Let us look at a few critical projects many supply chain leaders would like to initiate to save money and improve service, but can’t, because they can’t muster the necessary corporate support.
SKU Reduction – Stock keeping unit (SKU) proliferation generates costs in terms of manufacturing changeovers, warehouse capacity issues, procurement, product design and even for a company’s customers. In the book The New Supply Chain Agenda, one of the authors mentioned a consumer durables company that had done a study and found that the manufacturing and logistics costs alone that were associated with adding a SKU were over $100,000. Firms should be discontinuing SKUs almost as frequently as they add them. But it is a guaranty, sales will scream if this is attempted. And the sales organization will usually have more clout with the executive leadership than the supply chain organization.
Multi-echelon Inventory Optimization – These solutions – from companies like JDA, Manhattan Associates, Logility, SAP, Tools Group, and Oracle – cut the amount of inventory that needs to be held without adversely affecting service levels. (SKU reductions can also result in inventory write-downs, but usually not to the same extent.) Again, sales is likely to resist this change fearing that sales will be affected. But the tougher problem is that at public companies, when these solutions are first implemented, an inventory write-off will occur. CEOs and CFOs understandably like to meet their quarterly profit expectations. CEO’s not infrequently choose to forego better long term profitability in order to make their numbers in the coming quarter.
The Quarter End, Year End Sales Push – Sales people have quotas. What this often means is that sales folks are often more willing to discount when the end of a quota period is approaching, will forego placing orders until the next sales period if they have already met their quota, and may have little interest in selling low margin products (which can help clear slow moving and obsolete inventory). This disease is often worse at public companies, but certainly not unknown at private companies. This urge to surge, adversely impacts the supply chain. Warehouse and transportation capacity issues can arise, overtime rises, and service levels fall. Corporate executives may recognize all these problems, but they believe an improperly motivated sales force would be even worse. This is a very difficult problem to fix. While there are tactics that can be used – better Sales & Operations Planning, increased scrutiny of discounting at quarter end, and metrics designed to foster better sales force forecasting – these are solutions that help mitigate the problem, not eliminate it.
The Order to Cash Cycle – One thing a well-run supply chain does is free up cash flow by shortening the order to cash cycle. Better performance on the perfect order metric is one thing the supply chain can do to help customers pay on time. This is because customers don’t pay in a timely manner if there is a dispute about the order they received. Some companies have experimented with lengthening the accounts payable cycle by lengthening the payment terms to suppliers. For example, instead of paying a supplier within 45 days, trying to get the supplier to agree to be paid 90 days after their deliveries. This can be done by brute force, but having angry suppliers is not a good tactic for a smooth running supply chain in the long run. Some companies have experimented with providing things suppliers want – longer term contracts, a greater piece of the pie, and better joint collaborative planning – to achieve a win/win with suppliers. Similarly, on the accounts receivables side, faster service can be a tool to get customers to agree to pay a company more quickly. Achieving improvement in the order to cash cycle involves sales – who will resist cutting shortening payment terms for customers, the executive team, and suppliers.
Because of these collaboration issues, no supply chain executive can achieve a robust supply chain without the support of top executives. Does this make the job of a Vice President of Supply Chain hopeless where that support does not exist?
It does not.
But what it does mean is that supply chain leadership is required that is financially literate and speaks the same language as the CEO and CFO; is patient – points out the ongoing costs of suboptimal practices month after month after month; and is diplomatic – can forge partnerships with other parts of the organization and partners outside the firm to move the company in the right direction.
In short, I would argue that the key attributes for supply chain leadership are patience, diplomacy, and financial literacy. And this is a very rare combination of skills.