How fortunes can change. It seems like only yesterday that critics were busy consigning the phrases “supply chain” and “supply chain management” to the graveyard of business terminology. Not only was “supply” merely one half of the supply-demand equation, they argued, but the very idea of a “chain” was far too linear for an increasingly three-dimensional world. The future, we were told, was about “value networks” or other similarly titled concepts.
Although these theoretical objections may hold water, in practice the term supply chain has not only stubbornly refused to die but has, if anything, staged a revival. Its popularity is reflected not only in the names of corporate functions and job roles in many organisations and sectors, but also in the titles of a growing number of industry events, university programmes and professional bodies. Supply chain’s appeal lies less in the choice of words than in their familiarity at a time when the thinking associated with its most wide-ranging definition is beginning to take centre stage.
According to the Supply-Chain Council, an educational organisation with over 750 corporate members worldwide, the days when manufacturing quality was a competitive differentiator and manufacturers ruled the roost are numbered. “Today, customers are calling the shots, and manufacturers are scrambling to meet customer demands for options, styles, features, quick order fulfilment, and fast delivery… Companies that learn how to improve management of their supply chain will become the new success stories in the global marketplace.”
Companies acknowledged to be among the pioneers of the “demand-driven” supply chain include Dell and IBM in computers, Procter & Gamble in packaged goods, and Zara in fashion retail. One of the essential ingredients, say its advocates, is getting the various supply chain functions – planning, logistics, procurement, manufacturing, fulfilment – working together in a more integrated way. But while this vision may be attractive, the reality in most companies is rather uglier. David Closs, a professor of supply chain management at Michigan State University in the US, notes that the silo mentality is as entrenched as ever. “Historically, these different functions have not worked together or had common objectives; they have been at almost opposite ends of the company.”
Take procurement and logistics. One need only look at measurement criteria to understand the gulf that exists, says Closs. “Purchasing is still mainly measured on purchase price variance or the cost of acquisition, while logistics tends to be measured on service and fulfilment.” This keeps the functions apart and leads to conflict.
From divergence to convergence
But if conflict in the past has been the product of separate identities and a sense of distance, today it is just as likely to come from competing for the same ground. As the procurement and logistics professions have emerged from the corporate shadows, each has begun to see the advantages of claiming the broader mantle of supply chain management (SCM) for itself. The result is that the traditional boundaries between the two functions are becoming increasingly blurred.
To conflict, therefore, add another C-word – confusion. The lack of a common and widely accepted definition of SCM doesn’t exactly aid clarity, says Closs. But then neither does the breadth of the definitions being used by the two professions. A perfect example of this can be seen in the US, where the main purchasing and logistics institutes have both renamed themselves in the past five years and adopted definitions that encroach on the other’s core territory (see bottom). And this isn’t an abstract debate; it’s one that’s being played out at the practitioner level. While a “supply chain director” in one company will be a diehard logistician, in another it will be a career purchaser.
At the mining giant Anglo American, for instance, until recently the term supply chain was synonymous with planning and logistics, reflecting its relative maturity as a function, explains Neil Deverill, who heads procurement and supply chain at the group level. But as a result of its investment in strategic (as opposed to transactional) procurement in the past couple of years, this is changing. The company now has supply chain directors responsible for both functions in two of its seven divisions, with more on the cards. At some point, Deverill intends to drop the word procurement and use supply chain management to cover all the activities.
Whether it is rebranded as SCM or not, procurement taking over responsibility for logistics is a trend that appears to be gathering pace. The UK-based food manufacturer RHM (formerly Ranks Hovis McDougall) appointed Gerry Walsh to the new position of group procurement director in 2003 to introduce a joined-up approach across its disparate companies. Twelve months ago logistics was added to his portfolio with much the same brief, he says. “A more holistic perspective of SCM is what we’re aiming at, but we don’t have that today.”
