While the pandemic has accelerated the evolution of unified commerce, it has also surfaced troubling issues with non-resilient supply chains, widespread disruptions and rising cost of goods sold (COGS). As a result, more companies are moving to map their global supply chains and enable visibility of the flow of goods from source to customer.
Next on the agenda is finding solutions that mitigate risk and reduce COGS. That requires working with all trading partners to collaborate and harmonize on what will distribute value to all parties.
Paradigm shifts highlighted by the disruptions of COVID-19 have caused supply chain leaders to closely examine their end-to end (E2E) and domestic networks, practices, and supply-demand problems. The famous quote from Aristotle — “The whole is greater than the sum of its parts” — has everything to do with how we need to rethink the supply chain. But one key modification is needed: That the output from the whole exceeds the output of the parts.
Synergy happens when the combined value of multiple companies is greater than the sum of those companies. Thus, as we rethink the supply chain, it’s essential that we capture the collective value created when all companies in the chain work together in a harmonious and congruent manner.
The evolution of supply chains has progressed over three decades from one of efficiency to effectiveness. Yet the pandemic has opened our eyes to the need for more. The synchronization of supply and demand has been disrupted, and the need today is for networks to be efficient, effective, respected and resilient.
This rethinking calls for address four keys to a synergistic supply chain:
- Network. The hubs and links of the complete supply chain must achieve synergy from E2E operations.
- Synergy. They must work for the best interest of the entire network.
- Harmony. They must work together toward common objectives.
- Orchestration. They must operate on the same information, provided by the “conductor” in as real-time a fashion as possible.
These criteria determine the synergies of the modern-day supply chain. And they enable the power to deal with complexity, uncertainty, volatility and ambiguity, all of which characterize the supply chains of today and tomorrow.
The need for collaboration among trading partners is hardly a new idea, but it hasn’t caught on as it should. Let’s examine two major causes for this blockage.
One is the inability to determine the value to be distributed among trading partners.Corporate finance hasn’t been well understood by supply chain leaders; thus, initiatives to deal with E2E chains and trading partners have failed to pass hurdle rates for return on investment and other resource-allocation decisions.
Value today is measured in several ways. Commonly accepted measures include stock price and earnings per share (EPS). Many factors impacted by supply chain performance contribute to these market measures, including COGS, optimized working capital, free cash flow, gross operating margins, cash-to-cash cycle time, total supply chain lead times, product and service quality, and total delivered cost.
It’s important to understand that most if not all of these factors are determined by the E2E supply chain — from source to delivery, or suppliers’ suppliers to customers’ customers. All trading partners in the chain, including service providers, are creating or diminishing total value. Synergistic supply chains are the true goal.
The actions taken by supply chain leaders impact key business objectives, including profitable growth, margin improvement and capital efficiency. These in turn determine shareholder value.
The model for total delivered cost (TDC) illustrates this best. The E2E supply chain is made up of multiple companies, each of which carries out its own supply chain processes — plan, buy, make, move, distribute and sell — and as costs are incurred or allocated, they add up to the TDC. Operating independently, each company seeks to maximize its margins, but if all operate in harmony with common goals, based on a “single version of the truth,” then the overall TDC can be optimized. The same goes for other value drivers, such as total supply chain time, working capital efficiency and economic profit.
The recognition that E2E supply chains exist, but that trading partners work to optimize their own businesses instead of the whole, isn’t new. Business leaders have realized this for years, and as supply chains became increasingly global, vertical integration grew too costly. Offshore contract manufacturers, co-packers and suppliers offered lower materials or product costs that couldn’t be ignored. The synergism and benefits of common goals and “distributed value” were considered too complex, too challenging and not possible because of the lack of real-time, reliable data.
The traditional gaps between operations and finance, in language, terminology, definitions and goal-setting, have been a major barrier to the creation of synergistic supply chains. Another has been diverging priorities, with finance and accounting driven by income and expenses, and operations leaders by customer service, supply chain risks, disruptions and operating costs.
Executives seeking to integrate E2E supply chains speak of five primary barriers to that effort:
- Complexities. While global supply chains have introduced new and challenging complexities, today’s technology, fueled by the digital revolution, can provide real-time data and information to all trading partners. A related pushback concerns smaller suppliers being dominated by larger companies and their changing demands, subjecting them to extended payment terms and contract changes in the middle of production runs. These complexities are manageable, and should be controlled by the orchestrator.
- Processes. Commonly accepted practices dictate that business processes must be reengineered prior to introducing new technologies and synergistic supply chains. This is no longer necessary. High-level rethinking and preparation are adequate, coupled with collaborative agreements among trading partners.
- Technologies. Pushback here results from huge investments in enterprise resource planning (ERP) and point solutions, with no appetite for E2E systems. That attitude might be understandable, but it isn’t defensible. When the most important ROI of an E2E system is to optimize COGS and produce higher value factors, it becomes too important to delay or be overly concerned about prior investments.
- Investments. Similar to that relating to technologies, this pushback is about hurdle rates, ROI, skepticism and concerns about complexities of working the E2E chain.Operations leaders need to improve their initiative proposals and business cases by linking investments to corporate finance and enterprise value.
- Resistance to change. The digital age will leave behind those who are unable or too slow to adapt. Speed matters, and customer satisfaction is now the driver of business. E2E supply chains must be orchestrated to better serve customers and meet their need for speed, cost and quality.
Over the past 30-plus years, we’ve seen supply chains evolve from cost centers to the recognition of E2E’s potential. Achieving synergistic E2E chains enables organizations to become profit centers and important contributors to enterprise value. This is true for all trading partners in the E2E chain. As supply chains and economies continue to evolve, it’s critical to focus on the E2E chain and distribute the higher value and benefits to all trading partners and providers.
James A. Tompkins is chief executive officer and chairman, and Gene Tyndall is executive vice president and chief strategy officer, atTompkins International.
