Most organizations exist within a complex labyrinth of vendors, suppliers, customers, distributors, and business partners. Understanding and leveraging these supply chain relationships are key success factors in navigating an increasingly interconnected world. Many companies have tried to leverage supply chain relationships via industry consortiums and emerging Internet technology, but these solutions have collectively fallen short of their goal because most supply chain relationships are ill defined and lack a coordinating governance structure.
Deriving exponentially greater value from supply chain relationships requires developing a common vision in which companies concurrently cooperate and compete. To meet this goal, companies should formalize a supply chain alliance in which cumulative benefits exceed what an individual company could achieve on its own. This requires exploring supply chain governance structures that define shared purposes and principles for all participants. I will discuss basic supply chain challenges and outline holistic governance structures needed to address those challenges.
REVIEWING THE SUPPLY CHAIN CHALLENGE
Suppliers, business partners, and customers come in many varieties. Many times, institutions underestimate the importance of suppliers to the viability of their enterprise. Understanding who composes your supply chain is step one in understanding how to leverage it. Table 1 defines eight key supply chain categories.
Table 1: Supply chain categories
1. Raw materials: Include steel, lumber, fuel, and other materials needed to build a product or maintain a work environment.
2. Components: Include preprocessed items needed to produce products that are then sold to your customers. These can range from springs to computer chips.
3. Products: Differ from components in that they are procured for use by a company or consumer and not resold.
4. Services: Include maintenance, banking, insurance, healthcare, legal, association, and many other service categories needed to run a business.
5. Infrastructure: Includes emergency and other government services, electricity, water, natural gas, and communications capabilities.
6. Data or information: Includes any data or information, obtained in paper, electronic data interchange (EDI), or other format, from a third party.
7. Distributors: Includes agents, resellers, franchises, wholesalers, retailers, or other distributors of your products or services.
8. Customers: Include buyers or users of your products and services. Some institutions call their customers subscribers, constituents, clients, or patients.
Most enterprises rely on raw materials, products, services, infrastructure offerings, and data during a given business cycle. Companies that manufacture or assemble products also rely on component parts. The first six categories in Table 1 present opportunities up the supply chain. Relationships with distributors and customers present opportunities down the supply chain.
Many companies have little knowledge of the entities leading into and out of their supply chain funnel. This not only limits your ability to assess how a given industry may evolve, but it limits your understanding of when this evolution will occur. These complexities are magnified when thousands of entities lie up and down a supply chain. One company may supply a component, which is then sold to a third party, embedded in another product, and ultimately sold back to the originating company. Ending a relationship with a company could cut off your own supplier! Companies are concurrently cooperating and competing as suppliers, business partners, competitors, and customers — all in the same supply chain.
When a link in the supply chain fails unpredictably, numerous entities can suffer. Major damage can result when one company’s problem shuts down an entire portion of a supply chain that lacks an industry-wide contingency plan. When two companies in Boeing’s supply chain failed to deliver component parts in 1997, it cost Boeing $1.6 billion.1 The costs to other companies within the supply chain were never released. Obviously, effective supply chain management, including the creation of industry-wide contingency plans, is not a luxury.
HISTORIC ATTEMPTS AT SUPPLY CHAIN MANAGEMENT
The Year 2000 problem exposed the importance of supply chain management, but it also demonstrated that most industries lacked the ability to track compliance across those supply chains. Supply chain management strategies have lacked the cohesion needed to address minor and major industry challenges, and attempting to automate these defective strategies will only exacerbate the problem. Historically, industries wishing to track supplier-customer relationships tried to utilize industry associations. For instance, the Automotive Industry Action Group (AIAG) tried to address Year 2000 supply chain issues for its 1,600+ members by informing members of the problem, providing project guidelines, prodding members into compliance, and urging members to prod their suppliers into compliance. But because the automotive industry relies on more than 100,000 companies, this effort fell short of what was needed. AIAG lacked the broad-based access and clout needed to deal with this challenge. Ultimately, supply chain readiness efforts fell to the large corporations that dominate the supply chain.
The Securities Industry Association (SIA) coordinated a cross-industry Year 2000 test, but it focused on clearing selected transactions through a short list of centralized entities. Global financial markets and international clearinghouses did not manage to coordinate Year 2000 data interchange testing at the same level. Other industry supply chains were less effectively coordinated. The food industry, for example, has numerous associations that did little to ensure cross-industry supply chain compliance for the Year 2000.
The bottom line is that each company had to independently assess Year 2000 readiness across its supply chain. Almost identical research was replicated thousands of times by countless companies across various suppliers. Most of these efforts never ex-tended beyond the first tier of suppliers and customers. In other words, supply chain readiness was largely unknown going into the Year 2000 because no model existed that defined which companies supplied or bought products and services from other companies.
Another approach to supply chain management is coercion by large companies that dominate the chain. This has worked in limited fashion in the technology sector — at least for the companies with the clout to impose their view on those below. However, few companies have the market penetration to order a supply chain to bow down to their whims. And other companies in the supply chain derive little value from a top-down, command-and-control structure imposed upon them.
