Lesson 8 – The Future Challenges

Objective:
1. Describe and create customer centric supply chain.
2. Apply the concept of supply networks and its dynamics.

The Future Challenges

1. Creating Customer Centric Supply Chain
2. Managing Supply Networks
3. Watch the Dynamics

What’s the future holds for supply chain management? The future of supply chain
management is the future of the business management when there will be no business
that is not part of a supply chain. The paradigm of business management will soon be
converged to the paradigm of supply chain management. To precisely fortune-tell the
future of supply chains is meaningless. But what’s useful is to identify and explore some
challenges that we better prepare ourselves for. Three key challenges have been
identified and discussed here.

8.1 Creating Customer Centric Supply Chain

The first challenge that the supply chain managers are facing is to transform the supply
chains from supplier-centric to customer-centric. Traditionally, supply chains have been
developed from factory outwards so that the company’s business model may be
continued without major change. The management emphasis was on how to ensure the
production process could be most efficiently run and products could be most cost
effectively distributed. The marketing is to find the customer that fit to the products
rather than to make the products that fit to the market.

In today’s highly competitive global market place, the market favours whichever the
supply chain that satisfies them best. The strategic aim of the supply chains must be on
the higher levels of customer responsiveness. Thus the agility rather than the cost
becomes the key diver. The supply chains must be designed to get the customer on the
driving seat. Coordination and operational integration of the supply chain members must
be significantly strengthened to counter-balance the increased volatility of market
behaviour.

It is anticipated that there will be a culture change towards the 21st Century supply
chain management. This change, which is already underway, is expected to transform
the business model from supplier centric to customer centric. The customer centricity
idea represents a renewed paradigm that will have profound implications through every
aspect of supply chain management. Research shows that close connectivity to
customer will significantly improve supply chain effectiveness and market performance.

Traditionally, this task of customer connection is left to only small part of the supply
chain. Dealers and service/repair shops have most information about the consumer,
with OEMs and suppliers having the least. However, in future’s supply chain, more
information is shared across the network. With online communities, embedded systems,
connected online configuration and ordering the future supply chain will have more
information about consumers than ever before. More importantly, it will have better
intelligent analytics to synthesize and use the information. Across industries, demand
planning with customers in the centre will become a standard process for synchronizing
supply and demand. Customer centricity also will play a pivotal role in customer
collaboration on product innovation. Already more and more supply chains support
customer product configuration and specification, and collaborate extensively with
customers on product design.

While many models of organizational effectiveness can be used for transforming the
organisation, one that has persisted is the McKinsey 7S framework. Developed in the
early 1980s by Tom Peters and Robert Waterman, two consultants working at the
McKinsey & Company consulting firm, the basic premise of the model is that there are
seven internal aspects of an organization that need to be aligned if it is to be successful.

Three of those are what they call the “Hard” elements and four are “Soft” ones. The
“hard” elements are easier to define or identify. The management can directly influence
them. These are strategy statements; organization charts and reporting lines; and
formal processes and IT systems. The “soft” elements, on the other hand, can be more
difficult to describe, and are less tangible and more influenced by culture. However,
these soft elements are as important as the hard elements if the organization is going to
be successful.

Figure 39. The McKinsey 7S Model

Let’s look at each of the elements specifically to see how a customer-centric supply
chain can be achieved:

• Strategy: from the top of the organisation a customer oriented strategy must be
drawn and put to be communicated throughout the organisation. The strategy
must include how the organisation should align its strategy with the suppliers and
customers to have the visibility and responsiveness to the end-consumers’
demand.
 • Structure: For the organisation, horizontal dynamic structure that aligned to
products and market segment is more preferred that the vertical hierarchical
reporting lines; for the supply chain, networked flexible structure with small span
of vertical integration is more responsive to the customer demand.

• Systems: the procedures and daily activities must be in tune with market
sentiment; customer complaints and request must be dealt with by a fixed routine
procedure systematically; a joint forecasting and new product introduction
process should be established collaboratively across the supply chain.

• Shared value: customer service and customer value must be enshrined in the
core organisational value; it should become the culture and second nature for
people to act on anything relate to the customer and end-consumer at the
highest priority.

• Style: the leadership style adopted must fit the culture of customer orientation
and customer-centric. The leaders and management team should ‘walk the talk’
and become the role model in caring about the customer.

