I reviewed with a client recently the overall historic progression of supply chain thinking, and it had a somewhat jarring effect. I think we’re all familiar with the early ideas of what I call “General Ledger” driven supply chain – there’s a line item for Procurement, there’s a line item for Manufacturing, a line item for Logistics… And you optimize those organizations to be very efficient.
The problem of course is that efficiency in any one focus area may drive inefficiencies in the other – great purchasing may drive inefficient manufacturing; great manufacturing efficiency may drive terrible logistics to the customer. The highlight of this kind of thinking is essentially that you’re not just inwardly focused; you’re even blind to the issues in your own company. The next stage was focus on the supply chain, the great discovery: how you focus on orchestrating activities cross-functionally to efficiently move a product to the customer. Unfortunately, there you can also evolve the “General Ledger” supply chain to the “Product P&L” supply chain – the vital link to the customer is still hidden, and while you may be very optimal for a product, you’re not optimal in a market.
I was working with a group in Disney and I remember distinctly – the VP’s in the group started their supply chain analysis at the customer, working the chain to suppliers. The Directors and Managers started their supply chain analysis at the supplier, working through the links to the product – it was quite stark in their view of supply chain, and the deficiencies in understanding that would provoke. What happens with supply chain product focus?
I talked to an electronics distributor a few years back, and they had “one supply chain”, which distributed electronics products, of all types. It had one strategic priority, 48-hour order turnaround. Then I asked a few questions – Did they have any distinction between end-customers and channels? Did they view spares as different than original parts? And as I continued down the question stream, they became uneasy. It was clear they used a very expensive, high-performance supply chain for bulk channel fulfillment – over-cost and over-performing to channel partners; and they paradoxically had, for spare parts, a low performance supply chain which really needed order-quantity-one fulfillment within 24 hours or less. I called it the “feet in the oven, head in the freezer” approach – on average it felt just fine. But in reality, customers were not happy overall – some were happy, some found them too expensive, and some too slow. But, they had simplicity in their supply chain – great flow of “product”.
Most companies I work with understand – over time – that over- and under-engineering supply chains for markets by focusing exclusively on a product supply chain has long-term negative effects, and it’s better business to look at true source-to-customer supply chains. It can be more difficult to organize accounting – but is the purpose of supply chain to have efficient reporting, or efficient service and products to customers.
My takeaway is simple: you may have gotten beyond GL-focused supply chain organizations (verticals), and may have developed end-to-end supply chain focus, but if you’re not looking at how each product gets to each customer type, and you’re still focused on product-level efficiency, you’re still missing the point. Of course, you’re not alone. My experience, and academic research has shown that fever than 5-10% of companies really have customer-centric supply chains. I’d bet that 40% have product-centric flows that they feel are customer-centric, and 50% of companies still are working with GL-focused supply chains.
The good news: there’s lots of room for improvement.