viewed as a new path to the corner office.
It's not that someone with a finance or operations background, for instance, has any less of a shot, but the ceiling for supply chain executives has been removed.
Executives growing up through the supply chain organization "spend more time working cross-functionally within and across the organization," says LaHowchic. That experience helps them develop international, multi-cultural, and multi-lingual expertise.
"Supply chain executives have a less power-based, more collaborative management style, and exercise those muscles more than executives in other functions," he says. They lead through fellowship, not followship.
"The top supply chain officer ought to be president of the company," says the University of Tennessee's Mentzer. "All C-level positions need to understand supply chain management."
Sunny D prefers recruiting supply chain talent—at all levels—from mid-size companies rather than large ones, to gain a broad perspective. The company organizes C-level responsibilities around individual skills and experience rather than traditional departmental categories.
Internal departments aren't the only place supply chain-infused companies are seeking talent. The board of directors increasingly recognizes the need for supply chain expertise as part of its fiduciary duty to protect stockholder interests.
"Board members put a different lens to strategic discussions," says LaHowchic, who sits on two boards in that capacity.
Mentzer, also a member of two boards, takes an activist approach to the job, meeting separately once a month with the CEO and chief supply chain officer to discuss supply chain issues. One board on which he sits is currently seeking a board member with experience in China, to bolster the company's supply chain activities in that country.
In general, corporate boards are developing an interest in supply chain management and are asking more insightful questions of executives, Mentzer notes. That helps as companies also begin to educate Wall Street on the power of the supply chain.
Even private companies are tapping investors for input on supply chain decisions.
"I try not to make all strategic decisions on my own," says Ben Serotta, CEO of privately-held custom bike manufacturer Serotta, based in Saratoga Springs, N.Y. A small group of investors, a board of directors, and an internal steering committee that includes supply chain expertise help the CEO approach decisions collaboratively.
Wall Street Takes Stock
The challenge of balancing long-payoff projects with the relentless quarterly expectations of Wall Street is nothing new. But analysts are beginning to heed the gospel of the supply chain and use it as a new measuring stick.
"Fifteen years ago, when a company wrote off unprofitable assets, its stock went down," notes Mentzer. "Today it goes up. It's an indication that the board doesn't want to waste time on unprofitable activities.
"Analysts are asking insightful supply chain questions and Wall Street is starting to reward excellent supply chain management with higher stock prices," he adds.
But that doesn't mean their patience is unlimited, one reason behind the movement to reject quarterly reporting. Public companies are seeking some of the latitude private companies enjoy, including the ability to make investments with long-term benefits without concern for short-term balance sheet impact.
Private but highly leveraged companies face similar challenges to public ones—they need to meet the often short-term goals of stakeholders rather than the long-term pursuits that supply chain projects often require.
Chief executives at private companies also can make decisions that indulge the kind of gut-check that public stockholders would be unlikely to tolerate.
Ben Serotta is one such executive. When he founded Serotta, the custom bike industry was served by specialist suppliers and small job shops creating short-run parts. That was fine when these small contractors were plentiful and customers were willing to wait as long as one year for a made-to-measure ride.
But when large bike companies began shifting parts manufacturing overseas, job shops dried up. A few years ago, Serotta made the decision to vertically integrate, and add two new businesses: a computer-controlled machine shop and a composite modeling operation that turns raw titanium, carbon fiber, and steel into various bicycle parts.
The decision to develop manufacturing capability in-house rather than outsource grew in part from the pride the facility took in its quality of work, as well as from Ben Serotta's belief that "a lot of what we do is worth the good fight. We're in business not just to be in business but because we like creating beautiful things. I was stubborn about not sourcing offshore."
Serotta and an internal advisory group decided to bite the bullet, not just because of a romantic belief in "Made-in-the-USA," but because of the supply chain relief the decision allowed. Because it buys only raw materials that it can transform into one of several different parts according to demand, the company reduces inventory carrying costs.