Walsh, who is also vice-president of the UK’s Chartered Institute of Purchasing and Supply (CIPS), acknowledges the danger of conflict and confusion as a result of these developments. He identifies three areas where roles and responsibilities can potentially clash. First, in the selection and ongoing management of logistics service providers; second, in the context of outsourced manufacturing; and third, in new product development, particularly around the interface with sales and marketing. The degree of overlap depends largely, he says, on how involved procurement is in day-to-day relationships and operational issues.
“The overlap is real and should be recognised,” agrees Alan Waller, veteran supply chain consultant and current president of the Chartered Institute of Logistics and Transport – CIPS’s counterpart in the UK. Predictably, he is less enthralled by the prospect of more procurement people taking charge of logistics. This is primarily, he says, because the two professions tend to have differing views of the supply chain. Waller defines it as the entire end-to-end process from your supplier’s supplier upstream to your customer’s customer downstream. “Procurement tends to focus only on the upstream part,” he argues. “It’s a fundamentally different mindset.”
United we stand, divided we fall
Despite these differences, Walsh, Waller and, indeed, all those interviewed for this article are united in believing that the two functions should be working together in a much closer, more “collegiate” way. Frank Muschetto, CPO of McDonald’s, which characterises its end-to-end supply chain as “from farm to fork”, sums up the mood when he says: “Competition between logistics and procurement is not going to generate the most value, either to the customer or to the business.”
Since November last year, under the leadership of his Illinois-based worldwide supply chain management team, McDonald’s has been working to “take our supply chain to a level that will give us competitive advantage”. In practical terms, that means suppliers to its 31,000-plus restaurants are being asked to contribute both to sales growth (for example, through new menu items or cooking methods) and to improved efficiency, by “taking logistics to the front counter” and making it easier for staff to serve customers. Neither of those things will be possible, says Muschetto, without tight integration between procurement and logistics.
A few years ago, out of a sense of “natural curiosity”, Muschetto did split the two functions in the company’s Asia region to see what would happen. “It was a mistake,” he recalls. “I thought their maturity would allow them to operate separately. But it didn’t work. We saw the results going down and the overall performance was both less than we expected and less than we achieved elsewhere.” The pilot was quickly scrapped.
So the imperative for working together is widely accepted. But how should procurement and logistics be organised as part of an integrated supply chain approach? And, crucially, who is best placed to provide the leadership required to make it work? The simple answer to both questions is: it depends on the industry and the specific line of business a company is in. “There is no one-size-fits-all model of supply chain management,” notes Shelley Stewart, senior vice-president of operational excellence and CPO at Tyco, the security systems to medical devices manufacturer.
At Serono, a Swiss biotechnology firm, direct procurement is split into two parts: operational and strategic, says Peter Laurence, integrated supply chain project director. The former is the responsibility of the global supply chain function, which runs all the logistics activities, and is handled at the plant level; while strategic procurement, which is responsible for major contracts and supplier relationships, is not.
Laurence admits he isn’t sure whether this separation makes sense, and says the issue was recently the subject of some debate at the Conference Board’s European supply chain council, which he chairs. “Cutting it right out goes against the holistic view. But in some companies strategic procurement is so critical that to bury it in supply chain may be doing it a disservice.”
That’s certainly the view of Ngawang Lobsang, global procurement director at confectionery maker Cadbury Schweppes. To him, “procurement is more than supply chain” because 50 per cent of the annual spend he’s responsible for is in non-production categories such as marketing, consultancy and travel. Because of the wider stakeholder community involved, Lobsang’s boss was initially a chief financial officer and then a chief operating officer, but he now reports to the company’s global president of supply chain – a shift that he sees mirrored in other manufacturers.
Who leads the supply chain?