• Staff: the employee and their capabilities are the assets of the organisation.
People are the only active force in caring and serving the customer. The change
of organisational performance is almost entirely dependent on the changes of
people’s understanding, knowledge and attitude.

• Skills: the quality of the products, the level of customer satisfaction, rely on the
skills of the workforce, which in turn determines the organisation’s and supply
chain’s competences in delivering the products and services.

8.2 Managing Supply Networks

The second challenge is to take on the whole supply network and manage it as an
integrated entity. Managers see the only legitimate platform for them to exercise control
is their own organisation, beyond which is the supply chain they participated. This
limited scope of business management is to be and has already been challenged.
Companies will not stand alone in the competition. Like it or not the competition will only
be waged with supply chain against supply chain. The survival of the supply chain is the
survival of the organisations in it.

Therefore the new competitive paradigm place the firm in the middle of an
interdependent network – a confederation of mutually complementary competencies
and capabilities – which competes as an integrated supply chain against other supply
chains. To manage in such a radically revised competitive structure clearly requires
different skills and competencies than those used in the traditional structure. To achieve
future global market leadership in the networked competitive environment necessitates
a network focused management model and the associated management processes.

One of the key cognitive characteristics of any network is its configurative structure,
which specifies how a supply chain is constructed in terms of its flow model. Such
network structure dimension determines how big the supply base is; how wide the
extent of vertical integration is; how much its level of outsourcing is; where the suppliers
are located; how close the dyadic relationships are; what the channels of connection for
the network are; and etc.. As it happens, globalisation has, amongst many other forces,
propelled some unprecedented shifts in network structure and configuration. Evidences
from numerous surveys and case studies show that more and more leading edge
enterprises are outsourcing more strategically important functions and vertically
disintegrating the supply chain to geographically, economically and culturally remote
destinations.
Such a momentum has inevitably given rise to some new challenges in reshaping the
network management. Business strategies formulation must be carried out collectively
with the network members. A significantly higher level of joint strategic development is
required in order for the network to be truly effective. Another challenge is for the
networks to break free from the often adversarial nature of buyer-supplier relationships.
There is now a growing realisation that co-operation between network partners usually
leads to improved performance generally. The result of the improved performance
needs to be shared between the members of the network to achieve what’s called ‘win-
win’.

Developing the shared information system for the network management is another
challenge. Forecasting information, capacity information, and production information
can all be collectively managed to reduce the inventory levels and achieve shorter lead-
time and JIT delivery. Throughout the supply the material flows are gradually to be
displaced by the information flow. Whilst the supply network becomes leaner in terms of
less redundant materials in the process, the investment in the information systems and
its management gets increasingly higher. Coordinating the IT system compatibility,
software upgrading, maintenance and service could be resource hungry. However the
gain in the much more coordinated operation and supply chain responsiveness is

understood to be worth the cost.

As supply network complexity and uncertainty becomes ever more persistent the
challenges also ripple out to the supply chain risk management. This is particularly true
when supply chains become more reliant on virtual networks. The emerging future
model of risk management for supply chains cannot be a scheme of buying an
insurance policy; nor would it be an experience of gambling. Companies that aspire for
the supply chain leadership position in the future will be those who mitigate the risk by
building various forms of reserves, including inventory, capacity, redundant suppliers,
but in the meantime maintaining a competitive strength in business efficiency and
responsiveness.

Managers thus must keep a vigilant eye on the trade-off between the risk and the cost
of building a reserve to mitigate it. With so many related risks and risk-mitigation
approaches to consider, it is suggested that managers must do two things when they
begin to construct a supply network risk management strategy. First, they must create a
shared organisation-wide understanding of supply-chain risk. Then they must determine
how to adapt general risk-mitigation approaches to the circumstances of their particular
company.

8.3 Watch the Dynamics

The third challenge is how to survive the dynamics of the never ending supply chain
evolution. The future of supply chain will face unprecedented dynamics in terms of
structural dynamics, technological dynamics, and relationship dynamics, to say the
least.

