Dynamic supply chain alignment: A theory ready for practical application

A few weeks ago I attended the Global Supply Chain Business Summit hosted by John Gattorna who has written two important books and several articles on supply chain management, more specifically on segmentation which then drives supply chain structure, both physical and organizational.  There were 10 panels on a range of themes. 1: Design thinking in enterprise supply chains 2: Transformation 3: The ‘new normal’ operating environment 4: Innovation in all its forms 5: Influential women driving global supply chains 6: Alignment 7: New business models and organization designs for enterprise supply chains 8: Leaders’ Forum – CEO perspectives on enterprise supply chains 9: Decision support in supply chains 10: Healthcare networks in the future Most panels were focused on the strategic aspects of organizational structures and supply chain design. At a personal level, the highlights for me were the panels on ‘Women in Supply Chain’ and ‘CEO Perspective’, which I will discuss later. But let me start with why we were all there.

Dynamic Alignment

This is a concept that John Gattorna has written about for some time, best captured by the diagram below.  The heart of John’s concept is that you need to segment both your market and your supply structures, and then design the appropriate supply chains to the company goals, customer objectives, and supply capabilities.  Jake Barr of Procter and Gamble was on the ‘Transformation’ panel and described their ‘From The Shelf Back’ approach to supply chain design (and product design for that matter), which is very similar to John’s approach in concept.

A quick high-level description of the diagram illustrates his concept. Perform a market segmentation analysis by product line, which should then drive the logistics strategies, including manufacturing/outsourcing. At the backend, perform the same analysis on your suppliers by commodity groups understanding how the suppliers are structured so you don’t put into place a contract based upon agility, with a supplier that has structured their supply chain for least cost.  Of course an alternative would be to purchase from a supplier that focuses on flexibility if the increased cost can be absorbed. Obviously there is a lot more depth to this concept than my thumbnail description. What is most different about John’s model is that he advocates different internal organizational structures to address the fact that we need different supply chains to satisfy the different markets most effectively. As we see in the diagram, in the future we will operate several supply chains, coordinated by a COO, that are aligned with both the sales and source market segmentation. Notice how there needs to be a coordination role, a horizontal structure cutting across functions/Bus/Geographies for each of the internal supply chains. What struck me in the description of the future provided by John is how much more coordination and collaboration will be required given that we will be using traditional organizational structures, based on functional expertise and hierarchical control, supporting multiple horizontal supply chains.  So how can we do this?

Women in Supply Chain

I bet more than 80% of the people who read my blog posts are male. At the conference, if we look at just attendees, my rough estimate is that there were 10 women and 110 men, which is not unusual at conferences on supply chain. More important for me was these were smart, articulate women that have risen to positions of power without becoming ‘one of the boys’. On several occasions they talked about the male culture in supply chain, and how, for some time, they had tried to be ‘one of the boys’. Two of these women were in the military, clearly a very male world. But they had come to realize that being ‘different’, being a woman, was one of their strengths.  They could view the problem from a different perspective, a more collaborative and consensual approach, one not typically practiced by men. The relevance to supply chain is that working together, collaborating, is something we have been talking about for long time, with little progress. It’s about time we walked the walk instead of talked the talk. And I think having more women in supply chain will help bring in different ways of working. My question to the panel was how do we get more women into supply chain.  The glimmer of hope I see is that at several conferences lately people have been talking about the need for more of the ‘soft’ skills rather than the ‘hard’ skills.  And aren’t these softer skills really what we need for the future?  I don’t mean instead of, I mean in addition to the hard skills I learned while studying for my engineering degrees. These skills or capabilities will be key to embedding and achieving end-to-end cross-functional supply chain alignment.

