The world of business is changing quickly, and supply chains need to keep up by innovating. Two kinds of innovation are important for supply chains:
Sustaining innovation: Sustaining innovation is built on continuous process improvement techniques such as Lean, Six Sigma, and the Theory of Constraints (see Chapter 4). Sustaining innovation isn’t sufficient, though, because new technologies can disrupt industries. So you also need to pursue disruptive innovation.
Disruptive innovation: Disruptive innovation introduces a product, process, or service that creates new markets and destroys established paradigms. When a disruptive solution is accepted, it becomes the new dominant paradigm. If you’re in the business of making buggy whips, you need to figure out how to make buggy whips better, faster, and cheaper than your competitors do, as well as what the new dominant paradigm is going to be so that you’ll know what to do when buggy whips are replaced by a different technology.
Collaboration
Supply chain management can’t be done in a vacuum. People need to work across departments inside an organization, and they need to work with suppliers and customers outside the organization. A “me, me, me” mentality leads to transactional relationships in which people focus on short-term opportunities while ignoring the long-term results. This situation costs more money in the long run because it creates lack of trust and unwillingness to compromise. An environment in which people trust one another and collaborate for shared success is much more profitable than an environment in which each person is concerned only with his or her own success. Also, a collaborative type of environment makes working together a lot more fun.
Flexibility
Because surprises happen, supply chains need to be flexible. Flexibility is a measurement of how quickly your supply chain can respond to changes, such as an increase or decrease in sales or an interruption of supply. This flexibility often comes in the form of extra capacity, multiple sources of supply, and alternative forms of transportation. Usually, flexibility costs money, but it also has value. The key is understanding when the cost of flexibility is a good investment.
Suppose that only two companies in the world make widgets, and you need to buy 1,000 widgets per month. You may get a better price on widgets if you buy all of them from a single supplier, which would lower your supply chain costs. But you’d have a problem if that supplier experienced a flood, fire, or bankruptcy. You may save some money at first, but you’re stuck if anything goes wrong with that supplier.
If you established a relationship with the second supplier by buying some of your widgets from them — even at a higher cost — you wouldn’t be hurt as badly if the first supplier stopped making widgets. Having a second supplier provides flexibility.
Technology
The rapid evolution of technology has transformed the way that supply chains work. A few years ago, we ordered things from catalogs, mailed in checks, and waited for our packages to be delivered. Today, we order products on our phones, pay for them with credit cards or information stored in a digital wallet, and expect real-time updates until those packages are delivered to our doorsteps. Supply chain management requires understanding how technologies work and how to use them to create value at each step in the supply chain.
Global perspective
The ability to share information instantly and to move products around the world cheaply means that every organization today operates in a global marketplace. No matter what product or service you provide, your company is global in some way. As a supply chain manager, you must recognize how your business depends on global factors to supply inputs and drive demand for outputs. You also need to think globally about competition. After all, your company’s real competitive threat could be on the other side of the planet.
Risk management
When you combine high-performance requirements with complicated technologies and dependence on global customers and suppliers, you have a recipe for chaos. Lots of variables mean that many things can go wrong. Even a small disturbance, such as a shipment that gets delayed, can lead to a series of problems farther down the supply chain — stockouts, shutdowns, penalties, and more. Managing a supply chain means being aware of risks and implementing processes to detect and mitigate threats. Stability may be the key to making supply chains work smoothly, but risk management is the key to avoiding or minimizing the costs of dealing with surprises. Done well, risk management can even provide opportunities to capture value during times of uncertainty.
Visibility
You can’t manage what you can’t see, so supply chain management makes visibility a priority. Knowing what’s happening in real time (or close to real time) lets you make better decisions faster. Visibility comes at a cost, however: You have to build your supply chain in a way that lets you capture data about key steps in the process. The value of visibility is that it lets you make decisions based on facts rather than on intuition or uncertainty. Having better visibility into supply and demand allows you to optimize the amount of inventory that you hold throughout the supply chain.
Value creation
Supply chain management is about creating value — meeting your customers’ needs in the right place, at the right time, at the right level of quality, for the lowest cost. This value is the heart of supply chain management. If I had to pick just one principle to describe the whole process of supply chain management, it would be value creation.
Introducing Five Supply Chain Tasks
James B. Ayers is a supply chain management expert who works with manufacturers, service companies, and government agencies. In Handbook of Supply Chain Management, 2nd Edition (Auerbach Publications, 2006), Ayers says that supply chain management should concentrate on five tasks:
Designing supply chains for strategic advantage: Consider how your supply chain can help you create value by operating better, faster, and cheaper than your competitors. Think beyond just lowering costs, and consider ways in which your supply chain can help you grow revenue, innovate, and even create new markets.
Implementing collaborative relationships: Consider how you can get teams to work together toward a goal rather than compete for conflicting objectives. If your sales team is trying to improve customer service by making sure that plenty of inventory is available, and your logistics team is trying to reduce inventory to lower costs, both teams are probably going to waste a lot of energy. Supply chain management can help them align their objectives.
Forging supply chain partnerships: Consider how you can build and sustain strong relationships with customers and suppliers. When companies understand that they depend on one another for success — and perhaps survival — working well together becomes a priority. Companies that don’t do a good job of forming and sustaining supply chain partnerships end up at a
