When working in silos, as many businesses do, it’s hard to get a view of the end-to-end supply chain, says Steve Bowen, chairman and CEO of global supply chain and operations consulting firm Maine Pointe, headquartered in Boston. But to transform amid the evolving digital supply management landscape, they need to develop that holistic view.
Bowen, author of Total Value Optimization: Transforming Your Global Supply Chain into a Competitive Weapon, says that two major obstacles impede supply management organizations, no matter the industry or sector, from doing so:
●A lack of alignment among key management — not just from procurement, but finance, sales, marketing and other departments as well — around a definition of what the end-to-end supply chain is, Bowen says. “If you can create that common definition, understanding and alignment, that’s the beginning of a cultural change within the company,” he says.
●A lack of a team approach/collaboration between functions like operations, engineering, new product development and procurement. All too often, purchase decisions about products and components are done by such functions as R&D, engineering and (to some extent) manufacturing without consulting with the procurement function, Bowen says. Methodologies like lean Six Sigma do offer a deeper dive into collaboration, but Bowen says that Total Value Optimization picks up where Six Sigma leaves off by presenting a more detailed, end-to-end view of the enterprise with an eye toward creating value for all stakeholders.
“But that’s not the way to accomplish optimized cost and/or structure,” he says. “In today’s world, what’s needed is a team — including procurement and suppliers — with product-development knowledge, which collaborates on how you come together to make your final product choices.” Additionally, he says, it’s critical to involve data analytics as well as procurement at the design phase.
Also affecting supply management’s view of the end-to-end supply chain is that many professionals don’t understand the finance side of business, he says. This prompts a third challenge: Getting professionals to understand business finance and relationships.
Take working capital, for example. Bowen notes that J. Paul Dittmann, professor and assistant department head at the Haslam College of Business at the University of Tennessee in Knoxville, Tennessee, calls the term an oxymoron. “Working capital,” Bowen says, “is inventory, payables and receivables that don’t actually ‘work.’ So, it’s not ‘working’ capital, it’s ‘non-working’ capital,” a concept that can be difficult to understand. “Organizations want to reduce working capital as much as possible because the total cost of capital — both working and physical — must be subtracted from the profit you make from a business. That’s what gives you your ultimate economic value-creation formula.”
Bowen cites Maine Pointe client companies that have developed end-to-end views of their supply chain, and how they achieved it:
●At one company, a lack of supply chain visibility led to a lack of knowledge of alternative suppliers that could meet specifications for such equipment as high-tech optics, Bowen says. Other challenges: Controlling or reducing costs, and sourcing/supply risk, particularly with 35 percent of the company’s supply coming from China.
Strategies included finding additional sources of supply — in other Asian and European countries — for about 60 percent of the Chinese supply. The company began using these additional sources once Chinese tariffs increased to 25 percent, Bowen says. This enabled the company to save close to US$10 million on supply costs and, he says, “created tremendous optionality. The company has now created a program in which they are going to keep a portion of their supply in China, a portion in other parts of the Asia-Pacific region and a portion in Europe, so that when things shift or change, they can move volume with suppliers. De-risking (the supply chain) is where the CEO placed the highest value.”
●Another company, in the oil and gas industry, reduced its number of suppliers by 50 percent, plus connected with new suppliers. “About 40 percent of the supply base is changing, which is quite radical in that industry,” Bowen says. Another measure pertained to the capital equipment purchased. “The combination of just those two features has saved this company more than $220 million,” Bowen says, adding that figure likely will grow as measures are completed. “They’ve also been able to create a different collaborative environment with the new suppliers versus the traditional ones,” he says.