By Kevin Davies
In your career you’ve identified some serious unlocked strategic potential in the supply chain, what first alerted you to this?
I have been working for some time with Dr Bram Desmet and he wrote for me, one of the most profound and excellent business and supply chain strategy books called “Supply Chain Strategy and Financial Metrics”. Now, while I was actually in contact with him, I had the privilege to contribute to the book with the forward, and also with a business case study on my previous work with a company called Johnson Controls.
That encouraged me to look into the concept of everything involved in business transformation and supply chain and the idea of taking a more strategic approach to it. Leading up to Bram and myself, working on a concept called “Strategy Driven Supply Chain” and also the “Strategy Driven Value Planning and Execution” model.
In your white paper, The Concept of the Strategy Driven Supply Chain, you explore the current trend of businesses putting their supply chain front and forward It highlights some of the issues that companies are going through…
There’s an enormous amount of change. We know that probably 63% conform, but their CEOs are going through a business model change over the next couple of years. Now, what we are also highlighting is that lots of companies are overly focusing on gross and margin improvement, and have a somewhat lack in focus on shareholder value. That’s measured in a metrics called Return on Capital Employed (ROCE). Another problem is that companies don’t have enough understanding of the true complexity of their supply chain and how to balance service costs, and capital employed within what Bram calls the ‘supply chain triangle’.
Having a better understanding would lead to sharper strategies and stronger execution. This would lead to more sustainable performance and results. So it’s really that sustainable performance and results aspect which comes through, and we believe that it looks like a perfect storm. Supply chain is at the front of it. A supply chain that is seen from an entity point of view, and not just a functional point of view, is really important to companies. Companies have different supply chains and each of the supply chains needs to be strategy driven. Then, different strategies lead to different supply chains with different targets and different trade-off, for service cost and capital employed. There’s also a belief that supply chain strategy is simply following a business strategy or from the business strategy. We do believe that, but it is not a sequential process and the value proposition, and the supply chain are the ying and the yang of the business strategy. Only together can they define how business generates shareholder value and is measured by ROCE.
So, it’s about looking into supply chain from the perspective of driving value for customers, and for the business. Supply chain delivers on the promise that businesses are making through their value proposition.
Does this represent an evolution from the traditional operational back-end supply chain function?
Absolutely! It’s an evolution defined by asking the question as to what supply chain management actually is. We believe that supply chain management is more about balancing the supply chain triangle of service cost and cash. It is also about facilitating the internal debate between sales operations and finance. It somehow takes on the role of balancing these kind of trade off decisions.
Now that also proves that the supply chain is coming from the back room into the front room. It is becoming an equal partner around the C-suite, hence we are also talking about putting the supply chain or Chief Supply Chain Officers (CSCOs) into a more strategic role. That would require people operating on that level with more financial and strategic skills instead of in the past, having just operational skills. They will be measured on their operational skills and their execution.
Are you seeing examples of that in action now?
Companies are now taking a more strategic approach. We also see companies promoting people who have lead the supply chain become the Chief Executive Officer. You’ve seen other companies in the US like Apple. Tim Cook, who had been leading the supply chain for Apple for many years under Steve Jobs, is now the one leading the organisation. Now that’s a very good example when you look into how supply chain becomes a more competitive advantage for an organisation that has and understands the importance of having a great supply chain. It also shows how important it is to have somebody leading the organisation that he has an operational, financial and strategic skillset. The future skills requirements of the CSCOs in many companies will follow this path.
Would this require quite a substantial cultural shift? How important is change management to an evolution of this kind?
Yeah, absolutely. We say that it takes a bit of a leap in terms of maturity of organisations, and also changing and shifting the paradigms from where they are today to where they need to be in the future. Now that requires a value creation and that is why we actually started to work on the concept of the strategy driven supply chain. Even knowing that this is maybe five to ten years out. But starting the debate and starting the value creation really helps to facilitate and move the needle up. It’s enabling organisations to have a more serious look into their strategic supply chain and what it means to them as well as what it means to the overall strategy employment process in the organisation.
Some organisations took the approach of being driven by gross initiatives, without truly understanding the strategy behind them or the value proposition and even the complexity of the business. How do they want to differentiate themselves in the marketplace and what does it mean in terms of the service they have to deliver, the corresponding cost as well as the capital employed in their environment? We are looking at how we can help organisations by highlighting the problem or the potential issue. More importantly, it’s about finding a solution and an approach, and taking a different more strategic approach in future. We’re highlighting how the supply chain triangle can be balanced differently by promoting the CSCO into a more strategic role.
