SCRC Meeting – Tom Linton’s “Supply Chain Eight” and Golden Winged Warblers : Questions Every New CSCO Should Ask Their CEO | Supply Chain Resource Cooperative

Our 40^th Bi-Annual Supply Chain Resource Cooperative meeting was a great success, culminating with the student gallery walk, featuring 27 undergraduate and MBA supply chain projects.  The meeting was attended by over 80 executives, as well as numerous students and faculty.

I kicked off the meeting with an overview of the current dilemma facing supply chain executives, given the uncertainties of tariffs with China, Brexit in the UK, and the disturbances in Hong Kong and the Middle East that create a path with many risks in every direction.  I identified four options to executives given these uncertainties:

1. Passive Approach – “do nothing”
2. “Wait and See” – make intangible resource commitments
3. “Reactive” – make investments in variable assets
4. “Proactive” – Tangible resource commitment in fixed assets, to permanently redesign supply chains.

In addition, I advocated that organizations need to begin to think through their strategy, given the likelihood that tariffs and global trade uncertainty is likely to become a permanent issue.  This included:

• Developing playbooks and contingency plans to address your most pressing risks.
• Evaluate structural changes in your supply base that could reduce risk exposure.
• Go digital: Explore the potential of dedicated supply chain risk management solutions.

I also provided an early look at one of the supply chain physics laws that I will be working on with my colleague Tom Linton, who also presented at the conference:

Supply Chain Physics Law 3:  Shorter distances between parties in the supply chain improve efficiency, communication, and speed of execution. Co-location of supply chains will reduce disruptions, complications with transportations, government regulations, etc. and will operate more efficiently.

These insights set the stage for the great speakers that followed.

My co-author and colleague Tom Linton presented at the 40^th Bi-Annual SCRC meeting, and shared his thoughts on how we need to think about supply chains.  He created a list of 8 questions that every new Chief Supply Chain Officer should ask his or her CEO before they take on the new assignment, as the answers to these questions will form the foundation for how you need to operate the company’s supply chain.

These questions are predicated in large part on the ideas promulgated in “The LIVING Supply Chain”, Tom’s previous book.  In this book, he emphasizes the importance of material being in motion.  When it is not in motion, it is classified as inventory.  And the fundamental issue is about TIME as a foundational concept for running a company.  Each CSCO has only so many days in a year, and everything you do has a clock attached to it.  And if you think about free cash flow, it is material that is in motion.

As another example, when you buy fish, you convert cash into fish – and put it in the fridge.  If you let it sit too long, the fish goes bad.  Although the cash is gone, and the fish is in the garbage, Einstein’s physics law states that energy and mass are conserved in the universe, so the fish ultimately degrades and serves to fertilize the growth of bacteria and energy which is dissipated into the atmosphere.

These concepts while perhaps abstract, are also linked to the concepts underpinning “The Physics of Life”, a book by Adrian Bajan.  He posits that everything that we have in the universe of human existence has an underpinning in physics, and to fractal mathematics which also underpins physics.  Material movement is similarly about friction and flow, and to speed things up, we have to think about how to improve flow, and to measure ourselves on customer satisfaction and cash generation.

This principle in turn leads us to the Supply Chain Eight, described here.

1. Philosophy:  What approach to supply chain fits the industry, culture, time, technology, capabilities and objectives of your organization?   

The first decision involves whether you will take an “offensive” or “attack mode” to your supply chain, or a “defense” or protectionist mode.  Offense and defense represent two different teams in football, so you need to either think about growing your supply chains in new regions, or defending it through increased risk resilience.

In both cases, “speed is the theory of everything”, and managers need to ensure that their supply chain strategy is completely aligned with the goals of the business.  The generation of free cash flow is becoming more important than the actual cost of the goods that are moving in the supply chain, so a strategy of incremental cost improvement is not likely to be as important as velocity of movement of goods.  “At Flex, I had more than 1400 customers, 20,000 SKU’s, 30 countries, 121 factories, 220,000 employees, and more than 1 million part numbers to manage.  We were drowning in complexity!  And I knew it was going to kill me, unless I converted myh role to become the “Chief Simplification Officer”, and made it my goal to enhance the visibility of the supply chain.  My first Monday in, I asked for a full report of all our supply chain metrics, and my analyst told me he could get it to me by Friday.   I told him I needed it NOW, not in a week.  So I set about creating visibility to understand what was happening in real time, to be able to generate improvements in cash flow.  But this took time – we had to “defrag” our supply chain, and eventually I learned we had 59 days of inventory.  We were able to compress this by 4 percent, and there was an important concept here:

The only conditions that improve cash/cost (outside of price which is set by the market and spec) is to either decrease the distance and/or increase the speed since demand and supply is not predictable.

