The new rules of LIVING supply chains
By: Robert Handfield and Tom Linton
Flextronics, which recently changed its name to Flex, could be one of the biggest companies you have never heard of. With over 200,000 employees and over 1,000 customers, Flex produces more than $12 billion in revenue across at least 12 industry verticals. While we once focused on PCs, today we make everything from footwear for Nike to speakers for Bose to floor care products for Dyson and Bissell. While you won't ever see our name or our brand on these products, they represent billion dollar businesses in each of these sectors. Yet, Flex's primary business is not manufacturing. Rather, it is supply chain management, on steroids, with a focus on continuously improving the end-to-end supply chain. Our new book, The LIVING Supply Chain, documents the changes going on at Flex in the context of the massive evolution in today's supply chain world. These changes will occur sometimes quickly, sometimes slowly, but will undoubtedly come into being in the next decade. The changes are not just about technology—they are about true evolution, in a biological sense, of the relationships, infrastructure and jobs in the supply chain.
Many of the changes we are seeing at Flex have been captured in a set of insights we call the "New Rules for LIVING Supply Chains.'' These new rules are aligned with many of the rules that dictate how species, human beings and genetics have evolved, and represent a natural, rather than a radical, evolution to change. They are occurring because the world of global trade is re-shaping the way we operate. In a sense, this world has reached the limits of growth; the new rules will require a new set of management approaches as the traditional approaches will no longer apply.
To understand this new world, a brief history lesson in supply chain management is in order. SCM developed as a field as large organizations saw the need for dedicated functions responsible for the management of materials, which included purchasing raw materials, managing manufacturing processes and moving materials (logistics). The overall objective of materials management was to solve materials problems from a total system cost perspective rather than from the viewpoint of individual functions or activities. The late 1990s saw the introduction of a set of principles known as "World Class Procurement.'' The idea, promulgated at universities like Michigan State University, where co-author Rob Handfield was a young assistant professor, was that procurement needed to establish a position not just as a "buyer of stuff,'' but as a centralized function that tabulated spending across both direct and indirect categories of spending, leveraged this volume through purchase power and sought to achieve significant cost improvement.
Driving cost out of the system was also a theme in logistics, where enterprises centralized their distribution centers and warehouses to drive optimization in transportation routing and reduce inventory across the system. Manufacturing, meanwhile, saw the introduction of Lean and just-in-time manufacturing based on the thinking pioneered by the likes of Toyota. Just-in-time and Lean focused on standardizing products, improving coordination between different enterprises to reduce inventory and only delivering the exact amount needed, in quantities that could be immediately consumed by the follow-on operation.
Still later came the "Logistics Renaissance,'' which proclaimed that the role of logistics was to add value and drive market penetration through technology integration. The concept was encapsulated in a "maturity model'' that identified how organizations could develop capabilities over time toward a truly "world class supply chain'' organization.
However, "world class'' still emphasized distinctions in the field. Purchasing, operations and logistics were lumped together as "supply chain'' functions, but they never stopped working independently of one another. Professional disputes emerged over which function was really in control of the supply chain. All the while, each claimed to be driving world class practices-implying that they are the best of the best.
In the end, there are some real problems with the worldclass view of the supply chain. Although transactional excellence and efficiency is certainly an operative element that forms the basis for excellence, there is a shift away from the idea that world class applies to every situation.
So if world-class supply chain management is no longer the objective, what is the next generation of supply chains going to look like? To answer this, it is important to emphasize that managing supply chains is no longer just about driving cost out of the system, but about a deep understanding of the components of customer value and making decisions quickly in response to sudden shifts in customer requirements.
While cost optimization may well be one element of this equation, value has many contexts and meanings. Managing the supply chain first and foremost requires that managers act as internal consultants who listen closely, not just to the explicit needs of internal customers for materials, information, services, knowledge and capability, but also to the intangible elements of value customers are unable to articulate. In a sense, real-time supply chains involve understanding and predicting what internal users and customers will need next month and next year, even before they themselves recognize that they need it. And velocity and speed is an integral capability that enables quick response to customer needs that produces the right outcome.
Attention to speed and velocity is also an idea promulgated by evolutionary economics and biologists, who emphasize that the organisms and creatures that are quick to respond will evolve more quickly-and will survive. Those that don't? They will die out. In his book: 'The Serengeti Rules,'' biologist Sean Carroll explains why entire ecosystems can get "sick'' when the populations of certain members are too low or too high. In fact, these rules provide an excellent set of guidelines for thinking about how supply chains operate as an ecosystem. In this manner, we propose the idea of a "LIVING'' supply chain as one of a set of networked enterprises that are subject to biological rules related to the ability to respond—and evolve—quickly.
Why is velocity and real-time transparency so important in the supply chain? An anecdote used by Linton at Flex makes it clear: Think about driving in traffic and suddenly it occurs to you to use the Waze app. This app provides you with realtime data, collecting information from millions of other Waze drivers to give you instructions on how to get to your destination faster, using alternative routes. What if you had Waze for your supply chain? You could move more quickly, get real-time information and updates and provide better service and value.
This analogy points out a simple concept, which is not far from the truth: In the new global era, speed and velocity are more important than everything else. Speed drives business value and inventory turns, reduces working capital, produces cash, (monetizes) assets and makes customers happy. That, in turn, further drives top line revenue. The creation of real-time supply chains provides a means for creating value that the customer cares about, and in today's rapid environment, velocity has customer value. Late deliveries, substandard quality, safety incidents and damaged shipments do not alleviate the benefits offered to a customer for lower prices, as many logisticians and planners will tell you. In many cases, speed not only reduces costs—it also creates customer value.
This article was written by Robert Handfield and Tom Linton from Supply Chain Management Review and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to firstname.lastname@example.org.