Supply Chain Management:

 Critical Factor’s For Success

Michael C. Zimmerman

Total Cost Solutions, Inc.

Severna Park, MD. 21146

SUMMARY

       In today’s markets, organizations rarely make huge margins on products or services that they bring to market. This means they must find new ways to bring value to the shareholders. The value that shareholders look for is profitability and longevity of the company. If profit margins aren’t achieving desired levels of value, how do we change our current model to achieve an acceptable return? During the 1990’s corporations attempted to bolster returns by implementing programs such as re-engineering and right sizing. Management was able to bring short-term value to the shareholder by reducing capital resource budgets. Unfortunately, this strategy has left many organizations understaffed and operating at less than 100% efficiency. In turn, customer service levels have suffered, production is down, and quality is suffering. These results adversely affect the bottom line and thus create dissatisfied shareholders. Organizations are now looking for methods in which they can enhance value and not adversely affect the bottom line. Supply Chain Management has evolved into a very strong application that achieves results while meeting the current corporate criteria. A strong Supply Chain Management Program is truly a relationship management program. Significant bottom line value can be achieved by building efficiencies into the processes throughout the supply chain. Three of the more critical focus points in management of the customer supplier relationship revolve around a fair and balanced customer supplier relationship strategy, a strong quality strategy, and a dynamic materials or service management strategy. The programs that achieve the highest level of success  (in relation to the focus points) have determined what base “Critical Success Factors” they should structure their strategy on. These critical success factors include such philosophies as open two-way communications, fair and honest business transactions, total cost analysis, equal sharing of risks and benefits, and a universal acceptance of change. There must also be an understanding that these initiatives will enhance the strength of the supply chain and that they are supported by the leaders of the participating organizations.

 KEYWORDS

 Critical Success Factors, Cross-company Teamwork, Partnerships, Savings, Trust

 TEXT

 What would the development of a program that delivers benefits, increases the quality of product and process, creates open communications channels, aligns goals throughout the supply chain, and identifies and reduces cost components, do for your company? What would it mean to you if the result of a program like this significantly increased your market position and bottom line? A strategically developed supply chain management program can do all this and more for your organization. By adapting this approach, you can foster an environment of continuous process improvement, operational excellence, and increased revenue. The recent past has generated many different approaches to building efficiencies into the supply chain. Many of the programs implemented throughout the modern industrial world have one thing in common; they achieved some level of success. Some of the programs focused on supplier performance, some focused on reducing cycle time, while others focused on logistical efficiencies. For the most part, the programs that showed significant levels of success followed Deming’s well known and proven process of developing and implementing a program, evaluating the change in results, and then implementing process improvements. Because of their strategic development approach, these organizations were able to design focused programs that delivered product and process improvements that were beneficial to the supply chain and resulted in significant savings. A little different approach from what experienced during the 80’s and 90’s, offers even greater advantages and potential than ever thought possible. By looking at the structure of an organization and redefining it’s boundaries, we are able to develop a new paradigm. By involving all the stakeholders in the process, from the beginning to the end, we are able to identify and even create synergies that would never been possible in the past. By focusing our strategy on developing critical supply chain success factors, we make the program even more profitable. By developing and implementing a critical success factor strategy, we create win-win situations throughout the supply chain. When everybody wins, the synergies that are developed promote savings that trickle down through the entire supply chain to all stakeholders. Realizing these synergies is simply a matter of developing an atmosphere of trust and a desire to achieve significant returns throughout the entire supply chain. A strong Supply Chain Management Program is really nothing more than a relationship management program.

Savings can be achieved by focusing on three core operational focal points in the relationship. These focal points include an interactive supplier relationship strategy, a superior quality strategy for both product and process, and a dynamic materials management strategy. The programs that achieve the highest level of success base their strategy on common factors, or “Critical Success Factors.” These critical success factors include such philosophies as open two-way communications, fair and honest business transactions, a total cost philosophy, equal sharing of risk, and a basic acceptance of change. There must also be an understanding that these initiatives can be measured, will enhance the strength of the supply chain, and that they have the endorsement of the stakeholders within the supply chain. 

