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Alignment in Supply Chain – is it really possible?

Recently I read a great news article in Supply Chain Digest titled “Triple-A Supply Chain” that actually talks about the article published in Harvard Business Review in the year 2004 by Hau Lee. I am sure most of you would have read it but for those who haven’t, I sincerely suggest that it is a must-read for all supply chain practitioners. Although the article is more than four years old, it is very pertinent in current business environment. Let me just provide the objectives of the three A’s mentioned in the postingf and then, I would like to share my viewpoints with respect to one of the A’s that I feel is the ‘most relevant and critical’ capability for all the companies. The three A’s that have been talked about are:

a)      Agility – it is about how quickly a company can respond to any change in its business environment. It refers to short-term changes.

b)      Adaptability – it is the capability of a company to adapt to business changes that are more permanent in nature and therefore, it is strategic and has a long lead time.

c)      Alignment – it is the ability to have common and shared interests across the supply chain including vendors and customers.

The description for each capability is pretty simple and straightforward but in practice, it is extremely difficult to achieve excellence in building these capabilities. I have observed that most of the supply chain performance improvement initiatives can be directly or indirectly mapped to one of more of these capabilities, and I strongly feel that it is an evolving exercise. Companies need to continually gauge their current performance, sense the future to-be scenario and quickly mould its supply chain, in order to sustain its competitive advantage. Talking about the three A’s, I feel that ‘Agility’ and ‘Adaptability’ are still under the company’s control to an extent, but building ‘Alignment’ as a capability involves close interaction with supply chain partners. And since, it is partner-driven, in my opinion, it becomes challenging to deploy and control activities or institutionalize any change that affects multiple parties. On top of this, as the business environment changes such as the economic crisis we are in today, where we have slowdown and demand de-growth in almost all the sectors, it becomes extremely challenging to sustain the ‘alignment’ of objectives and have mutually beneficial business policies.

Let me explain the concerns and pain points with the help of three real-life examples:

I recall one incident from my prior experience that’s worth mentioning. I was in charge of demand planning function for a region and we were facing problems such as poor order forecast accuracy and high inventory in days with one of our big distributors (in Asia region). Since our entire planning was based on demand forecast, it was very important to include such big customers right in the demand planning process and incorporate the events that occur at distributor level in refining the demand forecast. In order to facilitate this process, I travelled to meet the team at distributor’s end and had detailed discussions with the Planning manager, who was responsible for maintaining the distributor inventory. To my surprise, I realized that his personal KPIs of inventory targets were not aligned to our objectives and that became a constraint in implementing the improved process. We couldn’t influence his superiors to change his KPIs and had to resort to some work-around, but my point here is that “Alignment” of goals, objectives and probably, incentives is not complete unless and until changes are done at the ground  level. People tend to follow their internally set targets and what their superiors tell them to do. The key decision makers in the hierarchy greatly influence the priorities that are set in the supply chain. In fact, this is equally applicable within the company as well and it takes a toll to align interests of conflicting groups. In my opinion, people that belong to the same supply chain team including partners need to have alignment in their ‘thinking’ and ‘approach’ and that’s really an ‘art’ and probably that’s the reason why companies fail to do so.

Another instance that I would like to cite here is wherein one of our vendors wanted to improve its operational performance but lacked people with right skills. We had to go through multiple rounds of discussions to convince the leadership team to hire a person that finally helped in achieving the desired results. So, I feel that there should be some level of alignment in the ‘skill quotient’ of the supply chain partners; else it is very painful and difficult to adopt best practices across the supply chain on a continual basis.

And the last example is about a company that I have worked closely with, in supply chain planning domain. This company is an industry leader in adopting advanced supply chain practices and technology. They were moving at a fast pace to adopt CPFR practices with its key distributors in developing markets/regions, to have common and shared goals. They even went a step further to align the distributor’s KPIs with their planner’s KPIs to avoid any resistance and gain mutual consensus to make the execution successful. But in the last few months, I got to know that since their sales have got deeply impacted by the global economic slowdown, the business team lost its focus on this initiative and planned go very slow in taking it forward. Moreover, at distributor’s end too, the focus is more to control costs and put all such initiatives in the back-burner.

So, is it really possible to achieve alignment in supply chain? Not easy though, there are companies who have done this and continue to be competitive in business.

I would like to have your opinion on this topic. Any experiences, suggestions, feedback and ideas are more than welcome.