Structural dynamics

From a system dynamics point of view, the flow structure of a supply chain is a typical
dynamic system with lows and stock; there are feedbacks and delays. From managerial
experience perspective, it is even more so; there are fluctuations of demand,
overproduction, high inventory, capacity miss-match, backlogs of unfulfilled orders,
delayed delivery and so on. The trouble is that the supply structure is growingly more
complex, and market volatility is set to increase too. There is little doubt the dynamic
behaviour of a supply chain is only to be exacerbated. A number of factors are at play,
which is continuously contributing to the increased structural dynamics.
 ● • The first factor is that business around the world is becoming more specialised,
and they become so rightly for their competitive advantages, utilisation of
resources and returns on investment. This trend is leading to more inter-
connections of the specialised operation in the supply chain networks.
Specialisation gives rise to the need of coordination in between. Thus increase
the complexity of the system and more triggers for dynamic changes.
● • The geographical expansion of supply chains around world also exacerbates
the dynamic behaviour, as the delays in logistics and visibilities are worsened. It
has also brought in the unstable factors such as different legal and financial
systems, cultural and religious conflicts, indigenous market related ethical issues.
● • The rapid growing environmental concerns around world have already started
to reshape the supply chains. Not only the resourcing strategies, but also the
production and logistics processes have felt the significant impact. Carbon
footprint has become the KPI for many supply chains across industries, which
they never heard of in just few years back. Consequently, the structure of the
supply chains will have to change.

Technological dynamics

Innovation and technology advancement have been great news for the business and
the consumers alike in most cases. But the changeover to new technologies can be a
very painful process as it induces series of dynamic changes to the supply chains. All
too often the disruptive technology advancement decease the existing operating model
and invalidates the existing markets. The changing dynamics that have been enforced
upon the supply chain can be observed from number of directions:

● • Sudden change of competition landscape when the new technology

advancement has helped the competitors to update their offering to the market.
● • The manufacture may be forced to switch the suppliers due to the desperate
need of the new technology in the supply base in order to keep competitive.
● • Sudden arise of the new investment requirement due to the pressure to
upgrade the equipments and facilities to cater the new technology.
● • Unfolding a significant skill gap in the workforce due to the unpreparedness of
the technology.

Relationship dynamics

Many people believe the operating core of supply chain management is that of
relationships with the suppliers and buyers including the end consumers. Hence, the
external business relationship management for a company has become the centre
piece of today’s and arguably the future’s supply chain management. However the
conceptual alignment of this concept in the academic as well as the practitioners’ circles
has always been a quagmire, as there are many apparently conflicting approaches
towards managing the relationships.

It is now emerging, that no single existing relationship model so far can possibly serve
all business needs because of the underlying dynamism. There are basically two key
dynamisms in the relationship management, one is the portfolio dynamism and the
other is longitudinal dynamism. The portfolio dynamism addresses a portfolio different
relationship approaches that fit to a corresponding portfolio of business models. Thus, in
often times, business will need to harness with a number of different supply chain
relationships to different suppliers based on product categories, market segmentations,
development strategies, and financial circumstances and so on. The longitudinal
dynamism addresses the changing relationship posture along the time continuum. In
this way the relationship management becomes a powerful instrument to achieve the
supply chain responsiveness and supply chain agility. It is anticipated that the future
supply relationship management will hinge on a combined approach that addresses
both the portfolio and longitudinal dynamisms.
How to survive the supply chain dynamics?

The Triple-A supply chain model proposed by Professor Hau Lee (2007) from Stanford
University is a useful blueprint to survive the supply chain dynamics.

● • The triple-A stands for Agility, Adaptability and Alignment. A supply chain must

be agile enough in order to respond quickly to the dynamics of demand
fluctuations and sudden changes of supply. The agility is a supply chain
capability that handles the unexpected external disruptions smoothly and cost
effectively. It enables the supply chain to survive the impact of the external
dynamics and be able to recover from any initial shocks.
● • Adaptability differs from the agility in that it deals with more long-term and
fundamental changes in the overall external environment, which is often
irreversible. Adaptability calls for organisation and its supply chain to embark on
major strategic changes in technology, market positioning, radical skill upgrading
and competence shift. It helps the supply chain to survive the long waves of
external dynamics.
● • Alignment is a supply chain capability that coordinates and balances the
interests of all members. It addresses the supply chain’s internal dynamics and
ensures the supply chain to remain as a stable and cohesive whole. It also
means to align all the complimentary resources and optimise the operational
effectiveness and relationship to deliver the competitive advantage.

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