Supply chain means business
The supply chain world as we knew it is fading. No longer is it about planning, efficiency and optimization exclusively. In today’s ever-changing environment, innovation, flexibility and sustainability are the key capabilities. High time for supply chain to embrace this reality. By Prof.dr. Jack AA van der Veen
More than ever before, over the last couple of years, the term ‘supply chain’ appeared in the headlines of the everyday mainstream news. Whether it was because of Brexit, trade-wars, the corona pandemic, the blockage of the Suez Canal, the rising prices of products in short supply or the production and distribution of vaccines, it is ever clearer to the greater public that supply chains are important and that just-in-time supply cannot be taken for granted.
To the insider, the newfound attention for supply chains is no surprise; we always knew that supply chains were a crucial part of doing business. Not for nothing supply chain activities like source, make and deliver together are referred to as the primary process. After all, it forms the very basis of what organizations aim to do: provide goods and services to their customers.
However, over the last few decades or so, this fundamental role of supply chain seemed to be out of sight and organizations have deemed the functions of finance and marketing to be more important. In the process, supply chain became less of a concern and frequently merely a matter of organizing a perfect execution.
To be honest, supply chain’s reduction to a more operational role was not so much to blame by the ‘power-eager pushovers’ of the finance and marketing functions. At least partially, the supply chain’s secondary role can be considered as a self-inflicting wound; result-driven supply chain professionals with a can-do mentality were all too eager to focus on the more technological, numerical and economical aspects of their work thereby avoiding the more political boardroom dynamics. The result was that supply chain’s focus has been largely on ‘doing the same but better’, the key efforts being meticulously planning, optimizing, standardizing and automation with the objectives to reduce cost (operational expenditure, OpEx) and reliable delivery (on-time-in-full, OTIF).
Sure enough in some sectors, finding economies of scale and other cost reduction efforts remain the supply chain’s name of the game also for the years to come. However, for many firms that no longer applies simply because the organizational environment has drastically changed over the last years. The business trends are well-known: increased digitization, hyper-competition, customer focus and social and environmental sustainability. Together these led to a situation where organizations need to be able to quickly adapt to the ever-changing uncertain and complex environment. Companies and supply chains need to be able to react in a responsive, resilient and agile way to the circumstances. The effect being that transparency, innovation, continuous learning, flexibility and collaboration are no longer just nice-to-haves but have become absolutely necessary capabilities for organizations to prosper.
The consequences of such developments for supply chain goes far beyond the paradigm of the good-old ‘doing the same but better’. In the highly turbulent environment, organizations constantly need to reinvent themselves so that doing the same is no longer a realistic option. For instance, digitization can be great for efficiency but that is not its key benefit. A much more important consequence of digitization is that current business models will become obsolete and new business models become possible. The same holds for the need for social and environmental sustainability. For example, to achieve true ‘circularity’, the current supply chains must be overhauled completely; new materials, new production methods and new ways to communicate become a necessity. Also, to become truly innovative, it no longer suffices to spend more money on R&D. Rather innovation needs to become a mindset for all internal and external resources. Supply chain’s task then becomes to connect the ideas of all stakeholders and to transform these into joint actional plans.
Although, the trends mentioned are recognized by most executives, the consequences are not always well-understood, let alone implemented. In our research for evofenedex (the Dutch society that represents the interests of some 15,000 companies that export, import and transport goods on their own account or subcontract through a professional transport company), we found that most organizations are mainly driven by operational activities with hardly any structural approach towards reviewing and renewing business models. In itself this can be appreciated; all disturbances require companies to work even harder to survive and maintain the current business. However, despite that on the short-term this is perfectly understandable, this hardly is an environment where executives can take the required time and effort to be truly innovate.
Another striking observation from our research was that, whenever companies did take strategic initiatives, for example to launch a new product-line, attack new markets or any other business-model related efforts, supply chain professionals were usually not involved in the planning thereof. When it is done, this appeared as the task of either top management or marketing executives. If any, the involvement of supply chain only came at the execution level. In other words, typically supply chain had a role of executing the plans of others in the firm without being involved in making these plans. Again, this can be understood from the traditional way of working. Clearly, when supply chain is considered as being focused on operational issues only, involving them in strategic planning does make little sense.
Summarizing, our research showed that many firms are still using the classical ad-hoc approach to business model renewal and supply chain is hardly involved in such efforts. Clearly, although this might be the frequently used method of working, this does not make it the best way. As argued, the current organizational environment does require companies to have the capability to adopt quickly, so that an ad-hoc approach to new business model development simply does not cut it. Rather, organizations need to have a regular plan-do-check-act cycle on business model development. And to ensure that all possible resources are used to generate ideas and put these to action, it is necessary that all key functions, including finance, marketing and supply chain all contribute to planning and execution of business models and do so in a collaborative manner.
For supply chain to be able to contribute to such efforts, this implies a major breakaway from the traditional, operational driven practices. No longer is efficiency the key driver, but the main task becomes to create customer value. Services become equally (or actually more) important than products. It is not always about further standardization, but about deciding a portfolio that can satisfy customers in all relevant product-market combinations. Optimization is replaced by continuous learning and improvement. Fierce negotiations with suppliers and sharp price-based tendering is substituted by co- makership and collaboration on innovative concepts.
Importantly, a totally new approach to risk management is required. Traditionally, supply chain is always worried about deviations from the pre-set plan and does everything to prevent this from happening. However, in the highly dynamic environment, coping with deviations rather than preventing these from happening becomes the dominant approach. Moreover, new business models and innovations inevitably come with risks.
Therefore, supply chain needs to become more entrepreneurial and leave room for experimentation. After all, if you want to ensure that the current plan is executed exactly, you lose the ability to find new ways and thereby to truly innovate. Supply chain needs to learn that risks are deviations from the goal, not so much deviations of the plan. And that risks are not only negative but can also be an opportunity.
As mentioned, supply chain has always been a primary function. The current time and age, does require supply chain professional to start holding that fundamental reality again. No longer can supply chain conveniently take a back seat and reason from its own logic alone. Together with finance and marketing, supply chain is to form the ‘golden wheel’ of strategy. If the headlines show us anything, it is that the supply chain function is simply too important not to involve in the highly required strategic efforts of constantly finetuning and innovation of the various business models of the organization. However, for this to happen, supply chain must start to think, act and behave differently. A technological, numerical and economical viewpoint are fine, but that is not enough; supply chain means business and we better live up to that challenge.
Prof.dr. Jack AA van der Veen is evofenedex Chair Supply Chain Management, Nyenrode Business University – The Netherlands. Nyenrode Business University is a top business school in the Netherlands. It was founded in 1946 by renowned private Dutch companies, including KLM, Shell, Unilever and Philips. The institution offers an MBA, various intensive academic courses, and short and longer-running programs in the fields of business, management, accountancy, controlling and fiscal law.
What to read more on new supply chain business models? You can download the English language white paper on this topic: