6 things CEO should know about supply chain

Often executives view Supply Chain solely as cost generation area. They often overlook the complexity of operational processes. Why is it like this in so many organizations?

According to a survey conducted by Korn Ferry, most people on executive boards have a commercial or financial background. What they don't have is direct experience in logistics.

As CEO or Managing Director you are responsible for the entire organization. You cannot go into Logistics in detail because you don't have time for it. You need the Supply Chain running smoothly so the rest of the company can focus on running the business.

As a Logistics Director you need to get your boss's attention about Supply Chain challenges. You don't have time either. You need to speak a common language. The success of your team and your own career depend on it.

In this article, we outline 6 things you should talk about. We explain why you should answer the question if:

• the supply chain model fits the sales strategy?

• the supply chain was built with real foresight?

• we have the right talent in the logistics area?

• we use the right performance measures?

• quality is a component of our logistics?

• we are really working on efficiency?

WAS THE SUPPLY CHAIN BUILT WITH FORESIGHT?

It's possible that your supply chain is not aligned with the future needs of your organization. Worse still, it may not fully meet the current needs of your customers.

Was logistics taken into account when planning the company's development? Unfortunately, investments in logistics and supply chain may take some time.

It usually takes 3 to 12 months to implement a new planning system. Even up to 2 years to start using all the capabilities of the system. Opening a new distribution center usually requires 12 to 18 months, assuming you have the land and need to "just" build the halls, buy equipment, and then train the team.

If an organization grows rapidly, it may be easier to enter into cooperation with a logistics operator. However, the time between the decision and the start of operations may also take months, assuming no specialized requirements are involved.

Therefore, a mismatch between the needs and the Supply Chain's capabilities for sure affects the yearly P&L. Understanding this simple fact is not easy and requires some business maturity.

In the short term, it may be necessary to align the company's financial plans with current operational capabilities. In the medium term, interventional investment in Supply Chain, in information systems, or in logistics infrastructure might be crucial.

In the long horizon, the best practice is to regularly review business plans in relation to logistics capacity. Every developed organization conducts such a process.

It can be called various things – road to market, strategic business review, etc. The name is not important. What is important is that the review takes place at least once a year and it's an open dialogue. Most preferably spread over 2-3 stages at intervals of about 2 weeks each.

A stepwise approach allows plans of various functions in the organization to be coordinated, including plans to build the logistics capabilities of the enterprise.

DO WE HAVE THE RIGHT TALENT IN THE SUPPLY CHAIN?

Let's face it, nowadays logistics does not mean the same as it used to. Unfortunately, many people still perceive logistics only as the process of physical storage, reloading and transport of goods.

In today's business, with an increasing number of products and growing expectations on delivery times, the function has changed. It's not concerned as much with "how," but more with "what" and "when" to deliver.

The role of hard competencies is growing. Knowledge and statistical reasoning are becoming increasingly important. A better understanding of IT systems and the optimization algorithms programmed into them is required.

Several years ago, when even large manufacturing companies worked on 200-300 SKUs and a large retailer had 3,000-4,000 SKUs in its offer, demand was more stable. It was possible to succeed even without complex methods of sales forecasting, inventory optimization and warehouse operations.

Today, simple solutions are no longer sufficient in many businesses. Logistics without IT tools simply does not function at the required level of process and cost efficiency.

On the other hand, the importance of soft skills required to manage large teams and communicate with stakeholders both inside and outside the company has not diminished. On the contrary, soft skills are becoming increasingly important at every level.

From specialists creating demand forecasts, distribution plans and convincing others higher up in the organization's hierarchy. Through managers leading increasingly larger teams in distribution and fulfillment centers.

That's why diverse talent is needed in supply chain. Companies need managers who can work with systems and processes as well as with people.

How do you develop such broad competencies in the supply chain? This requires a focus on employee development through temporary cross-functional experiences, training, and sometimes going outside the organization.

DOES THE SUPPLY CHAIN MODEL FIT THE SALES STRATEGY?

… and vice versa? Supply Chain is a competence needed by the entire organization, not just the logistics staff. A lack of understanding of logistics can be as costly as digital illiteracy when it comes to sales or customer service.

In many companies, however, relationships have not been built between Logistics and Sales teams to allow for open conversation. As a result, both make decisions without consensus and without awareness of the consequences in the other area.

Imagine a product manager in a retail chain who independently approves a contract with a supplier to deliver only cartons containing a mix of products. He gets better front margin terms this way.

He assumes that in the warehouse, receiving kits is a simpler process than handling individual products. Sounds very logical, right?

In reality, the workload in the warehouse increases, as products need to be unpacked from the carton containing different products sold separately to the customer. Or in-store inventory increases if the warehouse manager decides to fulfill the store's demand for individual products by shipping the entire carton every time.

Imagine a supply chain manager who implements a stock optimization policy on a product category without informing the sales director. He moves an assortment that customers order irregularly from so-called make-to-stock to make-to-order.

Reducing inventory value by getting rid of the safety cushion in warehouses is significant. However, he has no access to commercial contracts, so he doesn't realize that the customer actually has the right to expect delivery within 7 days. Otherwise, contract penalties can be applied.

