The Role and Execution of Supply Chain is Changing, Supply Chain Exec Says; From Functional and Cost Focus to Driving a Company Forward
By: SCDigest Editorial Staff
This is Part 1 of the full transcript of SCDigest Editor Dan Gilmore’s “Unplugged interview with Nick LaHowchic. LaHowchic recently retired as Executive Vice President of Limited Brands, Inc. and President & CEO of the Limited Logistics Services. Prior to that, he was supply chain services President of medical device manufacturer Becton Dickinson. He recently co-authored the new book Start Pulling Your Chain: Leading Responsive Supply Chain Transformations. To see Gilmore’s summary of this interview, go here: The Limited’s Nick LaHowchic Unplugged. Part 2 to be published in a few weeks.
Gilmore: What do you think supply chain management, at the end of the day, is really all about?
LaHowchic: Well, having lived it for a good part of my life, I see it as a higher level of integration in an organization, and then late,r the channel to your ultimate consumer. When you first start out, it certainly is about functional excellence and then cross-functional excellence. But over time, it is really more about how can supply chain management integrate into an organization, within the organization and across organizations to really satisfy company objectives. In supply chain management, your mission is to profitably facilitate end consumer consumption in some way, whether its physical products or services like UPS or FedEx or another service companies.
So, how does supply chain satisfy that need with other functions in the company? Today, it needs to be a much more integrated discussion and execution within the management team, rather than a discussion of what a supply chain function can do. It needs to be about “How we can operate at a high level and how can we come together to do something extremely difficult to make us more successful?”
Gilmore: What do you see as the difference between supply chain management and logistics? Is the concept of logistics going away? Is logistics a subset of supply chain management?
LaHowchic: I guess the simplest way for me is - I see logistics like I see marketing. I see it as a functional activity of the organization and it must be done well, but is not the only part of the organization that does supply chain management.
When I have talked to people about supply chain management, the area that got me thinking about it differently is that if I was in the business of insurance, I would still have a supply chain. If I was in banking or brokerage, I would still have a supply chain. The supply chain process was certainly well identified as related to moving hard goods at the beginning of the century, but today it is equally as important to be moving the information, knowledge, and value as it is to be moving the physical product. But I see logistics as a legitimate, well-needed, required function of the company, but it is not supply chain management.
Gilmore: The interesting thing about what you have just said is, it obviously means that the skill sets for a supply chain leader are much different today than they would be if your role is just moving products from A to B.
LaHowchic: That’s correct. But the skills today are also much different even if you are just moving boxes from A to B, just because everyone in the transaction continues to use new technology. Knowing how and when to move boxes 20 or 30 years ago, versus how to effectively move boxes today, you have to have a much bigger appreciation for the role of technology in doing that more effectively.
Another would be really thinking about how to govern an enterprise organization that is now operating in a time dimension that is so different than even the recent past. An analogy would be how do we make decisions and operate today in chat rooms and blogs versus when we were doing telegraphs or faxes. Chat rooms and blogs are moving into the business world as enablers just as earlier technology did.
We are still using information, but the skill levels to use information well and how one must function in a different time dimension has totally revolutionized how business and supply chain management gets done.
So, let’s turn it back to the physical product. I’ll give you an example in my career in the fashion apparel business. At Limited Brands, we really needed to be highly responsive suppliers to consumers. We could certainly plan out what we thought they were going to buy, but only when they bought would we really understand what they wanted to buy, and we had to react quickly because it was fashion and not a more stable item.
So, to do that, we needed not to be highly focused on what they were thinking of buying, but design our supply chain to responsively keep us move toward the direction of where the consumer is going, not where we think they are going. Because we just run out of time too quickly before the consumer has other interests and, in that business, it just causes markdowns.
So, what it means from an information perspective is that practically today you have the ability to know everything from what just rang up at the register to where everything is in your business system to where everything is in your supplier’s system, and what’s running on a production line.
Capturing the important information from end-to-end and understanding how to orchestrate an organization that uses supply chain management as its overriding framework is what is now key. You really need to have a different governance model in terms of the organization, but with it, you can make things happen that in years before would have been sequential activities trying to self-correct themselves. Now, rather than doing that, you are able to more navigate your organization and possibly your supply chain channel rather than continue to forecast it positioning resources based on those outdated estimates.
Gilmore: That’s a lot to manage and orchestrate all the information and activities involved in a complex supply chain. At one level, vendors and practitioners are looking for a black box that all this data goes into and you push the button and the answer spits back out – is that feasible or desirable?
LaHowchic: I don’t think so. What’s important is context. Often, companies have a very traditional and industrial way of pulling information together, reporting that information and sequentially providing information and direction throughout an organization.
