Extending the Role of Supply Chain Management

As Wall Street increases the focus on firm revenue more supply chain executives are being required to
provide their firms with a critical risk management perspective. In this context supply chain executives
are increasingly involved in activities such as new product introduction and global expansion.

David J. Closs

Supply chain and logistics management requires effective evaluation and decision making, involving trade-offs between supply management, manufacturing, logistics and fulfillment. As illustrated by the first circle in Figure 1, the historical role of supply chain executives has been meeting customer service objectives while seeking the lowest total cost by trading off the functional activities involved in supply management, manufacturing, logistics and fulfillment. The increased use of balanced scorecards has expanded performance measures to include return on assets and revenue, as illustrated by the second circle in Figure 1. This shift increased the use of supply chain return on production, facility and inventory assets as one key measure of firm performance.

As Wall Street increases the focus on firm revenue, supply chain executives are increasingly involved in activities such as new product introduction and global expansion. This shift is illustrated in the third circle in Figure 1, which reflects the expanding role of supply chain in enhanced firm competitiveness. For many firms, new product introductions or reintroductions amount to 25 percent of the items each year. A high volume of new product introductions results in significant challenges for logistics and supply chain managers because of the need for surge activity to get the new products manufactured and moved to the field, and also because of the activities involved in recovery of the product that is being superseded. And global expansion introduces additional challenges to logistics and supply chain executives. The obvious challenges include longer lead times, operations in multiple time zones, substantially more documentation and more product variation. Just as executives are beginning to identify—but not totally understand—the trade-offs associated with innovation and globalization, the goal line is being extended further. While minimum cost, maximum return and maximum revenue are still critical performance measures, the new dimension is sustainability.

Events over the past decade require that firms consider long-term sustainability as a component of their strategy. A sustainable supply chain reflects the firm’s ability to plan for, mitigate, detect, respond to and recover from risks that it may likely encounter. Risks that have substantial supply chain implications include (1) complexity, (2) regulation, (3) resource availability and (4) security; the fourth circle in Figure 1 illustrates this trend. Today’s supply chain executives are increasingly being required to understand and balance these requirements for firm sustainability with supply chain strategy and operations.

The first risk dimension relates to market and product complexity. While global marketing and operations open up many opportunities for increased revenue, they also typically result in increased product and process variation. For example, global markets often, but not always, require more variation in product platforms, features and technologies. Unless decisions regarding product design variations and extensions are managed well, the resulting increase in operating complexity will likely drive up supply chain cost. So supply chain leadership must be proactive in identifying and balancing the increased revenue potential of more market and product variations with increased supply chain cost.

The second risk dimension focuses on the global regulatory environment. Global regulations regarding the environment and taxation are having an increasing impact on supply chain strategy and operations. Environmental regulations place limitations on supply chain activities that can occur at specific sites around the world, the processes that can be used, and requirements for recycling capabilities. As discussed previously in these editorials, national and regional taxation policies are having an increasing impact on supply chains by creating tax-advantaged locations for specific supply chain activities. Policies on income, property and value-added taxes can be the overwhelming motivator in supply chain design strategies and decisions. Today’s supply chain executive must understand the implications of these dimensions of the regulatory environment and the evolving related trends.

The third risk dimension focuses on resource availability. In a broad sense, a major task of the supply chain executive is that of resource manager. Typically, the key resources include facilities, equipment and inventory. Two additional resources that are increasingly problematic for supply chain executives are human and energy resources. Even in times of somewhat high unemployment, it is still challenging to develop and maintain supply chain talent, particularly people with global skills. Access to individuals with both the depth and breadth of supply chain skills for a global environment is critical for firm sustainability. Another consideration is volatility in energy prices. Recent energy cost increases have affected the feasibility of shipping product long distances, either domestically or globally, thus influencing optimal supply chain design decisions. Energy price volatility makes the decision very dynamic.

The final risk dimension focuses on supply chain security and defense. This includes many firm initiatives to defend goods and information throughout the supply chain, as well as the government activities that most countries use to protect their borders. While awareness and sensitivity have certainly improved over the past decade, supply chain executives must understand the increasing requirements. The demand for more timely information regarding shipments, tracking capabilities and accountability for supply chain partners increases the demands on supply chain relationship management and information exchange. While supply chain executives can choose to reduce costs by minimizing their involvement in supply chain defense and security initiatives, they do so at their own risk, as they will likely experience shipment delays and potential damage to their brands.
This discussion has outlined the broadened perspective that supply chain executives must develop to provide their firms with a critical risk management perspective. While the consideration has been logistics and supply chain cost-to-cost and cost-to-service trade-offs, the breadth of the cost considerations has increased considerably. Today’s supply chain executives must broaden the scope of their trade-off knowledge and collaborate with other senior executives in overall firm risk management.