 By focusing your efforts on implementing critical success factors into the three core functional areas relevant to supply chain efficiency, you can develop and implement a program that allows the entire chain to achieve significant savings. When developing this type of relationship with your customers and suppliers, it must be agreed upon that all savings as well as risks, will be shared between the partners. To this point, no company will benefit from any one improvement without passing some of the savings to the rest of the chain. This pass through could take on many different forms; it does not have to be monetary. Savings may take the form of  “soft savings,” or process savings. These soft savings are achieved through process improvements or efficiencies gained through value analysis. It can be difficult to put an actual value on these savings. When this happens information needs to be shared and improvements should be implemented so cost containment and/or savings can be realized as soon as possible. In the long term, when costs are contained (or lowered) the chain becomes stronger and benefits by not incurring price increases which erode it’s members competitive position. In order for this strategy to be effective, the members of the supply chain must also be willing to absorb risk. When changes are implemented and the desired results are not achieved, the entire supply chain should help implement corrective action and not penalize the company who is most affected. If higher costs are associated with the corrective action, the chain should be willing absorb the difference until corrective action is implemented and achieved. Once the stakeholders in the supply chain have agreed on the basic philosophy that partnering will create synergies for the supply chain, the real work begins.

   The basis under which the desired synergies will be achieved is one where the program is developed and functions under an umbrella of ‘trust’. This is one way the program differs from earlier attempts to leverage the supply market. To be successful, we must be willing to redefine the boundaries of our business and work with our customers and suppliers to better define and implement the needs of the entire chain. In adapting this type of strategy, we are able to create synergies throughout the entire chain that allow everyone to operate more efficiently and effectively. Developing cross functional supply chain teams will allow the chain to truly benefit from this type of strategy. These teams will have member support from each participant in the chain and their purpose is to coordinate wants and needs throughout the procurement process. Effective communication of everyone’s needs is critical to developing operating efficiencies significant enough to affect the entire chain. The old paradigms of negotiating a deal which benefit one party in the chain more than another must be redefined.  The chain must adapt a new philosophy of trusting their partners to share the wealth and bare the burden of risk.

It should be briefly mentioned that there are obvious criteria that must be met prior to entering into this type of arrangement. Not every commodity or service supply chain is a viable candidate for this type of program. Not every member of an existing supply chain is a candidate for this type of program either. Do your homework and pick your partners wisely.  You should only consider this type of philosophical change with your higher dollar supply and service chains. They should also show an understanding of the value of teamwork and supply chain planning. These are the chains that typically offer the greatest synergies and opportunities to create efficiencies and thus offer savings. Once you’ve analyzed your supply base and determined which are legitimate areas to target, you then approach the members of the chain with a value proposition. The members of the chain should be in agreement that there is value in having a superior quality strategy (for both product and process), that there is value in an interactive relationship strategy, and that there is value in a dynamic materials management strategy (or service strategy). Prior to moving on, they should also agree that they would trust each other enough to pursue working together to develop and share the synergies necessary to make this possible. This is a big shift from how we did business in the 1980’s and 90’s when we operated in an atmosphere of mistrust and self-preservation. The philosophy of negotiating the ‘best deal’ possible for our company has been a standard operating procedure in the recent past. Recently, there has been a shift in thinking by some industries resulting in the adaptation of a philosophy based on forming efficiency teams with segments of the supply chain. Unfortunately the strategies of early supplier involvement and customer input are still foreign to many organizations. The thought of developing a relationship with the entire supply chain seems as impossible as putting man on Mars to these organizations. There must also be an understanding from management that a strategic change in philosophy is necessary in order to bring the results they desire. Having the participants develop and implement critical success factors into 3 operational focal points of businesses involved in the supply chain can achieve dramatic results. 