Would that result in the CSCO reporting on a peer-to-peer basis to a CEO?
It’s an equal partner in the business, and with the same level of importance as the C-suite, (CFOs, CEOs etc.) The CSCO becomes the ring man. They will help the CEO, and the entire leadership of the company, including board of directors, make more informed decisions, or as I would call it ‘deliberate choices’.
So the key to this is that the supply chain function has a wealth of data and knowledge and insight readily available to use?
It’s also about the reality of balancing the triangle. When you think about a supply chain, and the mission of a supply chain, it’s often about delivering the right product at the right time, at the lowest cost, at the lowest inventory. There is conflict in the triangle all the time. It’s about a service you want to give to your customers. When you talk about service, it’s not only how you move your products and deliver them but it’s also the complexity of the product. It’s about the order flexibility you want in order to give you the product portfolio as such, but also having an understanding of what it means in terms of cost you’re going to have in the organisation and the capital employed.
When we talk about the capital employed, it’s really about two elements: a working capital (the decision you have to make to strategically keep a certain inventory level in your organisation) or it’s how you deploy your assets in a fixed asset structure. How this applies to the conflicts and the triangle and the critical stakeholders in your business. The VPO of sales, as an example, what does he really care about? It’s probably the sales top line and market share. The COO or Head of Production? The primary concern is probably efficiency, as efficiency drives cost. But if you think about the VPO sourcing of purchasing, it’s the spend and how the company can buy more volume at a lower cost. That’s conflict.
So the question then becomes; who is best positioned in a company to balance that? Decisions and people being driven differently in terms of service cost and cash and the best positioned person to do that would be the CSCO. Now that’s the best thing for organisations to understand and if they do so, it can really set them up for a very successful future or operating on a new competitive level.
Do you envision a situation where a CSCO could evolve and transition
into a successful CEO?
Yeah, absolutely. That’s a prediction Dr Bram Desmet and myself are making and we believe you will see it happening more and more in the future, and in organisations where successful CSCOs who have those operational skills, financial skills and strategic skills are the best people for taking the job at the top of the house.
If a supply chain function is evolving in this way it would have to shed some of its traditional operations, is it true to say that some of this could be liberated through technology?
Yes you are right. You see the merge between the physical worlds and the digitalisation of the digital world, and enabling technologies. Companies are not only selling products and services, they sell solutions and outcomes. That is a new complexity that organisations are dealing with that requires certain changes and like I said before, be crystal clear about the value proposition you’re going to have or want to have as a business, and what it means in terms of the corresponding supply chain, and now your supply chain or different supply chains are delivering on the promise you made. The question is now about how you deploy your resources in your organisation more efficiently and effectively. That’s what we are talking about.
Do you think this would affect, going forward, the training of supply chain officers?
I believe it goes deeper than that. I believe if affects structures, it affects roles and it affects your whole recruiting process in terms of the discourse you would need as an organisation. It would also impact talent development. Going back to the example of the CSCO, in the past he has probably been promoted based on his ability to bring in results based on how the organisation performs. Now in the future I think it would be more about the balance between how he is actually contributing to the overall results of that organisation based on a strong operational performance. It’s also about financial results of an organisation being top line, bottom line and results or returns and what kind of strategic skills he has in terms of taking the organisation forward.
So that’s what we are talking about and that requires a new skillset and new talents in the organisation. There will need to be new training which needs to be provided and opportunities for people to move into these kind of roles.
What would you say are some of the obstacles to the evolution of this role?
Probably mindset and the culture of an organisations where they have traditionally rewarded their people differently in the past. They need to overcome that and look at what that change means for them. They need to be ready with their maturity and company culture to move and shift the paradigm to a more strategy-driven supply chain and value planning and execution model. So culture probably is the key obstacle in the evolution of the role.
In your vast knowledge, do you see any industry sectors where it’s accelerating more than it is in others?
Well that’s a very good question. I would say, from my own perspective it is that you see some of industries a little bit ahead. Technology companies for example would be ahead in terms of looking at that from more of a strategic point of view. Overall I would say that more and more companies are at the starting point of truly understanding that change needs to happen.