Alternatively, he approaches the director with the information before making the change. He asks for approval before switching products to make-to-order… and gets the answer that, given the current service level, there is no objection.

Do both situations presented seem unbelievable? We have personally witnessed both. They occurred in large organizations. The first one in a major manufacturing company. The second in an international retail company.

To ensure that the company achieves the assumed results, it is necessary to adapt the Supply Chain model to the strategy of the whole organization. Not just on paper. Alignment at the level of understanding what is actually being done, along with all the implications of the model being adopted.

ARE WE USING THE RIGHT PERFORMANCE MEASURES?

One indicator of the maturity of a supply chain is the range of metrics used. Mature supply chains are usually accountable for metrics that assess how they support the organization's overall strategy. Evolving supply chains are usually measured just on how well they execute their own core competencies.

For example, if a company's primary strategy is "everyday low prices," then the first logistics KPI should be costs over sales. If the market strategy is "no substitute," then the first KPI might be the perfect customer order rate.

Furthermore, the KPIs at board level must be translated into requirements for other levels of management. Logistics Manager, Distribution Center Manager, Transportation Manager, Demand Planning Manager should be held accountable differently.

Of course, you can include logistics costs in the objectives of the warehouse worker. You can post it on a board in the warehouse or even inside the lockers in the changing room. However, there will be no effect other than the frustration of the employees.

A better solution is to select, at each level of the organization, metrics that are:

• directly visible to the employee

• contribute to the results one level higher

It's also worth remembering that no one can keep track of too many metrics at once. What exactly does "too many" mean? The rule of thumb is not more than five at once. No matter how many KPIs you choose, remember – if you're wondering whether you're using too many metrics… then you are.

Finally, the KPI system used in Supply Chain cannot cover Logistics alone. It should also extend to other functions in the organization, to suppliers, and even to customers.

Only when Supply Chain shares KPIs with Sales, Marketing, and partners outside the organization can we speak of a mature organization. An enterprise capable of running its business effectively.

IS QUALITY PART OF OUR LOGISTICS?

Active quality management in production, storage, and distribution is one of the elements of the Supply Chain that constitutes a real competitive advantage.

In addition to its direct impact on customer satisfaction, quality in the supply chain translates into company effectiveness. Resolving complaints and accepting returns is 4 to 5 times more expensive in any logistics network than other distribution processes.

Therefore, monitoring the quality of logistics processes is important from the very beginning of the Supply Chain. Ongoing communication with suppliers, control of incoming and outgoing goods, is a must. Otherwise, problems are transferred to other processes closer to the customer.

In internal quality control, it's important to assign responsibility to specific employees and to provide feedback as quickly as possible. Preferably on an ongoing basis during the work – even within 2-3 hours after a mistake is made, which allows for understanding the reasons and introducing changes in behavior.

Even small changes in the process or in employees' behavior are worth implementing. At a large scale of company operations, small mistakes can translate into significant values. This can be well illustrated by reporting quality problems calculated as Defects per Million Opportunities.

Is quality management so systematic in your logistics? The answer is probably no in most organizations. However, it is only when you implement the "least waste possible" approach instead of the "least cost possible" approach that you can expect long-term improvements in operational and financial performance.

ARE WE REALLY WORKING ON SUPPLY CHAIN EFFICIENCY?

Finally, are we really working on efficiency in Logistics? In many companies, working on Supply Chain productivity remains a mere declaration.

On the surface, everyone agrees that they want to achieve operational efficiency. However, they expect this to happen as a result of optimizing internal processes within the warehouse, transport or planning departments.

Few people realize how logistics productivity depends on agreements with suppliers and customers – agreements that are often signed off by other teams.

Therefore, to achieve a real improvement in Supply Chain effectiveness you need a broader look at the company's processes, and openness to the possibility of changes in the level of customer service. You need to discuss what needs to be achieved and what can be sacrificed for that purpose.

The first step should be to segment the company's customers and products in terms of turnover or margin, depending on what is currently the organization's top priority.

Only when a common view on customer classification is achieved, and only when you have information on the cost of service (and cost of inventory), can you make decisions affecting logistics.

In most industries, it does not make business sense to treat every customer (or market, or store) the same. It's also not economically sensible to apply a uniform approach to customer service at different times of the year. It is worth considering optimizing the level of service or additional services provided.

However, the highest efficiency in Logistics does not always mean the most effective Supply Chain. Efficiency in itself is not the goal. The ultimate goal is the profit achieved by the company. Many organizations learned this lesson the hard way during the Supply Chain crisis created by Covid-19.

IT ALL STARTS WITH AN OPEN CONVERSATION

If you ask yourself the questions discussed above, you are already one step closer to understanding your Supply Chain situation. I'm sure the answers will still require a series of more specific questions. But your own questions are better than someone else's answers.

For Supply Chain to be truly not just a cost in the organization but a source of market advantage, you need open discussions about your target expectations and current capabilities.

Sometimes an external advisor is helpful in such a discussion. They will look at the situation objectively, provide market-verified know-how, and arbitrate between departments within the organization.

They won't do the day-to-day work or build relationships with your employees or supervisors for you. However, they will help you put the ropes together before you throw yourself into the whirlwind of change.