 The first of the areas to develop are the supply chain relationships. These relationships are the basis for achieving a critical level of trust between the partners. Once the trust factor has been developed, a strategy that will promote synergies and thus savings can be implemented. The customer-supplier relationship management strategy involves developing long-term relationships, which will include partnerships or alliances as well as multi-year and evergreen contracts. Once you’ve completed your compatibility analysis and determined which customers and suppliers are potential partners, you can approach them with the concept. If there is an interest in participating with the cross-functional team and value analysis, you can move forward with the process. During the value analysis it is important that you determine what the critical success factors are, and make sure that the participants buy into them. The necessary critical success factors that make the relationship(s) work will center on the basics of creating an environment where the participants treat each other fairly and honestly. This environment will allow the development of the ever-critical success factor, trust. Once this hurdle has been achieved, the team can move forward with laying out the other critical factors. The next step would be for the team to evaluate what synergies can be achieved when long-term relationships like alliances or partnerships are the normal method of doing business. Long-term relationships allow for the chain to function with a completely different business philosophy. One difference is that the participants work together and eliminate duplicate and unnecessary process efforts. An example would be to implement summary billing, a process where participants only bill and make payments once a month. Add electronic transfer of funds to summary billing and significant process savings are achieved. In today’s world of electronics this process can be supplemented with electronic receipt settlement and become completely paperless. This means no invoicing, no manual account payable processes, and process savings. Another critical success factor in the relationship management is that of creating a two-way communication philosophy. This is achieved by developing cross-functional supply chain teams that meet on a regular schedule and share information about how the supply chain is operating. By planning and coordinating material needs and schedules, sharing manufacturing information, and communicating other pertinent information that can affect expenses within the chain, challenges can be resolved without undue expense. By communicating this type of information with the participants, plans can be implemented so that the impact of problems can be turned into opportunities instead of challenges.  In order for all participants to achieve efficiencies, communications must flow back and forth throughout the chain. At the core of utilizing the critical success factors is the team’s willingness to work together to identify and reduce cost components. The team members should focus on identifying areas where process improvements can be implemented and savings realized. The efficiencies achieved from using critical success factors allow the team to benchmark and report measurable results. When the results are shared throughout the chain all members benefit through cost containment, process savings and sometimes even cost reductions. The sharing of benefits and risks make it easier to accept philosophies such as earlier supplier involvement and customer input. By utilizing early supplier involvement and customer input, non-value or duplicate processes can be identified, standards and specifications can often be changed to reflect cost savings, and a total cost philosophy can be employed.  The team should document all savings and report them back through the chain so that every participant can see the benefits of their efforts.

The next functional area that will benefit from the implementation of critical success factors is the chains quality management strategy. In an effort to achieve the greatest return possible for participation in this process, teams must be open to looking at quality as not just a function of product, but as a function of process as well. Significant savings can be achieved in analyzing both product and process quality. The process quality philosophy is not unlike the philosophy an organization would go through if it were attempting to standardize its processes. There are many processes within an organization that can be standardized, reengineered, or even eliminated. Eliminating or revamping these processes will make the organization more efficient and thus bring a higher level of quality to the entire chain. Many processes have been developed and implemented which support the current methods that supply chains operate under. If we undertake a new supply chain philosophy, the old processes should be reviewed for obsolescence as well. When we go through this exercise we find that many processes can be eliminated because they are no longer needed or are redundant. Many of the same processes are performed numerous times by numerous organizations within the supply chain. These redundant processes need only be done once. If we are operating in an atmosphere of open communications and trust, we can share the results of redundant processes such as test results or other critical functional information. This means that processes such as compliance testing can be done once, with the results being shared and trusted throughout the chain. Simple paradigm changes like this are examples of critical success factors that a team can set to achieve savings. As we mentioned in the relationship management strategy, this type of analysis can yield huge savings to the entire chain. Because the development of critical success factors offers significant results, they should be a focal point of the supply chain team. Product quality can also provide significant savings through out the supply chain. During the analysis phase of the supply chain initiative, potential suppliers are asked to participate in a certification program. The certification program allows the supply chain to initiate new processes that are less demanding than the current ones. By certifying your suppliers you can start to work together to develop a zero defect strategy. If your partners have competent quality programs with a continuous improvement philosophy, the supply chain team can work towards reducing the cost of quality. By working together and communicating the correct standards and specifications, as well as possible improvements to the specifications, the chain can eliminate waste. The adoption of the early supplier and customer involvement philosophy as a critical success factor may allow us to redefine the form, fit, and function of a product. We are then able to address quality issues before they become a cost factor. By having suppliers participate in a certification/re-certification program, the team is able to work together in an effort to improve product quality and thus generate savings for the chain. The savings generated from product and process improvement are both hard tangible and soft intangible savings. The teams must make sure they define what measurements will be used to benchmark and report improvements. The savings generated through improving the quality of product and process as defined by the requirements of the particular supply chain can be a significant factor in cost containment. Critical success factors, similar to the examples mentioned, need to be developed and become a continuous focus of the chain team. 