The CEOs Agenda

Scott Price, President & CEO of Wal-Mart Asia was a breath of fresh air.  In many of the previous sessions, there was an emphasis on risk avoidance through design of the supply chain.  In many of the panels, particularly in the ones on Design Thinking and the ‘new normal’, there was an implicit assumption that risk can be designed out of the supply chain.  Of course some of it can be, but not all of it and perhaps not the most important and highest cost risks. The Wal-Mart story was about building in flexibility and agility to processes and systems because ‘the forecast is always 50% wrong’. And with the emergence of a huge middle class in Asia, demand volatility and product complexity is only going to increase.  My key take-away from Scott’s contribution is that we need to develop ways to absorb the volatility and complexity rather than designing them out of our supply chains.  Of course there is ‘stupid’ complexity, which only adds cost to the organization, and this needs to be designed out. What caught my attention in the P&G story was how they have achieved a huge increase in the number of change overs between products without a single capex dollar being spent. So yes, flexibility and agility can be designed into manufacturing and the supply chain. Yet both Wal-Mart and P&G are still looking for step changes in agility and flexibility.  My take is that they need look no further than the data flow in their supply chains and speed of analytics to convert the data into actionable insight.  Since the early 1990’s I have been hearing stories of 2nd and 3rd tier suppliers getting orders before they get a forecast.  What’s depressing is that I am still hearing these stories. This is because we think collaboration is the extremely slow exchange of data via EDI, with each node in the supply chain running their own MRP.  Even within an organization that has their own manufacturing or distribution functions there is the need to plan across systems, and definitely the need to plan across functions. Performing the analysis at each node of the supply chain separately and hoping that you can create a consistent whole from the individual results just doesn’t cut it anymore. And building inventory and capacity buffers to absorb all the mismatches is very expensive.

What’s Next?

What struck me during the ‘Women in Supply Chain’ panel is that while there was much discussion during the other panels about the need for end-to-end cross-functional alignment, there was little discussion of alternative organizational structures that would make alignment a practical reality.  The implicit assumption was that we would need to continue with the hierarchical structures for control, and functional silos for concentrated expertise. We inherited these military concepts of spans of control, dating back millennia, long before the advent of the Internet and other more modern methods of analysis and communication. The women’s panel hinted at the value of organizing horizontally along process lines rather than vertically along functional lines, but never addressed the topic completely, perhaps because they are comfortable with the current command and control structures. The Industrial Revolution took us from craftsmen to factories for scale, and Henry Ford took us from disconnected crafts factories to horizontally organized assembly lines, even vertically (really horizontally) integrated businesses.  While from a financial perspective owning all the assets in a vertically integrated supply chain has proven the Ford model to be incorrect, I have yet to see an academic or business school study that argues that this is the incorrect functional structure. As we have migrated to ‘asset light’ organizations by shedding assets, we have also fractured and fragmented the horizontal processes. I do see a number of companies that have outsourced or off-shored their manufacturing trying to achieve ‘virtual vertical integration’, a term coined by Michael Dell. Because of the high degree of outsourcing in high-tech/electronics we even need to move to multi-enterprise orchestration.

Just to make this point more clearly, I isolated part of the John Gattorna diagram above that describes the future organization and the supply chains.  In this case 4 separate supply chains with end-to-end cross-functional/BU/Geography alignment.  While of course John’s diagram is focused within the organization, these concepts can be extended to multi-enterprise supply networks typical in high-tech/electronics, and which are becoming more prevalent in other industries too. So how do we achieve this cross-functional process?  Niklas Hedin, CEO of Centiro Solutions in Sweden presented some really interesting ideas on organizational structure. Niklas’ description of the ‘truly flat organization’ they have implemented at Centiro is

At the bottom, you have strategic leadership, supporting the organization, working on strategic issues 6-18 months out. Slightly above is tactical leadership, who works on the now up to 6 months. Around the rim are the autonomous teams, which are kept together by means of culture and other mechanisms put into place which are the supporting struts. Between two people in the organization is nothing, besides the openness to share ideas and innovation. This is the basis for our learning organization and strong culture.

I’m struck by a number of elements of his description, the most novel being that strategic leadership is at the bottom supporting the organization.  This is a far cry from the top-down command and control structures typical in nearly all companies.  But it is the autonomous teams that evoke ideas of cellular manufacturing dating from the 1990s and so central to Lean. According to Wikipedia

The major advantage is that material flow is significantly improved, which reduces the distance travelled by materials, inventory and cumulative lead times. Cellular Manufacturing employs setup reduction and gives the workers the tools to be multi-process, operating multiple processes, and multifunctional, owning quality improvements, waste reduction, and simple machine maintenance. This allows workers to easily self-balance within the cell while reducing lead times, resulting in the ability for companies to manufacture high quality products at a low cost, on time, and in a flexible way.

Sounds like a winner to me.