You can either ship it by boat from China (30 days) or by plane (FedEx).  There is a higher cost of doing the latter, but can it be weighed off against the utility of having those goods earlier?  A big part of this is understanding the Tipping Point of when it is no longer cost effective to move things from China, and we need to think through this framework to help us drive speed.  If we really want to harness time as a competitive weapon, what do we need to do, and what are the relevant costs?  This is particularly important in an era of global shifts in tariffs and trade laws, and we need to be able to act quickly based on digital input.

2. Policies: What rules are required to control organizational behavior within the legal and ethical boundaries established by management?   

Policies are an important guide, even though people often disregard them as bureaucratic.  Tom wrote the policies that would govern how the supply chain would run at Flex, and enabled a visibility platform that would be used to execute them.  This was the creation of a room called the Flex Pulse.  There were nine of these rooms around the globe, which essentially consist are large iPads on the walls.  Tom then had to design the rules to visualize data.  The Pulse rooms are fed by data warehouses which pull together data from 94 different applications that are each being used to run data in different parts of the Flex organization.  All of the required data come together into one room, and a large touchpad is employed to optimize data wo that it can be used into a cohesive way, using simple rules.  One of the rules, was that information would be conveyed using color codes of yellow, green, and red.  Managers only needed to pay attention to the “red” parts of the data.  IN general, 98% of supply chains operate seamlessly without human intervention, but for the 2 percent, humans really need to be able to engage, interact, and deal with situations.  The Pulse projected various visualization to allow people work together in real time, on their mobile phones, to help them understand what is happening, and deal with the 2 percent of issues that needed their attention!     You don’t need a human to adjust minimum order quantities if the lead-time is reduced, machines can do this.  But humans need to be able to engage and act when things get bad.  Many such activities can also be linked to shifts in trade positions, which may automatically divert shipments to different regions.

3. Principles:  What positions support the legal and ethical policy framework to guide employees in supply chain? 

Visibility allows individuals to act on a local level, and to interpret how to act within the context and culture of that local level.  This allows individuals to build and enact the philosophical principles of morals and integrity and compliance with changing, shifting local regulations in the context of the overall supply chain.

Absolute principles are difficult to enforce in a relativistic world, and many such principles are open to interpretation, debate, and cultural norms.  In different parts of the world, political and social norms make it challenging to enforce them.  Boards are often under fire for different issues, and consumers will vote with their pocketbooks.  Some of the many issues that undergo different social and political debates include guns, the use of military force, sugar water, cigarettes, fatty food, and many other issues.  To find a common framework, it is important to establish an organization policy, which may be tied to broadly accepted frameworks such as the ILO convention of the UN Global Compact.  But these must also allow local flexibility.  For instance, Whole Foods allows each store to bring in goods from local farmers, and allow them to integrate local philosophies into their decision-making.  Acting locally is an important concept as global trade shifts as well, enabling businesses to react to local changes in regulations, culture, and people.

4. Practices: The Supply Chain “Scope of Practice” within your industry and company is defined as what?

The medical field describes a practice as an area where a specific physician’s domain exists, and where they are authorized to be able to practice.  A physician will refer a patient to a different physician, who has a different scope of practice.  For example, an ear nose and throat doctor doesn’t do what a pediatrician does, or a radiologist, or a pulmonary doctor.  Each has a specific scope of practice.

In a similar manner, supply chain officers also have to define their scope of practice.  Tom notes that if you talk to ten different supply chain officers, they are all likely to have different scopes of practice, and different organizational relationships and governance scopes.  At Flex, Tom had a scope that included the entire end to end supply chain:  procurement, transportation, warehouse management, as well as customer order fulfillment, customer service, procure to pay, and trade relationships.  This may not be the case in every company.  However, in general, the broader the scope, and the higher in the organization the supply chain officer is, the most room there is to be truly innovative in changing the nature of what can be achieved, and the level of contribution that supply chain can contribute to the overall business.  The right level of governance between regional business decisions and globally centralized decisions must be balanced off.

5. Processes – How will the philosophies, policies and practices be executed?

Many new supply chain officers immediately want to begin their tenure by going out and mapping out all of the processes under their governance.  This can then lead to automation of processes, establishing tools for decision-making in the context of these processes, and making them more efficient.  But this could be a mistake!  If you jump into improving current processes without thinking about the four prior questions related to the overall direction of your strategy, you could be improving or automating something that doesn’t reflect your strategic direction.  Is the current process what you need ibn the context of what you seek to be achieving?

