The Supply Chain Drives Shareholder Value
J. Paul Dittmann, Ph.D.
Director, Corporate Partnerships
University of Tennessee
The Supply Chain Drives Shareholder Value
In an increasing, but still small number of firms, the CEO and the Board understand the full value of the supply chain to their firm. But many other CEOs, battered by an immense range of items competing for their attention, do not see this link clearly. Yet the link is there. In most firms the supply chain controls most of the inventory; manages 60-70 percent of the cost; provides the foundation to generate revenue by providing outstanding product availability; and it manages many of the physical assets of the firm.
The Great Recession of 2008-2010 will increase the focus on supply chain’s impact on the financial health of the firm. In an era of tighter credit, supply chain levers can be used to free cash reserves from balance sheets rather than depending on restricted credit markets. The opportunity to increase shareholder value in the future even more than the past will be to take care of both the income statement and balance sheet through supply chain excellence.
Supply Chain as Part of the Executive Team
Because of this expanding role in driving a firm’s financial health, a growing but still small number of firms, make sure that the supply chain chiefs don’t just have access to the executive team ― they’re part of it. That role requires the need to bring value in terms not only of educating the CEO and the Board and giving them the vocabulary to talk about supply chain subjects and its critical role in creating economic profit, but in finding and driving opportunities to increase economic profit. The job in those progressive firms is no longer a mostly functional one, but instead plays a key strategic role that can influence as noted above 60 to 70 percent of a company’s total costs, all of its inventory, and most aspects of customer service.
The supply chain leader in these progressive firms has global responsibility for coordinating processes across functional silos like sales, R&D, and Finance, Manufacturing as well as functional responsibility for activities like procurement, logistics and production planning, and customer service. He/she pays as much attention to the demand side as to production and materials planning, and knows what it takes to reliably deliver products to customers and to build mechanisms to learn what customers have to say. In some firms, the role of the senior supply chain executive expands so much that he essentially becomes the COO, especially in those companies where the COO does not traditionally have responsibility for Sales, Marketing, or Merchandising.
Does the CEO Get It?
In this transformed world, even CEOs, who previously had little contact with the supply chain leader, must now demonstrate supply chain expertise. Indeed, supply chain chiefs have even become viable candidates for CEO succession. Wal-Mart’s past CEO Lee Scott, who previously headed transportation, distribution and then logistics for the retailer, is just one example. Mike Duke, the successor to Lee Scott, also has a big dose of supply chain experience in his background. It’s up to the company’s supply chain professionals to find ways to educate the CEO. For example, one supply chain leader told us that after much badgering, he talked his boss, the E.V.P. of Operations, into scheduling a monthly supply chain update with the CEO. Now after eight months of those reviews, he says that the CEO clearly understands it at a much deeper level, with supply chain advances mentioned now in most of his public comments.
However the majority of firms fall far short of this ideal. Many companies today don’t have a complete end to end process view of their supply chain, and these firms face a big problem if their competitors get it before they do. But, “getting it”, isn’t enough. They also have to win the battle for supply chain talent that possesses a skill set beyond the traditional basics.
The New Supply Chain Agenda
In the new book The New Supply Chain Agenda, (TheNewSupplyChainAgenda.com) written by Reuben Slone, Paul Dittmann, and Tom Mentzer, five pillars of excellence form the foundation of the new supply chain agenda. These are certainly not new on the one hand, but they undergoing a rebirth as they are increasingly resonating in the executive suite and in the boardrooms as a critical driven of supply chain excellence and shareholder value.
- Talent is the first of the five pillars to drive supply chain excellence. If you don’t have the right people in place, you can’t build an appropriate strategy and you certainly can’t execute it. Finding talent for supply chain positions has unique challenges due in large part to the cross-functional and cross-company process challenges faced by supply chain executives today.
- Technology is always critical, but the real key is making sure you choose the right supply chain technology and successfully implement it. Improperly understood or implemented, technology can cause severe damage rather than improvement. You must be careful in how technology you select and apply the latest supply chain technologies, especially given the extremely complex nature of today’s global supply chains.
- Internal Collaboration involves each function in your firm playing a critical role in a successful supply chain; and will help you develop a clear vision for how they can work together to achieve supply chain excellence. In the book, there is a self assessment you should complete to honestly evaluate your process for aligning the demand and supply sides of the firm.
- External Collaboration focuses on how your company can achieve break though results by collaborating externally with both your suppliers and your customers. Best practices for collaboration exist and are being applied by more and more firms.
- Managing Supply Chain Change addresses the last but equally critical pillar of a supply chain excellence strategy. Everything else is for naught if you don’t execute successfully. You need to learn how to increase your chances of success on the path to supply chain excellence. Because of their cross-functional, cross-company nature, supply chain projects are more difficult to implement than those in other functional areas.
We supply chain professionals must find a way to establish a new agenda with the executive suite and the boardrooms. This new agenda should be supported by supply chain executive education programs such as those at the University of Tennessee and other prominent supply chain universities. It should also be a key focus in industry forums held at a number of universities. (E.g. the Supply Chain Forum, http://forums.utk.edu.)
In this way more executive suites and boardrooms will resonate with discussions of “how to drive shareholder value with our supply chains.”