The Infosys global supply chain management blog enables leaner supply chains through process and IT related interventions. Discuss the latest trends and solutions across the supply chain management landscape.

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July 7, 2009

Is “Supply Chain function” a critical function to business?

This blog is a representation of my feelings and thoughts about the significance of supply chain as a function. I have been associated with supply chain for little less than a decade now, and based on my experiences and interactions with supply chain practitioners, I feel that supply chain function has slowly started gaining importance in the industry. We know that companies are driven by functions that drive business, get revenue and manage money. And therefore, functions such as Sales, Marketing and Finance have always been the pillars of any organization, independent of its size and scale. Having said that, I feel that over the past few years, supply chain as a function exists as a more formal organization and has grown from a mere supporting function to the one that has a direct impact on a company’s balance sheet. As per one of the articles in AMR Research, the average tenure of a supply chain organization in consumer products is eight years. So, there is still a long way to go from here.

As I understand, supply chain used to exist (may be it still exists today for few industry segments) in a very nascent form with hardly any interaction with business teams. Even, the term ‘supply chain’ has been used by companies in a very ad-hoc manner and each company has understood it in its own way. I remember instances where few buyers in a purchase organization would comprise a supply chain function. As companies grow rapidly without a formal supply chain organization, it develops processes and systems that are inefficient, sub-optimal and costly to maintain. This, in addition to stiff competition, has resulted in having supply chain function taking a lead role in company’s business decisions, and running large business transformation projects. It has helped companies in gaining market share, sales growth and controlling costs.

Let me share a real-life example here to explain my point. Very recently, I spent some time with one of our hi-tech manufacturing clients, which is a global leader in the industry. They have been showing consistent performance over the years in revenue growth and profits, despite an economic slowdown. They are also present globally in most of the countries, as any other large corporation, but have their supply chain processes and systems disintegrated, disparate and regional in nature. I observed that although this company has been pioneer in its industry, the supply chain function has never grown in the same degree. The function had existed in piecemeal and had a much localized presence. Even the designations of people were fairly traditional. The processes and systems lack the ability to provide flexibility and agility that a business environment demands today. But, now they have taken a very serious view of their supply chain processes, systems and organization structure. Their strategic intent is to have centralized global supply chain planning processes with few controls given to regional supply chain teams. They are even mapping their talent pool to the future needs and then analyze the gaps and take appropriate hiring decisions.

To close my viewpoint, I would like to share a data point: I was reading the ‘Global supply chain planning study 2009’ done by Capgemini, wherein one of the survey results is about “perception of supply chain function”. Interestingly, 16% respondents view supply chain as a source of competitive advantage and another 29% consider it as a critical decision-making function. I hope this number improves in future…

So, what has been your experience? Do you feel that supply chain is bound to gain that competitive edge and mature on a continual basis? Please share your experiences and feel free to comment especially if you disagree.

July 6, 2009

The Perfect Order – The Danger of Aggregate Metrics

The term “perfect order” has become a well-worn metric for anyone with a supply chain.  Typically, most people think in terms of the basic measures of “on time, in full, in spec,” which means have the customers gotten what they wanted when they wanted it, in the full amount ordered and with the expected level of quality?  Over time, the metric has expanded to specifically call out subsidiary metrics like Right Product, Right Packaging, Right Documentation, delivered to the Right Location, etc.  And all of these metrics make perfect sense.

What gets interesting – and I think a bit misleading – is when you aggregate these metrics  to come up with a single perfect order index, the “POI”, by multiplying all the individual KPIs together.  Some have argued that this makes sense, because looking at just individual KPIs could “lull you into a false sense of security.”  Perhaps. 

But looking at an aggregate index like POI can cover up specific issues in your supply chain performance.  For one thing, the underlying factors could be shifting around significantly from month to month but with no overall change to the composite POI.  You would have no sense if some metrics were trending better while some were simultaneously trending worse. What’s worse, you could be implicitly assuming that all of the component metrics carry equal weight, which is almost never true. 

Bottom line: There’s just no getting away from looking at the individual metrics and their interactions to have a clue as to what is happening in your supply chain.

July 1, 2009

Beware! Do not mix Procurement and Marketing

Much has been said, written and debated about Procure-o-marketing. My friends in the procurement community have advocated the advantages of introducing procurement concepts in marketing. This  group in procurement community has seen marketing spend with skepticism and disdain, as an overhead which needs curtailment. So, all these talks of Procure-o-marketing have come as a “novel concept”. The million dollar question, (and this is not figurative alone…)  Is a natural “marriage’ of the two enterprise entities possible? I strongly advocate NO.

Let us try and analyze the circumstances which make a procurement exercise successful. From the supplier’s perspective it is the survival of the fittest in the competitive environment. Cost structure optimization, delivery accuracy and reliability, quality of products and services, regulatory compliance and responsiveness to customer’s needs are quintessence of success. There is no room for “creativity” here!! The surmise from a buyer’s perspective is that all suppliers are equal and each one stands a fair chance. In industries where there are supply constraints, buyers go all out to book capacities in advance to prevent supply choking or exceptional spend on late bookings. Mature buyers would resort to hedge procurement to minimize costs and ensure supplies. They do take a beating sometimes, when price fluctuations break “set norms”, but that is what hedging is all about. 

 

A buyer’s buying behaviour is to look for ways and means to deride the “differentiators” projected by the suppliers and try and buy the products and services as “commodity” products and services. The yearly contract negotiations start with price and end with price. Taking the accounting route the objective of any buyer is to “chop off” the COGS and Inventory, to increase EBDIT and have a positive cash flow in their books. Since the procurement experts find it challenging to squeeze more out of COGS, so they have trained their guns on SG&A.

 

Let us take the case of marketing. The marketing professional is “glass full of ideas”. Their sole objective is to do something unusual to catch the eye of the person on the street. The five critical issues for success are differentiate, differentiate, differentiate, differentiate and finally differentiate….. Else the result is similar to the remakes of the epic movies, which have not lasted the test of time. Let us take the simple case of billboards spend. The location, the message, the colors, the depiction, the face and the expression on it….. these are more important success factors than simple buying fabric. Pepsi would go all out to have a blue attire for their brand ambassadors, what be the price.

 

So, if one starts probing into the cost structure of marketing spend and try to cut corners, one would surely find a lot of “scope’. But the fact remains that cost of innovation and creativity is simply….. priceless. Some organizations claim to have excelled in their art of procure-o-marketing. But behind the art lies a scientific classification of what is commodity and what is creativity. These organizations cut radically on commoditized products and services, but when it comes to creativity, they spend in millions to nurture it. That is what brand management is. It would be suicidal for organizations to jump onto the bandwagon of procure-o-marketing armed with scissors, if they have not yet mastered the art of classifying commodity and creativity.

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