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They are the best practices that leading companies are implementing now – practices that will be combined with advanced analytics and modeling tools to forge the supply chain of 2025.
The date is an arbitrary one, of course. But it helps today’s managers to focus on the path to supply-chain excellence, at a time when external factors are conspiring to undermine the efforts of global suppliers to get product to market in a timely fashion.
The next general of supply-chain risk management will deploy the quantitative analytical tools that are widely used today in global banking, said Anthony Tarantino, a senior consultant in supply-chain and operational excellence to Cisco Systems, Inc. So bring on the number crunchers.
But every successful supply-chain initiative involves a blending of technology and business-process change. Speaking at a recent global trade seminar in Palo Alto, Calif., hosted by the law firm of Pillsbury Winthrop Shaw Pittman LLP, Tarantino laid out seven best practices that can help businesses to weather the storms they’re likely to encounter in the next 10 years. Here they are:
Centers of excellence. Nothing new here – businesses have been piloting such initiatives in one form or another for years. Typically, they involve multi-disciplinary teams that are charged with addressing a specific issue. Tactics include the standardization of business processes and continuing education of key managers.
But a true center of excellence can be a “political lightning rod,” said Tarantino. “It’s not a slam-dunk to create one that’s successful.” It must have strong executive sponsorship and be reporting at a relatively high level within the company’s management structure.
“If a CoE is buried within the organization,” said Tarantino, “it will lack independence to make the tough calls and defy the status quo.”
A hybrid supply-chain organization. Companies tend to seesaw between the extremes of centralization, which promotes efficiency and controls costs, and decentralization, which provides flexibility and quicker time to market. The answer lies somewhere in the middle. “History has shown that a rigid application of either approach is not going to work,” said Tarantino. Yet achieving the perfect balance is a constant challenge for every organization.
Product segmentation. Products must reflect the realities of the marketplace, which is by nature fragmented and requires multiple tailored approaches. The trick, said Tarantino, lies in determining the optimal number of product types and segments. Defining factors include demand volatility, profit margin, supply-chain risk and resiliency, and variations in order and manufacturing lead times. They break down into millions of data points – hence the need for sophisticated analytics to sort through it all.
In the future, Tarantino said, segmentation will become an essential element of virtually every supply chain. Marketplaces are constantly changing, and businesses must conform – even if that means transforming a company’s very nature. Cisco, for example, went from being a maker of networking hardware to a provider of services and subscriptions. And the pace of change is accelerating. “Segmentation can’t be a one-shot deal that you do every five years,” he said.
Big data analysis and analytics. Up to now, most organizations have relied on structured data such as purchase orders, inventory levels and customer returns. The future will see the addition of unstructured data from external sources – books, articles, blogs, surveys, social media – “everything under the sun,” as Tarantino put it. These data points, which account for up to 90 percent of all business information, can have a huge impact on supply chains. Again, though, companies need a means of sifting through the clutter in order to extract meaningful data. It’s analytics to the rescue.
“This will be essential, if segmentation efforts are going to provide a realistic look at customer sentiments and trends, especially for new market areas and new products,” Tarantino said.
Hybrid outsourcing. Once again, balance is key. Over the past two decades, many companies engaged in rampant offshoring of their manufacturing capacity. They got what they expected in terms of cheaper labor, but they also became burdened with uncertainty caused by the additional distance between source and sale.
They’ve gotten smarter in recent years, having achieved a better understanding of the hidden costs of outsourcing and risks such as theft of intellectual property. Contract manufacturing is “a cutthroat industry,” in which nominal partners often perform work for direct competitors, said Tarantino.
Forget about protection from host governments or the reliability of non-disclosure agreements. “In China,” he said, “the rule of law is just a myth.” Often it’s smarter to locate at least a portion of one’s manufacturing closer to home, and keep core IP in-house or with trusted local partners.
Quantitative analysis for risk management. The advanced modeling tools in use by the banking industry were triggered by international accords such as Basel II and Basel III, and by U.S. laws such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. Banks today can model the rarest of catastrophic events – the so-called Black Swans – and supply-chain managers need to be able to do the same. “These techniques and tools will be applied to the next generation of supply-chain risk management,” Tarantino said. Expect plenty of new job openings for the quants.
Managing IP and patent protection. IP theft and piracy will continue to grow. They’re a cheap way for foreign competitors to get a foothold in emerging markets. Western notions of business ethics in those countries and in China are essentially irrelevant.
“Supply chains of the future will have to factor IP risk into their sourcing and trade decisions,” Tarantino said. He cited Seagate Technology, which makes disk drives in its own Southeast Asian factories, versus Apple’s decision to outsource manufacturing to “IP-challenged” countries such as China.
Similarly, good patent risk management can help to shield companies from expensive patent wars and trolls that claim the most basic elements of technology as their proprietary right.
The unifying theme among all these best practices is the growing inter-dependence among global businesses and their many partners. Said Tarantino: “I don’t think there is such as thing as a local supply chain anymore.”
