Exploring Complex Business Challenges
Managing a business is like playing a full-contact sport: So many moving pieces are involved, and so many things can change in an instant, that making long-term plans is virtually impossible. How can you really plan for commodity price swings, natural disasters, and financial meltdowns? You can’t. You can’t ignore those possibilities, either. Instead, you need to think about them and design your business so that it can function well under a range of scenarios. In other words, you need to think about the many possibilities that the future holds, try to imagine each one as a series of events, and then think about how it would affect your business.
To use scenario planning to prepare for the unknown and the unknowable, you need to understand three really important things:
Which scenarios are most important to you.
What you’ll do — and how — in each scenario. (Each scenario calls for a different plan.)
How you can tell when a scenario is becoming reality. You need to have triggers that help you decide when to implement which plan. Then the job of supply chain management becomes a process of sensing and responding to those triggers.
You need to determine how your business will sense what’s happening and how events will respond. Figure 1-2 shows how your sensors help you recognize which scenario is unfolding so that you can implement the proper plan.
FIGURE 1-2: Scenario-planning model.
I can explain this concept with a few practical examples:
You run a manufacturing company that imports products from overseas, so you need to consider what you’d do if one of your inbound shipments is lost at sea, impounded by customs, captured by pirates, or caught in a port strike. One option might be shutting down your factory until the issue is resolved. You might also consider placing a new order with a different supplier. In an extreme case, you might declare force majeure and tell your customers that you won’t be able fulfill your commitments to them. Force majeure is a legal concept used in contracts to free one or both parties from liability if they’re unable to meet their obligations due to an extraordinary circumstance.
You work for a wholesaler that has been selling a product at a steady rate for months, and one month, the company sells twice as much as normal. You don’t have enough inventory to fill all your customer orders, and now you also have back orders to fill. You may even be at risk of losing sales and customers. You might decide to place bigger orders in the future and keep more inventory on hand. That means you’ll be investing more working capital in inventory, and if sales drop off in the future, you’ll have to figure out what to do with that extra inventory.
You work for a transportation company. The company’s customers pay you to deliver their products around the world, and they count on your deliveries to help them meet their commitments to their own customers. Therefore, your ability to deliver on time is essential to them. Suddenly, a volcano in a distant part of the world spews ash far into the sky, making it dangerous for airplanes to use a heavily traveled flight path. You could reroute your planes, but this process is an expensive one that involves developing flight plans, scheduling airplanes, and finding available crews. Alternatively, you could tell your customers that their deliveries are on hold until normal operations can resume.
Thousands of companies have had to face every one of these scenarios in the past few years. In every case, making the right decision about how to respond requires understanding supply chains and supply chain management.
Some supply chain management professionals are generalists, and others are specialists. Generalists look at the big picture; specialists focus on a particular step in the supply chain. A good way for you to start learning about supply chain management is to think like a generalist and become comfortable with some of the general principles.
The next sections cover ten supply chain management principles, five supply chain tasks, and the five steps for implementing a new supply chain agenda. Each section provides a slightly different perspective on supply chain management, but the sections explain the same challenge in different ways. The supply chain management principles express the essence of supply chain management. The five supply chain tasks are like the job description of a supply chain manager. And the New Supply Chain Agenda is a strategy for planning and implement effective supply chain management practices.
Operating Under Supply Chain Management Principles
Many people try to define supply chain management by talking about what they do, which is a bit like describing a cake by giving someone a recipe. A different approach is to explain what supply chain management creates. To continue the cake analogy, that approach communicates how the finished cake tastes and what it looks like.
The key supply chain management principles illustrated in Figure 1-3 are good places to start.
FIGURE 1-3: Supply chain management principles.
Customer focus
Supply chain management starts with understanding who your customers are and why they’re buying your product or service. Any time customers buy your stuff, they’re solving a problem or filling a need. Supply chain managers must understand the customer’s problem or need and make sure that their companies can satisfy it better, faster, and cheaper than any competitors can.
Systems thinking
Supply chain management requires understanding the end-to-end system — the combination of people, processes, and technologies that must work together so that you can provide your product or service. Systems thinking involves appreciation of the series of cause-and-effect relationships that occur within a supply chain. Because these systems are complex, supply chains often behave in unpredictable ways, and small changes in one part of the system can have major effects somewhere else.
Bimodal innovation
The world of business is changing quickly, and supply chains need to keep up by innovating. Two kinds of innovation are important for supply chains:
Sustaining innovation: Sustaining innovation is built on continuous process improvement techniques such as Lean, Six Sigma, and the Theory of Constraints (see Chapter 4). Sustaining innovation isn’t sufficient, though, because new technologies can disrupt industries. So you also need to pursue disruptive innovation.
Disruptive innovation: Disruptive innovation introduces a product, process, or service that creates new markets and destroys established paradigms. When a disruptive solution is accepted, it becomes the new dominant paradigm. If you’re in the business of making buggy whips, you need to figure