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ASCM Insights

Episode 27: After the Dust Settles

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Bob Trebilcock: Welcome to The Rebound, where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, editorial director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments. Now to today's episode.

Welcome to today's episode of The Rebound, After the Dust Settles, Supply Chain Changes in a Post-COVID World. I'm Bob Trebilcock.

Abe Eshkenazi: I'm Abe Eshkenazi.

Bob: Joining us today is Gary Smith. Gary is the supply chain leader for the New York City Transit system. He's the guy that keeps the trains and buses running on time. He's also a frequent contributor to both Supply Chain Management Review where I'm the editor and the Association for Supply Chain Management where Abe is the CEO. Gary, welcome.

Gary Smith: Thanks, Bob. Thanks, Abe. I really appreciate it. I've been a fan of The Rebound for, well, since it started. I've been listening to it for a long time and really appreciate you're doing this.

Bob: We're glad to have you as a guest today. Thanks for joining us. I don't think there is anyone who isn't convinced that COVID changed and continues to change everything, and I just watched the news this morning. We can start with where and how product is sourced, how goods move through the supply chain, how we interact with our customers, the relationship between employers and employees, that's certainly in the news a lot today, just to name a few.

It sometimes feels a little like a scene from a disaster movie where the survivors walk out of their shelters to see what the world looks like after the dust settles. Last November, Supply Chain Management Review published a piece by Gary outlining a series of eight steps he believes organizations need to consider before the next disruption. Now, we're not going to have time to talk about all eight, but we're going to get through as many as we can.

Gary, before we look at a few of those steps, one of the things you wrote about is this idea of a people-first culture. Tell us why there's been a shift towards a people-first culture and why you believe that's important going forward.

Gary: Well, Bob, to begin, let's go back about 50 years. In 1970, the economist Milton Friedman published an article in New York Times where he argued that the sole purpose of a corporation is "To conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of society, both those embodied in law and those embodied in ethical custom."

What he was saying in effect that a company's purpose was primarily to maximize profits as long as it did not break the law. This concept became the cornerstone of what is known as shareholder primacy. The idea rapidly took over the boardrooms of America and much of the rest of the world. I believe that shareholder primacy is probably the main reason for the short-term quarterly thinking that's dominated business thought for the last 50 years, but it wasn't always like this. People build companies for the long-term.

No one ever said, "Let's build a company, work our keisters off and then close it down in 10 years." People don't think like that. Companies such as Southwest Airlines, Walt Disney, and Apple have always played the long game and put employees and customers ahead of profits. Just look at their vision statements. Southwest Airlines' vision statement is "To be the world's most loved and most efficient and most profitable airline."

Walt Disney's vision is to "Entertain, inform, and inspire people around the world through the power of unparalleled storytelling, reflecting the iconic brands, creative minds, and innovative technologies that make ours the world's premier entertainment company." Finally, Apple's vision is "We believe that we are on the face of the earth to make great products and that's not changing."

The interesting thing is Southwest lists profits third, and Apple and Disney don't mention them at all. The point I'm trying to make here though is that not that profit is unimportant because it is, it is important, but by putting people first, profits will come because the people who are your employees and the people who are your customers have a vested interest in your success.

Why did Henry Ford raise wages for his assembly line employees from $2.50 to $5 per day in 1940? He did it to create a new market for his cars because now his employees could purchase the cars they made. The sad fact is that COVID has been devastating millions of workers. In response to the pandemic at the beginning of the lockdown, we saw boards of directors and corporate CEOs not only put their salaries on hold but extend benefits to thousands of furloughed workers.

The $2 trillion surplus package that was passed into law and the continued benefits the workers are receiving are unprecedented in their reach and scope. Such public benefits were inconceivable just a few years ago. Yes, I am seeing the beginnings of shift to a people-first culture where the least of us is as important as the rest of us.

Abe: Gary, that's really interesting in terms of a setup on the transformation that we've all encountered over time from corporate responsibility to the shareholders to the employee. Really interesting. One of the steps that you pointed out is to create a vision, a culture, and end-to-end visibility. Obviously, that includes the employees and includes your partners, your vendors, and all aspects of it.

In our research with The Economist, we saw that one of the areas that we were deficient on relative to COVID was visibility, that we did not have end-to-end visibility. What do you mean by that and how do we do it?

Gary: I'm glad you asked that, Abe, because I think that we've all said in supply chain in ASCM and other areas, is that end-to-end visibility is really the holy grail in supply chains. It's a requirement for a people-first environment as well. When supply chain has true end-to-end visibility, it means that there is a system in place that, at a minimum, can track an order and its information anywhere in the supply chain from a tier-one supplier to a tier-one customer.