You are right. "Alignment" is the toughest of the three objectives. It is, however, where an OEM can get the most proverbial bang for its buck. We've all heard the saying "companies don't compete against companies; supply chains compete against supply chains." Well its true if, an only if, an OEM can succeed in obtaining buy-in to certain rules of engagement across multiple enterprises in its extended supply chain. As you say, this is a challenge because supply chain partners often have conflicting metrics. To make matters worse they often have vast disparities when it comes to maturity of basic business processes, MRP/ERP systems and inventory planning controls. I have come to the conclusion that sometimes it is OK for the OEM to simply set the rules. Take it from someone that has been involved in multiple OEM initiatives to consolidate, for example, common raw material requirements across an extended supply chain - for all the rhetoric about "partnership," the old axiom "every ship needs a captain" still rings true. What I mean is that for alignment to work, the OEM's ultimately needs to establish the rules of engagement and needs a way to monitor and enforce compliance with those rules. Generally speaking, rules will be followed only when they are enforced. To apply yet another metaphor, the OEM must assume the role of the conductor in an orchestra. Using the example of material-input consolidation, an OEMs outside vendors, distributors and mills constitute the various sections of the orchestra. The ability of the orchestra to produce beautiful music depends to a large extent on the conductor’s musical score (are the rules of engagement "win-win" or zero-sum-game) and the interaction of the various sections of the band. Get either of those two things wrong and the music sounds like @#*! To summarize my thoughts, alignment is best achieved when: (1) the OEM develops and relentlessly enforces fair, win-win rules of engagement; (2) a nimble adaptable system exists that connect the dots between all parties in an extended supply chain providing visibility into channel interaction (we use an inexpensive but efficient SaaS solution for that purpose); (3) visibility garnered into the interaction of various players can be monitored and enforced (day in and day out) by the party that has the greatest vested interest in the end result, the OEM. Does achievement of alignment take some effort? Yes. Is it worth it? Well, chances are your competitor is figuring it out, so you decide.

Thanks for your comments, Trevor. Really appreciate your practical insights on this. OEM, typically in a high-tech environment, generally should set the rules, But don't you think, when the OEM's immediate partners like distributors are as big as the OEM itself, then the situation is much more complex. And alignment is difficult to achieve. After all, everyone would like to dominate or be the captain of the ship!!!

Thanks for this nice piece, I read the same article you referred to and thought I would share a couple of comments. I agree with the challenges of creating alignment in the SC, also with the reading of reality that indicates how far most are from achieving this. At the same time this is essentially the essence of what SCM is all about--looking at the supply chain as a single system to make sure that each link in the system functions in a way that maximizes the system as a whole.
I believe that the road map for how to create such alignment has been provided by Goldratt and Theory of Constraints (TOC). While many still look at TOC as a manufacturing methodology, due to the success of The Goal and the results producers achieved following it, it is in reality much more. It is a way to understand complex systems and create a road map for synchronizing their efforts so that all parts function to maximize the whole. A supply chain is not different than a series of manufacturing steps, or for that matter any work that requires multiple resources to work in coordination to deliver the outcome. It's easy to recognize that even if it is made up of different companies, they are interdependent. If the end customer buys more, everyone in the supply chain sells more. So it is in everyone's interest to be aligned.
What blocks supply chains from agility and alignment (I actually tend not to distinguish between these two as agility is simply the coordinated movement of many parts) is that the way they are managed is as if each piece were it's own independent entity seeking to maximize its own local objectives. Your example of the distributor's KPI's is a case in point. These local objectives, which were originally created out of the very real need to have a way to simplify the complexity of organizations and systems so they can be managed, actually create incentives which are counter to the three A's Hau Lee discusses. In addition to your distributor example, here are a couple more examples that I think are pretty generic:
1. Mfg- Plants are genreally measured on things like cost and efficiency. One way plants improve cost and efficiency is by running larger batches of goods between set-ups. But what does this do to the SC? Larger batches mean more inventory and longer times for plants to go through the full cycle of the goods they produce, directly extending lead times. When the replenishment lead time is longer, the DC's and sellers have to hold more inventory since it takes longer for their stocks to get replenished when they place an order. Of course larger inventories ties up cash, but even worse it means that there is a much greater chance of getting stuck with more inventory that isn't selling as well as forecast, so companies pay by having to discount or even write off this slow moving inventory.
2. Logistics- Logistics is typically measured on things like cost per volume shipped, or total transport costs. Like the manufacturing measures these motivate logistics to ship the cheapest way, boat vs. plane, rail vs. truck, and also to ship only in full container or truck loads because this is the cheapest. Here is batching in a different setting, but producing the same thing results described above--longer lead times, so less responsive to the market, resulting in higher inventories, etc.
3. Purchasing/ procurement- We all know the main measures of purchasing (of course quality is important, but as long as it meets the specs there are many potential sources), the real measure is purchase price variance (another way of saying buy inexpensively). Everyone knows that this may mean buying overseas instead of closer to home, or buying from suppliers who are less reliable on delivery, and it almost always means buying in larger batches to get the volume discounts. Again all the same effects result.

TOC provides the methodology for companies to align the local objectives to maximize the entire supply chain. This was Goldratt's great breakthrough. The challenge is exactly what you have indicated, achieving the consensus and having the courage to change these local objectives. The track record of companies using TOC in this way is quite long, though most don't make much noise about it, and the results are very impressive. I am sure if anyone wants to do a search you will see, from many sources, the remarkable gains that so many companies have made in this way. I know I am falling short of explaining the "hows" here but I hope you find this useful anyway. Happy to discuss more. Thanks for the nice piece, I found it very thought provoking.


Thanks Kevin for providing such relevant examples here. The "How" part, I believe, has its answer in "experience" and there is not just one right answer for all the problems.

No doubt that a distributor can cause problems but to allow them to do so is a bit like allowing the "tail to wag the dog." Ultimately the OEM drives demand for all the material-inputs and services that collectively come together to produce a product (whether the product is a turbine engine, cell phone or nuclear power plant). If the distributor is unwilling to play ball, the OEM (and its sub-tier suppliers) should find another distributor. Admittedly, this is only possible when the OEMs owns design authority on the parts that go into its products. If it does not, then alignement can be more challenging. I should add that Kevin is right about TOC's being a key to getting this right.

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