You might need to ask: What do I really need to know versus what is it that I am pulling through this system of information that was required 20 years ago and don’t need to know anymore. So, part of this is going back and saying, wait a minute, don’t just do things faster, but how do we do things differently that are more effective.
Gilmore: Obviously, with globalization and the responsiveness factors you’ve referenced, managing cross-functionally, and all those things – the perception is that supply chain management is really challenging and hard today. What do you think are the things that are making supply chain very hard and difficult?
LaHowchic: I think probably one thing that is making it difficult is too often supply chain management is viewed as more of an appendage to the organization. Any appendage organization becomes a drain if you are trying to do things faster, quicker, and smarter. So, part of the discussion is: Is supply chain management a form of an organization, in which certain specialties are brought and operate together differently and govern themselves differently and focus themselves differently? Versus saying, in a very functional way, that you have to do this well outside of the standard organization model, but still let the organization run in its own way.
Where I have tried to change it, it’s been difficult because you are really talking about, in some cases, changing the company’s overall business model, because you’ve now said that supply chain management is a different way of working throughout the organization and operating within the organization. Supply Chain Management is the 21st century replacement for the industrial age, functionally-based organizational model for the reasons mentioned earlier, and many more reasons which information technology is just beginning to supply.
Contrast that to the view where we’re have great logisticians and they are going to help us get certain things done, but they are not connected into marketing, they are not connected in some cases as deeply in production or procurement as they should be. They may not be out with the customer in many cases as much as they should be.
Part of the challenge of this discussion is that once you say you are willing to change to a supply chain management-based organization, you also are saying you are willing to change the rest of the organization.
Gilmore: All of what you have said thus far positions supply chain management in a very different way from the cost-oriented approach that most companies still take, really. Obviously it is a very cost competitive world right now. What is your take on the cost focus versus supporting the business/“top line growth” kind of debate, about what supply chain management can do for a company?
LaHowchic: I think part of the question of how you think about supply chain management is really where does it fit in the strategic discussion of the company? If it is not sitting at the table talking about where and how to take the company forward, but rather as a second thought that means after we figure that out, we’ll look for the supply chain functions to come up with ways to either produce more value or reduce more cost, then you will forever be in that cost-focused paradigm.
If you are talking about the strategy of the company, if you are talking about how this company is going to grow profitably over the next 3-5 years, then you have to ask: Where is the supply chain management agenda taking place? Is it taking place at that high level, or is it looked at as some functional remedy that, after we have our strategic objective, we will use this supply chain tool like a wrench?
For the people that are really great performers, they have elevated the discussion. That doesn’t mean cost isn’t important, but what you are really trying to do in any business is unlock value for the ultimate consumer. Cost you can pound out forever, and people will do that. The real question is: Where does the customer or consumer perceive value, and how does supply chain management support that?
As an example, when I was at Becton Dickinson, we were able to drive real market growth using supply chain management. We were selling products and we were able to offer supply chain services for a price as value-added to our products, with our own marketing and sales staff.
So we went beyond just selling syringes to managing the inventories of syringes from our factories right to hospitals, and building and executing supply chain physical models that had financial cash flow models in them that really drove profitability across customers and suppliers. Our Supply Chain Management organizations would never have that discussion if they were viewed just a back end function, focused on finding a lower cost to transport syringes.
So the real issue isn’t if cost is important, - of course it is. It’s that it should be a secondary agenda. The primary agenda is really how supply chain management can support the growth and profitability of the company. And if that is the primary discussion, then you should really be looking at where supply chain management is touching your customer or consumer.
Gilmore: That sounds great, but I was recently speaking to a supply chain exec at a consumer goods company, and he said the Wall Street pressure now is so unrelenting on the quarterly numbers, that even if people believe what you just said there, it is so hard to take your focus off of just shaving another penny off cost per share, that you just don’t have time to get to that more strategic level.
LaHowchic: Right, but I will tell you at the same time, sitting on two outside company boards, more and more companies are moving out of giving quarterly guidance, just because of what you just described. But to your point exactly, it’s bending companies throughout the year out of shape for no good purpose.
There has always been Wall Street pressure, but it used to be more annual. As it has moved over the last 20 years to quarterly pressure, it causes companies to do stupid things. The focus on pushing last month of quarter volumes is one result. If you look at history - for example, the tobacco companies, the grocery companies, and others, you will see they all had pushed 3rd month volume and internal costs to achieve quarterly targets only to pile up unneeded inventory in the consumer pipeline. This has now stopped or at least slowed down. Companies are today more concerned about continual profitable growth. Wall Street analysts would prefer continual profitable growth versus more profitable stagnation anyway! And so that agenda you just talked about in companies is now happening at a much higher level. So, will it take time to move to a different agenda? Yes, but I think the discussion is starting.