Balanced supply chain management: Managing at the edges

From the July-August 2024 edition of Supply Chain Management Review.

July-August 2024

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In this, the second of the four-set series of articles on balanced supply chain management, we will continue the exploration of what balance means and why it is important. However, the set of tensions explored in this article share a common theme—they deal with managing at the edge—focusing on interfacing with other groups or articles (either within the firm or with suppliers or customers). Driving this focus is the realization that the modern effective supply chain manager can no longer live or manage in a supply chain management silo. In today’s environment, most of the critical activities and tensions involving the supply chain manager take place at the edges. Yet, the challenges of managing at the edges are often poorly understood or even comprehended. Consequently, it makes sense to focus this article on these challenges.

Understanding what it means to manage at the edges?

The concept of managing at the edges was first introduced by author Steven A. Melnyk in a 2016 Supply Chain Management Review article,“The emergence of the strategic leader.” Then, it was discussed in terms of “cross-boundary, coordination.”  To better understand this notion, consider Figure 1. This figure was initially developed for a long-term corporate program developed by Michigan State University. At the heart of the figure is the supply chain manager. The SC manager must work with four groups: superiors, subordinates, upstream (suppliers), and downstream (customers). Each group is critical to the long-term success of the supply chain manager; the supply chain manager must work with each group.  However, each group often has a unique perspective with views that often overlook critical issues—issues where the supply chain manager can offer important insights. Each group often has its own “language” and organizational biases (which often distort outcomes).  The presence of a separate language means that the supply chain manager must be able to communicate with each group in terms that make sense to them. These communication flows are bi-directional—going from supply chain to the other groups and from the other groups to the supply chain. These issues form the foundations of this article. Before leaving Figure 1, it is important to understand the importance of the three circles found in this figure. The first circle closest to the center represents the immediate suppliers, subordinates, customers, and superiors; the second circle—the ultimate groups, and finally, the outer circle represents external elements such as technology, government, geo-political, the competition, and key stakeholders.
This outer circle is important because the changes taking place within this outer circle ultimately influence the behaviors of everyone in this diagram.

 

In this article, we will focus on the following “managing at the edges” tensions central to balanced supply chain management.

• Embracing complexity ↔ encouraging simplicity.
• Supply chain excellence ↔ business excellence.
• Expectations of top management ↔ needs of operational personnel.
• Focusing on costs ↔ focusing on other supply chain outcomes.
• Embracing complexity ↔ encouraging simplicity

Before we begin this discussion, let’s make sure that we understand the difference between complex and complicated. Many managers and researchers treat these two terms as if they are interchangeable and they are not. As noted by Lars Magnusson, currently an ASCM board of directors member and supply chain expert, complexity comes from the customer. It is anything that the customer wants and is willing to pay for. In contrast, complications are whatever we do to ourselves that unnecessarily increase cost and/or lead time, or adversely impact quality and innovation. From this perspective, complications form targets that we should be continuously focused on identifying and eliminating if possible. We encountered a quality problem due to parts coming in from a supplier; in response, we put in an inspection step into our current process. We resolve the problem with unacceptable quality parts. Yet, we still have an inspection—that is complexity. Once the quality problem was resolved that inspection should have been eliminated.

Yet, if the complexity comes from the customer, then why should we as supply chain managers be concerned? The answer is that we must educate the customer (and, in turn, marketing) about the true costs and strategic implications of complexity. To illustrate this point, consider the following problem facing Starbucks—a problem described in a recent BusinessWeek article (Sirtori, 2023, “Why your Starbuck’s wait is so long,” Bloomberg BusinessWeek).

