Successful supply chain management requires a company to recover from disruptions, which are a normal part of any business. The cost of recovery from a disruption in procurement management depends on factors such as supply source, volume, manufacturing location and inventory. Recent changes in supply chain solutions include building to order and obtaining supplies just before they're needed, resulting in a greater dependence on lead times. These changes mean that mistakes in supply chain optimization are easier to make than ever before.
Here are six of the most common mistakes in integrated supply chain management:
1. Quantifying by Spend
Prioritizing functions by spend is one of the most common mistakes in supply chain optimization. A group purchasing organization typically finds that it spends 80 percent of its budget on their top 20 suppliers, and they also organize other resources such as time by spend. This practice worked well until the proliferation in outsourcing over the last 15 years, which has created supply chains with multiple layers throughout the world. Supply chains that rely on a single source are now more likely to experience disruptions.
The fundamental challenge in shipping for supply chain managers is the requirement to wait until all parts are present before shipping the product. Supplies without an alternate source can become a single point of failure for the supply chain. Managers in supply chain sustainability should consider the financial impact of losing a part when they consider a single source for that part.
2. Rushing the Launch of New Systems and Protocols
Many companies think they can do too much – without testing out the limits of new products and protocols. Before locking themselves into massive deals or expansions, get advice from an outsider on any blind spots you may have overlooked. This outsider’s view will ensure your company won’t face disrupted or run into problems launching a new product with multiple suppliers.
Take, for example, one of the worst-case scenarios of this issue. In 1999, Hershey’s didn’t deliver $100 million worth of Jolly Ranchers and Hershey’s Kisses to stores before Halloween. As a result, the company lost 8% of its shares – all because Hershey’s didn’t give enough time to its new ordering and distribution system before it was tested on a major holiday.
3. Lack of Visibility
The lack of visibility across dependencies in the supply chain is also a challenge for managers in the current global environment. Managers often don't know where their parts are coming from, which means they are unable to determine their true supply chain, undermining supply chain optimization. For example, a part that a manager believes is dual-sourced may actually be single-sourced one or more levels up the supply chain.
A particularly disastrous example was Nestle’s admission that they hadn’t known that fish used for their Fancy Feasts product were harvested using forced labor. The workers, mostly in Cambodia and Myanmar, were paid unreasonably and locked into contracts.
Most supply chain managers readily acknowledge that the lack of visibility is a problem, although they are unlikely to take the steps needed to regain control over their supply chain. This solution generally requires supply chain managers to establish a priority of correction based on the parts of the supply chain that have the greatest financial impact. This prioritization strategy allows managers to deal with catastrophic disruptions in the supply chain, as well as localized problems.
4. Short-Sighted Risk Management
Supply chain optimization presents many risks such as the following:
- Delivery days
- Increases in demand
- Quality problems
- Supplier issues
- Supply shortages
These factors make risk management a dynamic process that often requires organizations to implement one short-term solution after the other. This short-term risk management means that managers have trouble in proactively assessing problems in the supply chain. Rewards such as cost savings, time to market and inventory turnaround also contribute towards short-term goals. Risk management is the easiest activity in the supply chain process to de-prioritize since it conflicts with goals and rewards. Managers must tie their efforts to mitigate risk with metrics that will result in the long-term support of higher management.
5. Poor Framework for Accountability
Supply chain consulting firms find that most CEOs hold the Chief Procurement Officer responsible for disruptions to the supply chain, although the specific parties that the CPO holds responsible for this possibility is less clear. Organizations typically don’t assign the responsibility over supply chain disruptions to anyone at the operational level within the procurement organization. This lack of accountability results in confusion when the action needed to restore the supply chain falls outside the scope of normal activities.
For example, the Target corporation recently severed ties with Welspun India, a producer of cotton sheets, because the sheets weren’t actually made from Egyptian cotton, as advertised. When Welspun lost 50% of its value, the corporation tried to blame its suppliers, rather than taking responsibly for the error themselves.
Effective leadership during a supply chain optimization is typically as important in responding to a crisis as the supply system itself. This fact requires upper management to scrutinize supply managers carefully by appointing a leader in advance of such a crisis. This leader must have the proper training, tools and infrastructure that will allow the CEO to control the crisis rather than the other way around.
6. Reactive Management
Managers often manage supply chains reactively because a crisis fails to make a large impact or they can recover from it quickly. However, a small crisis that has little impact on an organization represents an excellent opportunity to manage a supply chain proactively. Reactive management often involves the creation of a war room that allows employees to meet executives, which can increase the transition to proactive management.
A famous example of poor reactive management is the production of Boeing’s 787 in the mid-2000’s. While the planes were supposed to hit markets in 2008, supply chain management problems delayed the production for three years. The company expected it could produce more than it could and failed to accurately assess production risks.
An assessment of a reactive response to a crisis often shows that the true cost of this approach is higher than expected. This assessment can also show the areas where team members have the greatest need for more information and coordination in a crisis. Managers should use rewards instead of punishment to ensure that the organization adopts a proactive approach to risk management.
The globalization of businesses has created a greater risk of disruption in supply chains. Supply chain managers should view risk management as a long-term investment that requires a different strategy from that used in traditional supply chain management. Organizations will continue to have trouble in maintaining their supply chains until they solve the root problems with proactive management.
Editor's Note: This blog was originally published March 17, 2014 and has since been updated and expanded upon with new information.
About Michael Wilson
Michael Wilson is AFFLINK'S Vice President of Marketing and Communications. He has been with the organization since 2005 and provides strategic leadership for the entire supply chain team. In his free time, Michael enjoys working with the Wounded Warrior Project, fishing, and improving his cooking skills.