The third functional area in which developing and working with critical success factors can help the supply chain team achieve significant savings is through adopting a materials management philosophy. By utilizing the customer supplier relationship and quality concept strategies we can develop a materials management strategy that will also yield significant savings. The supply chain is all about manufacturing, delivering, and using product. The product can be either a material or a service. For the purpose of this paper I have basically referenced a materials chain. Similar critical success factors can be generated for service agreements and they can yield comparable results. By employing critical factors such as open two-way communications, total cost analysis, equal sharing of risk and benefit, and a trust in the business relationship, the team can generate significant savings by getting out of the box and manipulating the chain differently than past relationships would have permitted. By analyzing the requirements of the entire chain, the team can focus on the critical materials or the 20% of the items that represent 80% of the value to the chain. This analysis allows the team to work together and plan a method of optimizing the flow through the pipeline. It doesn’t take much imagination to realize how much non-value added process could be eliminated if you identify what’s important to the chains stakeholders and have the team focus on achieving those goals. Once you’ve identified the 20% or critical inventory, a second step might be to perform a standardization analysis on these parts utilizing the entire teams input. Very often material specifications can be rewritten to include acceptable generic product or industry standard product. These alternatives may reduce the cost and save the chain money. Another factor affecting the materials management strategy is labor as many of the processes in the supply chain are labor intensive. By automating material handling systems, material logistics systems, and the accounting systems the team can drive long term cost out of the pipe line. Automation also helps to capture data that can be utilized by the chain to benchmark process improvement. By implementing performance management requirements the chain can utilize the data to show savings. Once you’ve embraced this type of philosophy, the team can agree upon performance management requirements. The team may want to consider such performance requirements as number of defects, on time deliveries, percent of fill, customer service levels, and scrap rate. You can even take the requirements to the next level and assign customer service levels based on commodities position in a material criticality analysis. By utilizing strategic focus points such as two-way communication, focusing on material stratification based upon criticality, and the sharing of requirements and capabilities, the team will be able to standardize material, optimize inventory, and save significant amounts of capital.

The benefits of a program like this will increase quality of product and process, create open communications channels, allow goal alignment throughout the supply chain, identify and reduce cost components, and improve products. This approach will foster an environment of continuous process improvement, operational excellence, and increased revenues. By utilizing these concepts, the participants can implement a system that will save a significant amount of money that can be directly applied to the bottom line. In order for the team to be able to implement successful changes in philosophy they must educate the stakeholders about the effects of change management in relation to stereotypical organizational silos and existing fiefdoms. The best way to show success is with data. Your performance measurements must benchmark service metrics throughout the chain, time improvements, asset/inventory savings, and a gamut of financial savings due to process improvements. By utilizing critical success factors that generate supply chain savings we can contain and often reduce cost associated with the procurement of goods and services.