Strategically, Starbucks offers its customers an affordable luxury in its coffee. What this means is that Starbucks has been willing to allow its customers to customize their coffees. Consider the café latte. Customers are offered choices in size, long shots, how the cup is lined, the type of milk/cream used, the type of sugar used, the type of syrup used, and the specific flavoring. Starbucks deals with three different types of customers: (1) in-store; (2) drive-through; and (3) digital. While each type buys the same type of café latte, what they want is very different. The in-store customer wants a cup of coffee to drive to the store and they are willing to wait for it. In contrast, the drive-through customer wants speed. Once they get in line, they want to place their order and get out as soon as possible. Finally, the digital customer wants to place an order (and pay in advance) with the assurance that it will be available at a specific time. Furthermore, all three customers are served with the same process. So, what is wrong with this situation?

Part 1 of the Balanced Supply Chain series

 

Balance supply chain management: Setting the stage

This is the first of four articles about balanced supply chain management, its traits, and the need for such an approach. The concept draws on the collective experiences of the three authors with supply chain management—a base of more than 120 combined years. Over this period, the authors have seen the ebb and flow of many developments—some, such as computer integrated manufacturing—were initially seen as revolutionary. However, it is our view that the reality generated by many of these developments has failed to meet the hype. These experiences have given the authors an awareness of the need for a more balanced perspective. It is this perspective that underlies this series.

Read More

 

Currently, Starbucks has found that it is not $7 for a grande blonde vanilla latte that is bothering customers, it is the long wait time. The time from placing an order to being served now exceeds five minutes for more than one-third of customers. Consequently, some customers are not picking up their café lattes, even though they have paid for it. If you have paid $7 for your café latte and it is not there when you expected it to be, then there is a very good chance that you may not be returning to Starbucks. The company has potentially lost a customer forever. It is in this situation that the supply chain manager can provide real insight.

They can point out the implications of allowing customers to completely customize their café lattes. For example, when all the options for a café latte are considered, a customer can order up to 383,201,280,000 different and unique versions. The implications of this breadth of choice are staggering: these options generate higher lead time variance and adversely affect service time; more inventory has to be stocked and managed (remember in many cases, we are dealing with perishable items); staff training has been made more complicated; and we have more room for error. Second, one process cannot be expected to adequately meet the needs of these three customer segments. If we want to effectively service these three customer segments, then we must invest in three separate processes—one for each customer segment.

In other words, we must carefully and completely identify the implications of complexity both operationally (inventory management) and strategically (how it affects our ability to meet or exceed the expectations for each segment).

Before leaving this segment, it is important to note that balanced supply chain management requires mutual education and learning. We, as supply chain managers, must learn about our customers (specifically our key customers); we must educate other areas (such as marketing) about what their supply chains can and more importantly cannot do. We must understand how we compete (and how we lose customers—consider Starbucks and the long lead times) and how we differentiate ourselves in the marketplace.

Supply chain excellence ↔ Business excellence

This second tension flows out of the preceding discussion. This tension focuses on how we define success, and how the parent organization defines that success. Two extremes are underlying this tension. The first is being the best in terms of supply chain performance; alternatively, the focus could be on overall business excellence. At first glance, this tension can be effectively resolved simply—by focusing on business excellence. Yet, the challenge here is that business excellence is impacted by numerous factors—many of which, such as budget constraints, are outside the control of supply chain management. In contrast, supply chain excellence is under the control of the supply chain manager. However, the tension here is that sometimes the actions that the supply chain manager takes can adversely affect the ability of the firm to implement or change its strategy quickly. A good example can be found in the experiences of a large American-based farm equipment manufacturer during the 2010 farming boom.

Before this boom, the supply chain group had decided to focus its attention on becoming the leader in “lean” supply chain management. The reason for this focus—to help reduce cost. By 2010, the supply chain group had achieved this objective. Yet, 2010 was a period of rapid change for the American farmer.

Poor harvests in China, Russia, and Europe had created a sudden demand for American wheat and other grains. By March 2010, most American farmers knew that they had to increase capacity if they were to meet this sudden uptick in demand. This meant investing in farming equipment, with the expectation that this equipment would be in place by the start of the growing season.

