Supply chain has traditionally been the backbone of business, but new factors are shifting the boardroom focus, making it the hero of the tale, says Johanna Parsons.
Once upon a time supply chain was a mythical beast. End users were connected to suppliers by a series of business processes that hung together by some invisible magic. Integrating these systems, and managing them to get a better view of what is going on across the business has been reaping huge rewards for decades. So how can some executives still refuse to believe?
It’s staggering that a third of chief executives are disengaged with supply chains, and half of businesses have no risk mitigation strategy, according to research by the Chartered Institute of Purchasing and Supply. A recent survey by KPMG found that almost half of manufacturing executives globally admit that their companies currently do not have visibility of their supply chains beyond Tier 1 suppliers.
And when the CIPS analysed a selection of annual reports, it found that buzz words such as brand strategy and carbon footprints featured significantly more than any mention of supply chains.
One explanation for this is that in these days of global recession and ever tightening margins, the focus is on sales, and boosting market share with marketing tactics. Emma Scott of the CIPS says it is a “survival mode” that has drawn attention away from back room activities.
But panicking and losing sight of the overall picture is a dangerous trap to fall into. More than just a means to optimising processes and profits, efficient management of the supply chain is a vital way of avoiding risk and mitigating damage when the unexpected strikes.
Scandals such as phone hacking or tax avoidance are relatively easy to fix, as far as investors are concerned. A judicious firing, or an apologetic (and high profile) subscription to a new set of ethics brings ready forgiveness from the markets. But a break in the supply chain, preventing business as usual, infers an integral problem with the business. And that is more difficult to change peoples’ minds over.
Law firm Freshfields Bruckhaus and Deringer produced a report that found such operational crises caused the biggest long term negative impact on share prices of all. Crises that affect the corporate and financial wellbeing of the organisation, behavioural crises triggered by illegal or questionable conduct of the company or employees, and informational crises affecting IT infrastructure or electronic systems were all found to do less damage.
Operational crises included anything that affected the integrity of the supply chain, and the ability of the firm to function properly. And although they may have a fairly modest initial impact, the report found that on average share prices drop by 15 per cent after six months and that 25 per cent of companies were still experiencing problems a year later.
Scott highlights the example of a fire at a Philips factory making chips for mobile phones. Supply was disrupted, customers were notified and plans were put in place.
It later emerged that the “clean room” was contaminated. This is the core of the factory where chips are made, and has to be completely dust free at all times.
This time delays were longer, and impacted the launch of new handsets for some customers.
Nokia was quick to respond and worked with Philips to secure the supply of the chips from Philips’ other plants. But others were less responsive.
“Ericsson really took their foot off the pedal, and never recovered. Whereas Nokia went from strength to strength,” says Scott.
Increasingly, supply chain risk is a factor in strategic decisions such as where to locate operations. Scott says firms are “re-shoring” because with fluctuating labour rates, for example, there will always be a “new cheapest place to manufacture” and the cost of shifting to keep up is getting prohibitive. Less long haul shipping is also an advantage considering how wildly fuel costs are rising. But significantly, it gives better access to monitor the supply chain and less room for risk.
Tesco has moved some of its meat production closer to home in the wake of the horsemeat furore earlier this year, to get a firmer grip on its supply chain, says Scott. And sadly, it may take such high profile negative events to drive supply chain up the list of priorities for chief executives, finance officers and other chiefs in the “C-level” of the board.
“I think the more scandals and risks that occur in the press will make people prick their ears up. Like Tesco, they’ll react retrospectively, but hopefully others will follow by example,” says Scott.
Fight for influence
“It’s a selling job… to go to the board and say ‘we don’t want to be one of those statistics’.”
Robin Proctor, supply chain director at Travis Perkins agrees that there is a burden on supply chain practitioners to fight for boardroom influence, but he believes that the worm has turned.
“I think that from a strategic influence perspective there are big opportunities for supply chain directors to open peoples’ minds and drive the agenda, based on the growth of multi-channel.”
While the customer and the proposition will always be the top priority, the new ways of retailing, and new demands of delivery brought about by e-commerce has made the supply chain a far more integral part of that proposition, he says.
“With increased delivery options and extended ranges, the proposition has gone beyond the branch, so the supply chain is a lot more important… The final mile can potentially make or break the profitability of a product, so it’s imperative to get that right.”
This represents a huge challenge, as well as an opportunity for supply chain. With the market, customer expectations and technologies changing apace, boards are looking to supply chain for the answers. Supply chain directors are being entrusted with massive investment budgets to completely reorganise and set up for multi and omni-channel retailing.
But such huge outlay comes with strings attached, and whatever is spent on property, fleets and equipment often has to be justified on timescales of up to 20 years. And when the very nature of the requirements is fast changing new sales channels, it’s extremely difficult to be certain that a solution to meet today’s multi-channel needs will be sufficient in decades to come.
“The challenge is to future-proof investments,” says Proctor. “It’s got to be flexible and a board is more interested in getting that right, and asking ‘what if…’.”
These new responsibilities are signs of progress for supply chain’s role. Proctor maintains that traditionally it was a low cost business function that acted on strategies decided at C-level, delivering results from behind the scenes.
But today supply chain and its directors are the knights in shining armour entrusted with the mission to manage pan-business transformations. And Proctor reckons that recruiting suitable candidates for the task is getting to be a challenge.
“The skillset of a supply chain director is moving rapidly from being process and cost management led to being about strategy, considering corporate risk, the impact on stakeholders of that risk, and broadly, HR too.”
To that end, Travis Perkins has set up a joint skills programme with the Cranfield University. It is also one of the 15 or so firms that sponsor a new four-year logistics and supply chain BSc degree course run by the NOVUS Trust at Huddersfield University.
“Over the past decade retailers and manufacturers have leveraged the logistics and supply chain function to give them competitive edge, while trends such as increased technology, online retail and globalisation have changed the dynamics of supply chain management,” says Andy Kaye, chair of The NOVUS Trust steering committee. “The skills, capabilities and intellectual capacities of managers within the industry must keep pace with this change.”
The CIPS has also updated its courses for 2013 to better reflect the professional nature of the qualifications, and the new importance placed on the function. Its Supply Management profile of the profession survey reported that these days almost two in five respondents are reporting to a higher level within their companies than five years ago.
So it certainly seems that supply chain is being taken more seriously. Sadly some smaller firms are slower to catch on, and with the immediate pressures of the global economy distracting some, there is still a battle to be won to boost supply chain up the boardroom agenda.
But high profile failures to navigate the risks, and the transformative power of e-commerce are encouraging businesses to equip supply chain departments with the funds and strategy setting power to face the challenges head on, and hopefully, set us up for a happily ever after.