At Flex, the Pulse was about visualizing the data and suppressing a lot of the noise around current processes (see figure below).  A simple chart was used to depict inventory, with the size of the indicative of the amount of cash tied up in that inventory.  If the inventory was more than 60 days old (turns of < 2.0), than the box was red; 30-60 days, yellow, and less than 30 days, green.  The boxes were ordered from left to right by size, so managers could quickly focus on large volume inventory that wasn’t moving.   This served to prioritize action in real time.  Giving access to people with data that drives actions in real time is a game changer.

The idea behind these types of applications is that it moves innovation into not just a concept, but a process.  Ideas become action, vs. an invention, which is just a new idea.  Buying becomes actions of an offer, acceptance, logistics involves weight, volume, time and cost, and inventory becomes everything we don’t need, so the logal is to minimize it.  We have gotten to a point where software and technology are used to dictage the process companies follow, and leaders need to think about how to focus on their processes and actions first, and not worry about software involved.  This requires thinking through the right process that works at a regional level as well as a global level

6. Physics – What are the structural requirements that define the places, facilities and distances for efficient execution?

Physics involve questions on the structural requirements that define the places, facilities and distances for effective execution of customer value chains?  The structural requirements involve where facilities are located, where material is located, and how to minimize tying up cash in doing so.  Managers need to design and optimize to the phyhsics of supply chains, because distance matters and impacts time and money.  In a  post-global world, globalization is dying because economies are rising out of nothing.  China has lifted more people out of poverty in the last twenty years than they have in the previous 5000.  Consumption is rising, and politics are becoming tenser.  A post-global world is actually good for supply chains, as it drives proximity of resources closer to customers and suppliers, as organizations seek to manufacture locally.

And yet, most supply chains are far from simply organized.   Tom notes that “At Flex, we have a tool called SimFlex, which is a supply chain simulator that allows us to look at our network design.  At a high level, our supply chain looks so complex it is nuts!  It has long distances between nodes, lots of back and forth between locations, and appears to be entirely random in design.  The physics of flow is based on distance and time, and we need to re-think our physical supply chains based on these principles, and certainly this plays a role in global trade.

7. People – What talents are required to support the mission successfully?
   Are organizations’ hiring, training or retention methods necessary?

More and more, human judgement on different issues can be improved by machines.  For instance, a tool may be able to provide insight on where to locate factories, but ultimately humans need to apply judgement on whether such locations make sense based on multiple other factories.  We will always need to have “Humans in the Loop”, to help guide Artificial Intelligence solutions, and render judgement that a machine cannot.  Machines are good at automating rote tasks (which is about 80% of all tasks), but humans are needed to source and manage exceptions, and there will always be exceptions.  Can a machine re-set a Minimum Order Quantity when lead-times drop?  Likely, yes.  Similarly, payment processes can likely be automated.  But other tasks requiring more subtle indicators and judgements will always require humans.  Cultural issues will also play an imoprtant role.

8. Performance – What types of objectives measure indicate the success of execution?
   Are they visible and clear to all the participants?

At a high level, performance indicators allow us to keep our jobs, so alignment of negotiated targets are important to set as a leader.  The major components include revenue, income statement, and balance sheet metrics, but others may follow that are important to the organization and its stakeholders

To summarize, Tom discussed something he observed on a drive from Asheville to Raleigh, on the way to the conference.  He observed a group of starlings murmurating, that is flying in a cohesive pattern – guided by some sixth sense, involving intense collaboration between thousands of birds in motion.  Think of how supply chains could be more efficient through the IOT, if all trucks moved together at 80 MPH, only six inches apart, or on an interstate having self-guided vehicles working together to optimize the system. This also brought up a discussion of the Golden Winged Warbler.

An expert in bird migration noted that a massive group of warblers in Eastern Tennessee, suddenly flew away and left for Florida.  They did so two days before a massive hurricane went through the region.  How did they know two days ahead of this to fly away to avoid the hurricane?

Experts believe the warblers sensed it through infrasound noises that storms make, and picked it up while the storm was still over the Gulf of Mexico.  Can humans find a way to mimic infrasound waves or other signals to better predict what might be happening this afternoon, or next week or next month?  The more sensing we can pick up on the supply chain ecosystem, the better we will be able to sense and avoid disruptions and risks.  Technologies may one day be able to do so.  The concept of sensing and understanding how things move and respond in nature, will impact the physics of supply chains and how we design them in the next decade.