Designing and Managing Supply Chains, from ‘Outside-In’

Dr John Gattorna, Adjunct Professor at the University of Technology Sydney, describes how to design a contemporary supply chain to achieve genuine customer centricity and network optimisation.

In this ‘new normal’ era of increased volatility, customers must be put at the centre of all supply chain designs. ‘Outside-in’ thinking replaces the predominantly ‘inside-out’ thinking in order to have any chance of achieving the much desired customer centricity condition. This means taking a reading on customer expectations in the target market, grouping customers along behavioural lines (rather than on institutional or other bases), and then reverse engineering back into the business for optimal network design and allocation of resources. The key here is precision in aligning with customers.

The trick is to establish a direct link between the enterprise and its customers, rather than basing our design on assumptions about the way customers think. This missing link is provided by the human dimension that is common to all supply chains, from suppliers, through manufacturers, to customers and end users. Remember, supply chains are driven by people, and technology is a facilitator.

The over-arching principle is to dynamically align the business enterprise with customers in its target market. The more precise the alignment achieved, the less over and under-servicing that occurs. Thirty years of field research across multiple industries found that 5 dominant segments (of a possible 16) account for up to 80 percent coverage in any given product-market combination, eg., Collaborative; Transactional; Project Accumulation; Dynamic; and Innovative Solutions segments. The main attributes of these are depicted in the diagram below.

Behavioural segmentation is the first and mandatory step in the Dynamic Alignment™ design process, where the enterprise identifies the customer segments present in it’s target market, and links to these through an array of supply chain configurations, each delivering a unique value proposition to customers. Each of these value propositions are brought to life by the corresponding mix of operational strategies and these in turn are underpinned by an appropriate array of subcultures, each comprising a unique combination of internal capabilities.

There are thirteen possible internal capabilities as follows: leadership style; organisation design; KPIs; positioning people in the right roles; training and development; recruitment; processes; job design; role-modelling; IT systems; incentive schemes; planning systems; and internal communication methods. Different combinations of these capabilities lead to the unique subcultures required to propel the corresponding operational strategies toward the target customers.

Leadership is perhaps the most powerful of these internal capabilities, because leaders with a good understanding of their market generally formulate the most appropriate operational strategies and shape the most appropriate subcultures over time. In the case of improved alignment with customers, the evolution of new organisation designs are now more urgent than ever. This means reducing the previous dominant influence of functions in the business, and placing more emphasis on cross-functional flows (or supply chains) that cross these functions inside the firm to service customers. Ideally, each of these supply chain configurations would be managed by dedicated multi-disciplinary teams. In this way, procurement, manufacturing, and logistics can still be managed as specialist functions, but also become part of a more tightly integrated supply chain capability that is managed as a whole, with customers as their singular focus.

Indeed, all functions in the enterprise should buy-in to this cross-functional ‘supply chain philosophy’ because it is essential in order to attain genuine customer centricity. Most if not all functions should be represented in the multi-disciplinary teams that drive the horizontal flows (supply chains) across the enterprise. In some cases, F&A, HR, and IT could be exempted from these teams and instead become part of a ‘shared services’ organisation, servicing both the functions and the cross-functional supply chain teams.

The metaphor for this new type of aligned architecture is a series of conveyor belts operating in parallel, each with different operating capacities, which deliver products and services to customers at the end of the line according to their buying behaviours and underlying expectations. The same product or service can travel down different conveyors (supply chains), but will be delivered differently because they are designed differently to cater for different pricing, lead-time, packaging.

Once the correct conceptual architecture is in place, it is best to build a network optimisation model of the entire enterprise-wide logistics network, from supply-side to customer-side, and test multiple scenarios based on previous segmentation field work. Ideally, you should segment not only customers on the demand-side, but also suppliers on the supply-side, and use the results at both ends as inputs in the ensuing network model analysis.

You will now be in a position to commence the first transformation stage, involving adjustments to assets and processes in procurement, manufacturing, and logistics functions, and it is likely you will witness significant reductions in cost-to-serve as well as on-going improvements in customer satisfaction results.

The next stage of transformation is to take the new conceptual design and set out to increase the clock-speed of the entire enterprise so that it operates at a faster rhythm day-to-day. This involves digitising the entire supply chain wherever possible in order to achieve end-to-end visibility and traceability. Control Towers (CTs) can then be used to closely manage day-to-day operations, and be empowered to make faster decisions. Faster clock-speeds will largely offset the negative impacts of increased volatility in the target market, and thereby reduce the risk of excess inventories and stock write-offs.

In order to fully leverage the Internet of things (IoT), you will need an IoT strategy to guide the positioning of sensors at critical data points along your enterprise chains. You will then be in a position to embrace Blockchain protocols that will deliver extra governance and assurance to customers. This is going to prove a real benefit in the years ahead, as customers and consumers alike increasingly seek both assurance and sustainability.

When it comes to digital transformation, ‘there is no destination, it’s an ongoing journey.’ So we must be prepared for that. As Ann Burns goes on to say in the same article, ‘few (companies) are using advanced technologies in concert, and truly collaborating across the whole business ecosystem and even less are looking for end-to-end optimisation.’ So a big opportunity exists for the more enlightened organisations to make significant advances in the performance of their enterprise supply chains.

Inside the 4 walls of the factory, much has already been achieved via the introduction of automation/robotics, supplemented by Artificial Intelligence (AI) in many applications. The latter can mine data for patterns and systematically improve quality and speed of decision-making (hence clock-speed) across the entire enterprise. Many of the proven protocols in manufacturing will now be applied downstream in logistics networks to continue the downward pressure on cost efficiencies and response times.

This type of blueprint requires relentless discipline from leadership and by all employees in the enterprise, but having a definitive target in the marketplace, and a predictive prescription for configuring operational responses, makes for a great start. Indeed, it has now become more of a matter of continuous transformation, rather than once-in-a-while large-scale transformations.

From our experience, companies need to clean up their Master Data files as they proceed down this digitisation path, in support of in-house network modelling advanced. And in the early days of transformation it becomes necessary to raise a special SWAT team to implement the intended designs and operational changes, fast, before handing over to the Business-as-Usual (BAU) team.

The best of the best global organisations have already realised that many of the challenges posed by the new digital era are cultural. For that very reason, these companies are injecting a ‘start-up’ subculture into their business that is able to grow into new areas before handing over to the business to become part of the new core. They also understand very well that to achieve success in implementing new and innovative practices, personnel in the company must be fully involved and communicated to along the way, and most of all, made to feel valued. This is the secret of success in the new continuously transforming world of business.