It is really a three-part process. Part one is for inbound material, part two is for outbound material, and part three is within your company. This means that the purchase order, customer order, and internal inventory and information can be tracked at any point. Not only can it be tracked, it can also be expedited, slowed down, increased, reduced, or canceled at any time.

In my experience, e-commerce companies have come closest to the true end-to-end visibility because of their need to continually invest in system upgrades in order to stay competitive, although I'm sure there are exceptions. Two of the best examples from a customer perspective is the customer order tracking available on Amazon and UPS. In the B2B sector, there are numerous truckload, LTL, and small parcels carriers that have excellent reporting to their customers.

End-to-end visibility is critical in identifying material that is subject to product recalls and identifying the location of defective and potentially defective products as well. The ability to track material using lot tracing, serial numbers, and now blockchain allow materials to be identified and quickly remove from the supply chain. Also, it is an essential requirement for implementing circular economy initiatives as this concept matures.

Bob: Thanks, Gary. I find the discussion of visibility really interesting because I think it's been the holy grail of supply chains probably going back to when the Egyptians built the pyramids. I'm a big fan of financial histories. I read a two-volume biography of the Rothschilds, I don't know, 10 years ago by the British economist, I think it's Niall Ferguson. The Rothschilds got a competitive advantage over their competitors when Napoleon lost at Waterloo.

You wonder how, but it's their competitors were waiting for news releases and the Rothschilds got their information via homing pigeons. Pigeons were the emerging technology at the Battle of Waterloo. Today, we hear about all these exciting emerging technologies. From your perspective, how do we leverage technology that's going to speak to the vision that you just talked about in this continual quest for end-to-end visibility?

Gary: Bob, first, we have to develop a complete understanding of our company's vision, mission, and culture. The technologies that an organization chooses must be a fit for all three. They must also integrate seamlessly with the myriad of handheld sensors and equipment that make up the Internet of things that provide information to all these systems. Finally, all these systems need to connect using cloud.

The systems and processes also must be transparent, and the operations and processes should be known or available to all affected parties. For example, everyone might not be able to calculate inventory turns, everyone should have access to the information as to how it's calculated. Confidential company information and trade secrets to the contrary, a well-run supply chain should democratize it's information making it accessible to all.

One of the best execution systems that I have come across lately is the supply chain control tower. The concept has really become a reality mainly due to advances in technology. I like to think of a control tower much like the bridge on the Starship Enterprise, where all the supply chain information is centrally available and can be analyzed in real time. A big advantage of control tower is that since most decisions are routine, the control tower makes the majority of its decisions automatically.

It's the outliers that require the higher level decision-making, and that's the responsibility of the supply chain professionals. The control tower has all this information at its disposal to determine what inbound and outbound shipments will be late, which shipments are damaged, and what customers or suppliers are credit risk. Decisions can be made in real time and followed up in real time to determine the overall impact to the organization.

Abe: Gary, let's put some of the puzzle pieces together here. We talked a little bit about employees, talked a little bit about technology, we talked a little bit about end-to-end visibility. This starts to come together an organization, oftentimes an S&OP, sales and operations planning, in terms of everybody committing to a one plan or a design for the organization. In the supply chain disciplines, we talk about planning and forecasting as if they were the same. Oftentimes it's used as a corollary for either scenario planning or other types of issues for the organization. Why do you position that we should emphasize planning over forecasting and what's the difference in your mind?

Gary: Well, Abe, that's a great question. We all know that 2020 and 2021 were disasters as far as forecasting is concerned and have been relegated to the outlier category. What I've heard lately is that it may take until 2023 for forecasters to really begin to trust their models again to any degree of confidence. I believe that both planning and forecasting are useful and necessary, and the purpose of supply chain planning is to be an instrument to meet demand, but demand by its very nature is uncertain. To reduce uncertainty, organizations develop forecasts.

Today, forecasts are developed using complex software packages. However, forecasts are lagging indicators. By the time a trend is discovered, many times it's already gone, at best they're educated guesses. As my friend Carol Ptak says, there are two kinds of forecasts, lucky and lousy. I believe that the emphasis should be on demand planning. Dwight Eisenhower once said, "Plans are useless, but planning is indispensable." The goal is to find a reasonable balance between inventory and customer needs without having too much or too little, while forecasts are usually made in a black box setting without a lot of direct input from supply chain professionals or others.

Planning as much more participative. It explains the course of action and identifies the strategy behind it. Plans can be updated and changed, circumstances dictate. The basic difference between the two is personal accountability. Plans are accountable. If a plan goes awry, there's always a name that can be associated with it. You can always say, "Mary and Bob wrote this plan." Forecasts are not, because what we often hear is, "The forecast was bad."

Bob: Thanks, Gary. Going back over your steps, another one of those was about segmentation. Segmenting your supplier and customer bases. First, tell us what you mean by that, because customer segmentation is a thing that people talk about. To you, what's segmenting your supplier base? What's segmenting your customer base? Then why should we do that? Why is it important?