As the need for supply chain management grows, vendors are rushing to automated solutions. Early automation came from ERP vendors using traditional IT solutions. But when these systems failed, distribution capacity collapsed. In evidence of this, a series of distribution system failures at Hershey,2 International Multifoods,3 and Royal Doulton4 caused profits to drop and stocks to tumble. These companies lost control of their distribution capability because they lacked a robust supply chain governance structure that could withstand a computer system failure.
Now companies are pursuing Internet-based solutions that claim to manage supply chains through e-business environments, but these initiatives rely on the same old paradigm in which a company views itself as the center of the supply chain. Within this model, decisions are made with a skewed view of supply chain relationships. What is needed instead is a holistic view of a supply chain that will enable the creation of holistic, e-business solutions. Developing this view of supply chains requires governance structures that supersede the myopic view of any one company’s trying to assess a seemingly endless number of relationships.
SUPPLY CHAIN GOVERNANCE REQUIREMENTS
Supply chain participants should be able to work with other supply chain participants to benefit themselves and their industry sector. This is difficult because supply chains are organic. They are constantly evolving into new and complex structures that cannot be pinned down or defined hierarchically. This requires a holistic view of the supply chain in which the participants can evolve organically around a common governance structure.
For example, a holistic view of a supply chain would suggest patterns where companies could pursue mergers, acquisitions, partnerships, geographic restructuring, direct-to-market options, and other unforeseen opportunities. And a holistic view would never assume that a single entity dominates a supply chain — a transitory situation that invariably changes over time. Sample principles that can be used to create a holistic supply chain governance structure are shown in Table 2.
Table 2: Sample supply chain governance principles
1. Establish and share a holistic view of the supply chain that allows any member company to derive value from that view.
2. Create an incentive-based supply chain program in which members work cooperatively to create a complete picture of their own supply chain as input to the whole.
3. Foster an environment where supply chain participants work harmoniously for the betterment of the industry.
4. Ensure that cooperation on certain matters does not detract from free market competition.
5. Provide access to an evolving view of the supply chain that allows individual companies to streamline acquisition, processing, marketing, and distribution costs.
6. Shorten time-to-market for products through improved tracking of internal and external supplier, distribution, and customer processes.
7. Ensure participants in this governance structure share equal rights and that domination by a single entity or small group of large entities is impossible.
8. Work with the collective supply chain to set priorities for industry initiatives, including development of cross-industry contingency plans.
9. Work with supply chain and non-supply chain organizations for the betterment of the overall environment.
10. Ensure that competitive and proprietary information is secured as a component of this approach.
These principles can be distilled down to a single goal: companies should work together where they can collectively benefit but still maintain an environment where they can compete in a free market scenario. This requires the creation of a governance structure — a legal entity — owned and run by all members of the supply chain. This approach allows companies to build a supply chain knowledge base that benefits the entire industry.
Members would have an incentive to join the governance structure because they could access and profit from information about the entire supply chain unavailable elsewhere. Member companies would be able to quickly pinpoint supply chain dependencies up and down the chain — something that has eluded most companies for decades. Any group of members could create substructures, as needed, as long as they were in accordance with the purpose and principles of the governance structure.
Initiatives enabled under this governance structure include the development of a centralized, supply chain relationship model and the ability to address industry challenges based on the relationships defined in this model. These initiatives might include foreign market expansion, labor issues, common data sharing, conservation measures, human rights, raw material management, regulatory issues, waste treatment, and development of environmental positions.
CREATING A SUPPLY CHAIN GOVERNANCE STRUCTURE
In order to meet the aforementioned requirements, a supply chain governance structure must have
1. Accepts all product and service suppliers, customers, and distributors as members
2. Exists to further the goals of its membership
3. Uses incentives, as opposed to coercion, to build participation
4. Concurrently competes and cooperates
5. Is empowered at the periphery and unified at the core
6. Self-organizes and self-governs
7. Constructively channels conflict
8. Seeks opportunities in challenges
9. Fosters diversity and accommodates change
10. Learns, adapts, and innovates in ever-expanding cycles
These principles are found most commonly in a chaordic® governance structure. Chaordic describes the state of an organization that embraces and leverages chaos and order. The term chaordic comes from a book by Dee Hock, founder and CEO emeritus of Visa International.5 Visa is a prototype chaordic organization, being member owned and operated. Under a chaordic alliance, a legal entity is formed that binds relevant and affected parties under a civil contract, which, for the purposes of this article, includes suppliers and customers in a given supply chain.
A chaordic governance structure enables supply chain initiatives because it fosters collaboration in the face of disparate or competing agendas. This is accomplished by defining a shared purpose, guiding principles, infrastructure, and a constitution governing the behavior of participating entities. Suppliers and customers linked to the supply chain join the alliance by committing to the purpose and principles defined in the constitution. Once in, they cannot be removed, unless they do not abide by the constitution. They can leave whenever they wish.
