29 May The Supply Chain Triangle in the Supply Chain Ecosystem
In his foreword to my book and in earlier linkedin posts, Frank Vorrath, talks about the evolution towards a supply chain ecosystem. The idea was initially launched by Prof Martin Christopher from Cranfield University that we are no longer competing companies against companies, but as supply chains, as networks of companies creating a supply chain ecosystem. When linking that to our book “Supply Chain Strategy and Financial Metrics” it triggers the obvious question whether our triangle still holds in the supply chain ecosystem?
Within the company boundaries, the supply chain triangle captures the suboptimal results generated by functional KPIs. Purchasing may source in the Far East to lower cost but ignore the impact on inventory. Marketing may expand the product portfolio to boost sales but ignore the impact on cost or inventory.
The same holds true across company boundaries. Many companies have improved their working capital by increasing the payment terms of key suppliers, which is simply shifting the burden to the suppliers. In a bid to keep inventories low, many distributors demand short lead times and high availability from their key suppliers, again shifting the burden upstream in the supply chain. In many traditional supply chains each of the partners will try to optimize their own supply chain triangle and try to shift the burden either upstream or downstream. It is a battle in which the dominant partner wins.
Within company boundaries the triangle learns us that instead of fighting each other, different departments should evaluate the impact on the shareholder value as measured by the ROCE. If sourcing in the Far East is improving ROCE it should be done, if a line extension is improving ROCE it should be done as well.
Likewise, if we want to optimize across company boundaries, we should have a metric that captures the value generated in the network. This could be the network ROCE. Companies should look at the Supply Chain Ecosystem Triangle instead of managing their individual triangles.
Instead of focusing on the On Time In Full delivery performance of a supplier towards its distributors, it is more relevant to look at the product availability at the distributor and his OTIF performance towards the final customer. Maybe I didn’t deliver on time or in the requested quantity but as long as there is no shortage at the end of the chain there is no issue. If I am willing to relax the heavy constraints on the timing and the quantity of the delivery upstream in the chain, I create opportunities to better synchronize shipping with production or to better consolidate my freight before the actual shipping. Just as an example, Vendor Managed Inventory takes advantage of exactly this opportunity. By relaxing some of the internal constraints we can optimize the value generated in the network.
The challenge of VMI or other types of supply chain collaboration may be that the benefits are not equally distributed. In the case of VMI the benefits may be primarily on the supplier’s side. If it is to work, part of the benefits will need to be shared within the network. That remains the result of a negotiation, but starting from a different perspective, being “which value can we generate within the network” or “how can we improve the network ROCE”?
In summary we believe the triangle remains valid when looking at the supply chain ecosystem. Instead of optimizing our individual triangles we should focus on optimizing the value generated in the network as measured by the network ROCE. If we want the collaboration to be sustained, we’ll have to share the benefits throughout the network.
Another question is whether the companies in a supply chain ecosystem need to follow the same strategy. Read more about that in the following recent blog.