Some manufacturers and retailers have started using the title “chief supply chain officer” to describe this position, although its usage is currently far less common even than CPO (as a rough and ready measure, a quick search on Google yields less than 20,000 hits for “chief supply chain officer” against over 300,000 for “chief procurement officer”, which has seen a tenfold increase in less than 12 months). But whatever title companies choose, it’s likely to be a senior leadership position reporting into a main board director. Which raises the question: who is best placed to fill this sort of role? Again, there is no universal answer, although the consensus among logistics and procurement folk can neatly be summed up as “anyone, as long as they aren’t from manufacturing”!
“Manufacturing people tend to be doers rather than thinkers,” says Tim Carroll, vice-president of worldwide supply chain operations at IBM, who spent a number of years in the function. “They are interested in the efficiency of their plant, rather than looking at what’s going on in the rest of the company.”
Last July, IBM modified the structure of its integrated supply chain (ISC) organisation, which was created in 2002, in an effort to get better co-ordination between the main centralised functions. It now has three vice-presidents, responsible for in-house manufacturing (Carroll), global procurement and logistics (John Paterson, the CPO) and customer fulfilment (Barbara Martin). Each of them reports to Bob Moffat, senior vice-president, integrated operations (in effect, the chief supply chain officer). At the same time, the company has introduced cross-functional “brand advocates” to align the ISC more tightly with its business units. In 2005, the ISC is credited with cutting IBM’s costs by $6 billion, speeding up inventory turns and improving customer satisfaction by 1 per cent.
Carroll believes many more chief supply chain officer (CSCO) positions will be created during the next 18 months, as companies experience what he describes as “an A-ha moment” – recognising the competitive advantage locked up in their supply chains. Could some of these be filled by ambitious CPOs looking to take on greater responsibility? Possibly, although he is sceptical that one person could, or should, perform both roles at the same time.
Some, however, already are. At Maxtor Corporation, one of the world’s leading suppliers of hard disk drives, David Beaver, its Colorado-based CPO, now has responsibility for logistics, fulfilment, materials management, third-party manufacturing and customer service – a global team of about 400 people – while a separate VP of operations looks after in-house manufacturing. This model works well, he says, “because it gives suppliers a consistent message and ensures that they are held accountable for their performance. The communications and the measurement all come out of one office.”
Those in both the procurement and logistics camps play down suggestions of a contest between them for CSCO jobs. “I don’t think our professions have matured enough to have a battle over this,” says Tyco’s Shelley Stewart. But Alan Waller thinks that’s exactly what it is, and he has clear views about the chain of command. “The supply chain leader is like the conductor of an orchestra,” he says, “whereas the CPO might be the lead violinist.”
For a CPO to step up and fulfil this wider role, they need to have both strong leadership skills and at least some experience of working in supply chain functions other than procurement, reckons Michigan State’s David Closs. Given the shortage of such people in the market, he believes it will be the next generation of leaders – rather than the existing one – who will benefit most from supply chain management’s elevated status.
And who knows, some of the most capable might go on to be the COOs and CEOs of the future.
Definitions: When two professions collide
As an indicator of how the boundaries between the procurement and logistics professions are blurring, consider the recent history of two US-based institutes.
In 2001, the National Association of Purchasing Management changed its name to the Institute for Supply Management (ISM). It defines supply management in broad terms as “the identification, acquisition, access, positioning and management of resources that an organisation needs, or potentially needs, in the attainment of its strategic objectives”.
Specific supply management activities include not only procurement, negotiations and contract development, says the ISM, but also “transportation and logistics, physical distribution and warehousing, inventory control and management, strategic planning/sourcing, product/service development” and “manufacturing”.
At the beginning of 2005, the Council of Logistics Management changed its name to the Council of Supply Chain Management Professionals. It defines SCM as “the planning and management of all activities involved in sourcing and procurement, conversion [or ‘manufacturing operations’] and all logistics management activities. Importantly, it also includes co-ordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers and customers.”
Notice any similarities?
Geraint John (geraint.john@cpoagenda.com) is editor of CPO Agenda and editor-in-chief of Supply Management