Creating this governance structure requires leading suppliers and customers to assess the value of such an alliance. They would then assemble a representative body to draft a purpose, principles, governance structure, and constitution. Great attention should be paid to institutionalizing incentive-based participation. A small number of large entities must not dominate these proceedings, because the holistic value of chaordic supply chain governance would be lost to the controlling entities.
While supply chains across various industries share common goals, unique market sectors also have unique requirements. Table 2 listed 10 principles that a supply chain governance structure might embrace. The purpose that ties any given set of principles together must clearly state what the governance structure sets out to accomplish. For example, Visa International created the following statement of purpose:
“To create the world’s premier system for the exchange of monetary value.”
Let’s consider some statements of purpose for other supply chain governance structures. Table 3 lists sample statements of purpose that industries on the left side of the table might wish to pursue. (Be aware that each statement of purpose is just a sample and that an actual statement of purpose could take months to draft.)
Table 3: Sample industry statements of purpose
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Each purpose must be supported by a set of governing principles. When drafting a purpose and set of principles, it is important to focus on:
• The greater good of the entire industry and the supply chain
• Value to the ultimate customers of the supply chain
• How the supply chain alliance will affect other industries interfacing with the supply chain
• How the alliance will impact the overall environment and human rights worldwide
If there is a situation in a given industry that suggests the need to create a legal, member-owned, and member-run supply chain governance structure, remember that this goal involves considerable pain and effort to achieve. Mobilizing a core group to agree to this approach could take months. Drafting a purpose, principles, governance structure, and constitution can take years. But if the benefits, as outlined by the purpose and principles, are clear to supply chain participants, it is worth the effort.
E-BUSINESS AND SUPPLY CHAIN GOVERNANCE
As supply chain governance structures mobilize, the desire to deploy strategies to benefit the supply chain will intensify. Members will each want to contribute lists of suppliers and customers to a unified supply chain model. As more members join, the model grows more complete. Soon the model paints a picture of cross-industry relationships that never existed before. Handling proprietary customer information and security will be a challenge, but such issues should be incorporated into the governance structure’s core principles.
As this process evolves, the governance structure is able to leverage supply chain relationships beyond what any single entity in that supply chain could accomplish alone. Instead of each company in a supply chain trying to craft myopic e-business solutions, the governance structure could unify a single e-business solution that suppliers and customers could collectively deploy and leverage. With this in mind, a unified set of e-business objectives might include the following initiatives:
1. Establish preeminent e-commerce Web sites for end-customers.
2. Allow manufacturers to track retail demand down the supply chain.
3. Enable retailers to predict supply chain product availability up the supply chain.
4. Streamline distribution strategies based on a comprehensive model of the supply chain.
5. Allow companies to collectively refine just-in-time inventory management, material usage, production, and related processes.
6. Standardize electronic data interchange, including contracts, for the industry and any entities interfacing with the industry.
7. Ensure that invalid data is checked and corrected at key checkpoints in the supply chain.
8. Define common solutions for linking internal ERP systems with e-business environments.
9. Create shared sales or service strategies that can be marketed through e-commerce sites.
10. Interface with e-business strategies from related industry sectors.
This list is just a sampling of e-business initiatives that could be collectively deployed by a supply chain unified under a common governance structure. Individual companies could pursue these options independently, but holistic governance offers exponentially greater value to an entire supply chain.
LONG-TERM SUPPLY CHAIN MANAGEMENT PROJECTIONS
The borders between internal and external business processes will eventually blur. Companies leveraging sophisticated supply chain governance structures, fueled by e-business solutions, will insource and outsource processes based on holistic views of supplier-customer models. On a grand scale, linking multiple supply chain governance structures under a larger chaordic alliance would reflect the ultimate evolution in supply-chain-to-supply-chain management.
Imagine leveraging customer-supplier relationships across multiple industries to the ultimate benefit of private and public sectors across global markets. Creating a holistic governance structure for your supply chain is the first step in this journey.
NOTES
1 David Field, “Production Turbulence Hits Boeing,” USA Today, 9 October 1997.
2 George Strawley, “Eek! Computer Bug Slowing Delivery of Halloween Candies,” Associated Press, 29 October 1999.
3 Emily Kaiser, “Multifoods Dealing with Computer Woes,” yahoo.com, 11 November 1999.
4 “Royal Doulton’s Y2K Cure Backfires,” Associated Press, 22 November 1999.
5 Dee Hock, Birth of the Chaordic Age (Berrett-Koehler, 1999).
6 This industry category may surprise people, but the Internet is suffering growing pains and lacks a cohesive governance structure. There is no current way to effectively address security, hackers, pornography, government intervention, or eventual takeover by an oligopoly. Many small entrepreneurs may shun a governance structure in what has become a bastion of freedom, but if the Internet does not govern itself, governments and large corporations will step up to the task.