The move also helps balance the fickle nature of the custom bike buyer, whose tastes may change quickly from titanium to carbon fiber to steel frames and forks. It also allows Serotta to deliver a custom bike in approximately six weeks, just about as long as customers will tolerate.
"These new capabilities allow us to deliver more value to customers willing to wait, and our technology is more advanced than our competitors," says Serotta. The company also avoids some of the quality and intellectual property issues other companies face when sourcing globally.
Curing the Capacity Crunch
Command Medical, an Ormond Beach, Fla.-based contract manufacturer of medical equipment, gained similar process efficiencies two years ago.
Seeking additional production capacity, the company supplemented its Florida operations with a new facility in Nicaragua rather than Asia, saving 20 to 30 percent in labor costs while netting an eight-day ocean transit time to and from Miami.
Command Medical is currently quadrupling its square footage at the new facility, and took the opportunity to reevaluate where raw material storage and kitting activities occur. It also examined its ability to cube out shipments by transferring long-term inventory as needed among its U.S. and South American facilities.
The move allows the company to be "a lot more entrepreneurial," says David Slick, CEO. "Compared to public companies, we can make quick decisions based on business merits only."
Private companies devoting large chunks of cash to quickly transform their supply chains while their public competitors hedge their bets is an oft-repeated pattern.
"If I tell the CEO of a public company he can do three things to enhance the supply chain, but they will cause the stock to get hammered, he will not do them," says Mentzer. "But if I tell a private company CEO he will lose money for six months, then see a profit, he'll say 'let's start tomorrow.'
"Supply chain decisions often hurt earnings for a few quarters, then make a lot of money," he notes.
Tools for the Future
Focusing on the supply chain from the top down will be essential as companies face new market challenges in the years ahead.
One challenge currently impacting strategic direction is the green movement. Media, non-governmental organizations, and consumers are ramping up pressure on companies to reduce their carbon footprints.
Supply chain plays a critical role in green strategies, providing opportunities for brands to rethink processes from design through delivery. When the market starts to reward green practices and penalize environmentally unfriendly ones, the executive suite pays attention.
Another looming challenge is deteriorating U.S. transportation infrastructure. "U.S. ports will exceed capacity in two years," asserts Mentzer. This issue is spurring shipper interest in Canadian and Mexican ports. But that doesn't solve the problem, because under-funded domestic transportation threatens the ability to move those goods.
"We're under-funding railroads, ports, and the air transportation system," Mentzer says. "China's number-one trade concern is not its infrastructure, it's ours. To cope, we'll see dramatic shifts in trade patterns, such as moving production to Central or South America to take advantage of the Supercorridor into Mid-America, over the next five to 10 years."
The evolution of supply chain technology will also challenge executive leadership to transform the business and take advantage of new capabilities and paradigms.
"CEOs are concerned with achieving multi-tasking, getting business to work in real time," says LaHowchic. This will enable companies to, for example, shorten cycle times and rapidly test new ideas as opposed to forecasting what they believe consumers will buy.
The globalization of business goes hand-in-glove with the skillsets and collaborative thinking required to execute a supply chain that contributes value to products and services.
Companies are readjusting their culture and processes to adopt a new style of thinking, communicating, and applying technology as the gospel of supply chain continues to win converts in the executive suite.
C-Level Executives Say: Logistics Approach Could Stand Some Improvement
Logistics is starting to receive more C-level attention. But only 37 percent of senior executives at large, U.S.-based industrial manufacturers responding to a recent PricewaterhouseCoopers Manufacturing Barometer survey believe their companies' current distribution network and logistics approach is very effective or extremely effective.
The majority believe it's a mix—some effective parts, some less effective, some not particularly effective.
Most of the industrial manufacturers responding to the survey (58 percent) have undertaken either a supply chain effectiveness assessment (48 percent) or risk assessment (39 percent) over the past year.
Were these assessments effective? The response is largely mixed—some parts are effective, and some less effective. Only 27 percent of respondents report a very effective or extremely effective result. In contrast, three percent say the assessments were not particularly effective.