In the Winter 2010 issue of the MIT Sloan Management Review, professors from Michigan State University and the University of Virginia authored an article, “Supply Chain: Managing for Multiple Outcomes,” which outlines the advantages of “outcome-driven supply chains.”
The professors effectively argue that traditional supply chains, focused on reduced cost, faster delivery, and improved quality, aren’t always “sufficient in the modern business world.”
The professors postulate that going forward, supply chains should be designed and managed to deliver specific outcomes — cost reduction, responsiveness, security, sustainability, resilience, and innovation. Simply put, the most effective supply chain, according to the professors, is typically one that provides a blending of these desired outcomes.
The article is thought-provoking and well worth reading. The professors note that “the old supply chain was strategically decoupled and price driven, the new supply chain is strategically coupled and value driven.” This re-emphasized to me the importance of supply chain value mapping.
Supply chain value mapping defines how to arrive at the desired outcomes in a supply chain. It commonly encompasses an analysis of manufacturing; origin sourcing; vendor compliance and standardization; transportation; and the financials that maximize economic profitability (e.g., capital and fixed-asset utilization, day sales outstanding, days of inventory on hand, and the cash-to-cash conversion cycle). In short, every critical business function and process should be analyzed.
This analysis can take the form of a formal or informal “whiteboard session” that involves all the key decision makers within the organization. For example, the decision maker in finance (e.g., CFO or controller) should be on hand to baseline key financial data that drives shareholder wealth and value. Changes to a supply chain should positively impact the cost of goods sold, purchases outstanding, day sales outstanding, inventory turnover and operating ratio, and, ultimately, a company’s economic profitability.
Since procurement personnel influence origin sourcing, purchasing, and the contractual terms of corporate agreements, they need to be involved to determine the feasibility of a supplier change and the cost-to-value impact.
Input from information technology or information services is essential, because the flow of information affects every component of the supply chain. Larger organizations have created supply chain executives, and their involvement and expertise is paramount to fostering change. In fact, if there is a supply chain division within the organization, the vice president of the department should be project manager facilitating the value mapping project.
A total quality management approach to optimization calls for all organizations to analyze their operations as they pertain to the entire supply chain model and customer service experience. In addition to internal participation, companies should invite their top vendors and suppliers to participate in the open discussion. The invitation can also be extended to key customers of vendors/suppliers.
This helps an organization understand how recommendations, decisions, and possible changes will affect their suppliers and vendors. After all, it doesn’t benefit a company to design a solution that cannot be implemented by its source supplier.
One of the desirable supply chain outcomes identified by the professors is innovation. Achieving the innovation outcome requires knowledge of changing customer needs. Therefore, marketing, and perhaps even key customers, should participate in the whiteboard session to represent customers' issues and communicate key differences across the various geographic locations and industry segments served by the company.
As the “outcome-driven supply chain” recognizes, sustainability is not only good for our environment, but it can also work to reduce cost and foster growth. As companies work to shrink their carbon footprints, savings can be realized and financial benefits can be obtained. Keep sustainability in mind during the mapping process.
In short, supply chain value mapping is the first step in creating an “outcome-driven supply chain.” The process identifies the change that will differentiate an organization from its competition, serve a client base with a prosperous value proposition, reduce internal cost, and drive profitability.