Gary: Because Bob, as you know, all suppliers are not created equal and neither are customers. It's like the phrase in George Orwell's Animal Farm that says, "All animals are equal, but some are more equal than others." Only from a supply chain perspective, it's much less dystopian. Let's look at suppliers for a minute. Every company has a wide range of suppliers that can be grouped in various ways. They can be organized by volume purchased, by total dollars purchased, by percent of received, and on-time in-full. My personal favorite is the Kraljic matrix.

In 1983, Peter Kraljič wrote an article for the Harvard Business Review titled Purchasing Must Become Supply Management. In it, he makes a case for changing the mission of the purchasing department from one that traditionally treated all suppliers the same or nearly so and suggests reclassifying suppliers based on their relative importance and risk profile to the company. The result is one of those classic 2x2 matrices that academics and consultants love.

Each supplier is assigned to the matrix based on where they fall into one of four quadrants. The first is non-critical items. This is the lower left quadrant, both low importance, low complexity. These are the simple buys that are usually purchased in bulk commodities and can usually be assigned to a low-level buyer for purchase.

The second is the leverage items, these are found in the upper left quadrant, high importance, low complexity. Items in this category are items that can be fully leveraged. While important to your company, the products purchased are not complex, and there are a number of competitors in the marketplace that supply the same product or one that is, could be a reasonable substitute.

If your company typically purchases these items in large quantities, you can usually negotiate good pricing and terms. Typically these items are purchased by a more senior person on the buying staff. Bottleneck items, which is the third category, usually require that you have a good relationship with your supplier. There are fewer qualified suppliers, and the items purchased are relatively complex, so they have longer lead times.

Items in this category can hurt you if your supply is interrupted, so it's wise to have a backup supplier or two in the wings. Your company should also have contracts in place that are several years in length. Again, supplier relations are important. People negotiating these contracts should be senior buyers and department heads. The final category are your strategic items. These are found in the upper right hand quadrant and usually have long lead times, are very complicated and expensive. These will shut you down if you run out.

Generally, there are a few qualified suppliers in these items, and it's not uncommon for them to be sole suppliers. Here, again, supplier relationships are particularly important. Your company should be negotiating long-term agreements and partnerships with these suppliers, and they should be negotiated by chief procurement officer. When it comes to customers, customers can be segregated by profitability, by sales volume, by geographic volume, et cetera. Again, there are customers that can be very profitable and customers that are not, and you need to maximize your profitable customers and minimize your non-profitable ones.

Abe: Gary, last question, I think you're alluding to this right now in terms of the relationship that you have with your suppliers. Let's go to that particular relationship, a switch from a transactional to a collaborative approach. I think you're starting to talk about that in terms of your segmentation. Give me a little bit more insight into that.

Gary: Okay. Supply chain professionals requesting and being requested to sit at the leadership table and having a seat at the leadership table is an indication that your supply chain organization is mature. Making the transition from purchasing to procurement is a key part of the maturation process. Purchasing is transactional, a buyer gets a request for an item, and they cut a PO to a vendor.

Purchasing departments have vendors, procurement departments have suppliers. I live in New York, and when I hear the word vendor, I think of the vendor carts along the streets in Manhattan, these are low-level simple purchases. I consider supply chain people to be professionals regardless of which side of the table they are. A professional buyer deals with suppliers, not vendors.

Purchasing is associated with a one-size-fits-all transaction. Typically, these result in a win-lose buying event. These transactions usually leave one side feeling shortchanged and can lead to passive-aggressive behavior in the form of poor quality, late deliveries, inflated prices, and generally poor communications between parties. This type of one-off purchasing is really best left for items that are infrequently purchased. However, procurement professionals are really in a relationship business.

Relationships are based on mutual respect and trust, and they're built over time. Relationships can help carry you through tough times. I would say that the present COVID situation qualifies as one of these tough times. Remember, when times are tough and your supplier and customer relationships are not good, then it's too late to ask for special favors.

Abe: Gary, thank you so much. That's all the time that we have today. A special thanks to our guest, Gary Smith. I'm also excited to share that both Gary and Bob will be joining the ASCM CONNECT Annual Conference. It's taking place October 24th through the 26th in San Antonio for a panel discussion on this topic and many more. The registration for ASCM CONNECT Conference is now open.

Whether you choose to join us in person in San Antonio or attend virtually, both of the experiences are going to put you front and center with the information and relationships that you'll need. You can find more information about ASCM CONNECT Annual Conference at ascm.org/conference-2021. Again, a special thank you for joining for this episode of The Rebound. I am Abe Eshkenazi.

Bob: I'm Bob Trebilcock.

Abe: All the best.

Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.

 

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