Farmers who had long bought this company’s equipment (the company had a great reputation for brand loyalty) visited their dealers in February and March to place orders.  The prices quoted for the desired products were great—the lowest in the market. The problem, however, was delivery. Most farmers found out that they could not expect delivery until late October or early November—far after the end of the farming season. When faced with this reality, many farmers decided that availability was more important than brand loyalty and they turned to products offered by competitors—products that while higher priced offered one major advantage—they were available. What the company had learned, through the school of hard knocks, was that lean, while excelling at reducing costs through attacks on waste and reduction of variance, was not sufficiently responsive when faced with large and sudden shifts in demand. Consequently, the definition of supply chain excellence had to change and with that change, the systems used to achieve that excellence had to also change or, at least, be modified.

This tension between supply chain excellence and business excellence can only be resolved when the supply chain manager clearly understands the corporate strategy but also is in constant contact with the customer. As changes in the environment and the expectations of the customer become evident, the supply chain manager must be willing to reassess and adjust the supply chain strategy when it is no longer consistent with the new realities.

Expectations of top management ↔ Needs of operational personnel

The third tension is one that most supply chain managers are familiar with. Supply chain management must realize that they have to balance the needs of these two groups, which are often not quite in synch. Top management is interested in outcomes; they want to know what has not happened, not how. They are interested in knowing how supply chain management can affect the firm’s ability to compete. This impact can occur at the following three levels.

• Better, faster, cheaper. This is the lowest level of impact and the one with which most supply chain managers are familiar. It is focused on cost savings. However, it is important to understand what generates these savings. Essentially, in the past, one or more errors took place within the supply chain. These errors have now been identified and corrected. These are also the easiest types of impacts to demonstrate since they can be captured using existing cost accounting systems.
• Cost avoidance. One step up from better, faster, cheaper is that of cost avoidance. In other words, avoid making the investments that ultimately led to the cost savings in the first place. While potentially more attractive, these types of impacts are more difficult to measure.
• Customer needs poorly met. With this impact, the focus shifts from cost to revenue (from the bottom line to the top line). These types of impact are far more attractive to top management because they represent growth. Again, at the heart of this impact is an understanding of the key customer(s), their needs, the value proposition, and how the supply chain can be used to address these needs. It is here where technological changes are most effectively felt.
• Costs needs not met. This final impact is the home run of impacts. It is here that the supply chain can address a need that the key customer did not realize they had or that they realized they had but no one could address it.

Success with these impacts is dependent on being customer-centric (see the prior article in this series, SCMR, May/June 2024). It also depends on recognizing that the language of supply chain management (i.e., fill rates, ppm, Cp/Cpk, TAKT time) is not the language of top management. The language of top management is dollars and cents, and it focuses on output measures. For the supply chain manager, enlisting the involvement of top management involves identifying and understanding the key measures by which top management assesses their progress and then showing changes in the supply chain can positively influence these measures. It is WIIFM (what’s in it for me) in action. The challenge for the supply chain manager is to translate operational improvements and changes into financial terms (this can be done through the Strategic Profit Model, otherwise known as the Dupont Profit Model—an example is found in Figure 2). It also means mastering the language of performance measurement.

 

In contrast to top management, the operating personnel have very different requirements.  They are interested in output measures (which are recorded after the fact). While somewhat informative, such measures are ultimately viewed as punitive because, since the events triggering these measures are already completed, there is nothing that the operating personnel can do to change these negative outcomes. Rather, they are interested in predictive or process-based measures. These are measures based on the processes that can be used to predict the outcomes and which can also be used to help operating personnel identify what can be done to achieve the desired results. For example, if we are interested in competing on speed and reduced lead times, then predictive measures would focus on the following attributes.

• Number of steps in the process.
• Distance covered by the order.
• Number of people who touch the order.
• Setup times (the higher the setup times, the more likely that we are to build larger lot sizes, thus increasing lead times).
• Percentage of the steps that are operations or transformations (value, operationally defined, consists of three traits: (1) it involves an operation; (2) the customer is willing to pay for that transformation; and (3) it is done right the first time).

With these measures, operating personnel know what they must do—reduce steps, reduce the distance covered by the order, reduce the number of people who touch the order, reduce setups, and eliminate any activity that is not an operation. By the way, the important role played by performance measures is covered in greater detail in Melnyk et al. (2020, 2021).

“Top management is interested in outcomes; they want to know what has not happened, not how. They are interested in knowing how supply chain management can affect the firm’s ability to compete.”

Operating personnel are also motivated by different factors. They are driven by the four S’s—survival, surprises (eliminating any negative surprise), simplification (making existing systems and processes easier and simpler to manage and understand), and success (being part of a successful activity, department, or company).

Within this context, we see balanced supply chain management as having the manager act as a translator and as a coordinator. As a translator, that person is communicating changes taking place in the supply chain in terms that are meaningful to top management. Similarly, they are communicating top management and strategic directions to the operating personnel in terms that are clear, unambiguous, and meaningful. They are coordinating activities to ensure that what is done on the shop floor is in synch with and supportive of strategic intent.

Focusing on costs  ↔ Focusing on other supply chain outcomes

Traditionally, supply chain managers have focused on cost and cost savings/reduction.  There is something satisfying about this focus. Costs and cost savings are something that everyone can agree are important. Everyone can understand and appreciate the importance of costs and cost savings. Yet, the supply chain manager must understand that costs and cost savings, while important, are not enough. There are additional outcomes that customers want and are willing to pay for. These include the following.

• Responsiveness. The ability to respond to changes in demand (volume, mix, location) quickly and at a reasonable cost.
• Security. Ensuring that supplies coming through the supply chain are protected against threats to quality and that the digital assets of the firm (information technology, intellectual property, and operating technology) are protected from cyberattacks.
• Sustainability. Provide goods and services through a supply chain that ensures controlled and minimal resource impact both today and, in the future, and that ensures that people at all levels are appropriately treated and nurtured.
• Resilience. Develop a system that can identify, monitor, and reduce supply chain risk and disruptions, as well as react quickly and efficiently to these threats, thus offering its customers “peace of mind.”
• Innovation. Provide key customers with a stream of goods and services that not only are new but also address needs that the competition has either neglected or poorly addressed. Innovation also focuses on changes in process, business models and the supply chain.

Each outcome requires a different type of supply chain structure and supply chain practice. No one supply chain system can adequately address all of these needs simultaneously. The challenge for the supply chain manager is that of determining which outcome is most attractive to the firm’s key customers and recognizing the need to reconfigure supply chains if and when needed.

Conclusion: Part two

In this second article, we have focused on the theme of managing at the edges. This skill, part of the requirements for the new supply chain leader, as set down by Melnyk in 2016, introduces its own set of tensions. We have explored only four. Yet, from this discussion, we can see an image of balanced supply chain management as being one where the supply chain management actively engages others, recognizes the importance of measures as communication, tailors the message to the audience, and attempts to balance success at the micro level (the supply chain) with success at the macro or business level. The supply chain manager is both an active learner and an active teacher. This vision requires new skills and capabilities. Yet, it can be argued that developing supply chain leaders with these skills and capabilities benefit the supply chain, benefits the firms, and it benefits the customer.

We will continue this exploration of balanced supply chain management in the next article.

About the authors

Steven A. Melnyk is a member of the department of supply chain management at the Eli Broad College of Business at Michigan State University. He can be reached at [email protected].

Nick Little is the director of the Railway Education Center for Railway Research & Education at the Eli Broad College of Business at Michigan State University. He can be reached at [email protected].

Lee K. Levy II is a retired Major General of the USAF, and CEO of The Levy Group, LLC. He is a doctoral candidate at Vanderbilt University and holds the Directorship Certification from the National Association of Corporate Directors. Levy can be reached at [email protected].

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