Three Reasons Why Supply Chain Centers of Excellence Failed

Over the past decade, I completed 51 quantitative surveys to better understand the drivers of supply chain excellence. Over the past ten months, I worked with the Data Science Institute at the University of Wisconsin-Madison to understand the factors that improve supply chain satisfaction. (In the surveys, a simple sliding scale was used to determine whether the respondent felt their supply chain was working well. In the data science work, the responses were correlated with factors such as the type of technology deployed, company size, industry, organizational design, organizational alignment, and balance in S&OP.)

I had several insights from the study:

• Size Matters. The company's size trumps industry differences regarding the supply chain working well. Similarly, industry differences trump regional differences. Respondents in smaller companies with less than 1B in annual revenue believed that their supply chains worked well to a higher degree than respondents in larger companies. The differences were significant at a 95% confidence level. The largest gap occurred with companies between 1 and 10B in annual revenue. The reason? We defined supply chain processes in the 1990s when supply chains were regional. As corporations became global, we did not redefine work. The needs of a global corporation are higher for workflow, visualization, and what-if analysis/simulation. Instead, most of the industry activity focused on the accuracy of engines—the cadence of batch jobs and collaborative planning elongated planning cycles as product and replenishment cycles decreased.
• The Importance of Proactive Analytics. When companies actively used what-if analysis and proactive analytics, their ratings of working well were significantly higher. (When the industry moved to tight integration of Enterprise Resource Planning (ERP) to Advanced Planning Solutions (APS), many of the leading solutions lacked what-if analysis, reducing a company's ability to work well.)
• Centers of Excellence. No Impact. Having a Center of Excellence in Supply Chain did not improve the Working Well scores. Surprised? I was at first. For me, the story was sad. In 2013, I saw some movement in the surveys with the working well scores if a company had a Supply Chain Center of Excellence. However, as the decade progressed, the importance of a Center of Analytics trumped the significance of a Supply Chain Center of Excellence. Here I share insights on why Centers of Excellence were not successful.

Why Did Supply Chains Center of Excellence Not Improve the Ability of a Supply Chain to Work Well?

A Supply Chain Center of Excellence sounds like a good idea, right? I thought so. In 2009, I conducted an extensive qualitative study on the design and scope of Centers of Excellence. I encouraged companies to form and use these centers to drive supply chain improvement.

In the last five years, I did two qualitative studies to understand the importance and impact of Centers of Analytics and Centers of Excellence. Here are my findings:

Centers of Excellence Can Only Drive Excellence if there is a Good definition. Supply chain excellence can only be driven with a clear definition, which needs to be defined at the business strategy level.

I'll share an observation with you. The rollout of CRM, SRM, ERP, and APS transactional systems changed the definition of supply chain. Over the past two decades, the term supply chain has become more narrow and IT-focused. For example, four decades ago, the definition of supply chain excellence focused on delivering excellence for the customer's customer based on trade-offs in managing a network of trading partners. The basis of supply chain management in 1982 was to enable economies of scale and efficiencies by aligning manufacturing, sourcing, and transportation processes. Today, I often go to a supply chain strategy session and ask, "What Drives Supply Chain Excellence?" Blank stares follow an awkward pregnant pause. Most are driving a functional cost agenda.

Functional Metrics and Bonus Incentives Drive Behavior. While leaders frequently speak on the need to reduce functional barriers, functional excellence is embedded deep in organizational DNA. As global companies expanded through M&A, procurement, manufacturing, and transportation organizations became self-serving. Focusing on functional excellence throws the supply chain out of balance, reducing value and increasing operating margins. However, the tie of functional objectives to bonus incentives drives short-term behavior. In this world, how could we ever assume that a supply chain center of excellence could ever be successful?

Variability Increased, Cycles Shortened, and Analytical Capabilities Improved, but the Focus Did Not. Many supply chain centers of excellence focused on improving demand error and safety stock levels. The batch cycle time of S&OP increased threefold as companies added meetings for collaborative planning and steps for regional/global governance for finance in IBP. As a result, planning cycles grew while order and manufacturing cycles decreased. Companies focused on matching demand and supply volumes when the need was to balance demand and supply cycles in delivering a balanced scorecard. (The research shows a Balanced Scorecard of operating margin, revenue/employee, return on invested capital (ROIC), and inventory turns drives market capitalization. Reducing functional costs in most organizations does not improve operating margin.)

Let me close with a thought. When asked if I am a consultant, I say, "No. Consultants know the answers while research analysts try to figure out the questions to ask to help business leaders." Here, I share my observations. I would love to hear yours. Let's start a dialogue in the comment section.

Want to Know More? See You on December 5th?

On December 5th, Supply Chain Insights is hosting a small event at Georgia Tech to share the results of a two-year research effort to connect financial metrics by industry to supply chain performance to drive value. The session will be a roundtable format, with no sponsorships, vendor speeches, or pay-for-play pitches. The focus is on shared learning.

At the session, we will discuss the choice of metrics for a balanced scorecard to improve market capitalization/employee by industry. (Did you know that improvement in the supply chain drives 50-70% of this value metric? Or does a focus on cost reduction undermine value creation?)

The session is open to manufacturers, retailers, consultants, and academics. At this session, we will launch the "supply chain fundamental score" (a simple measurement to determine the value generated by the supply chain compared to the peer group). Each attendee will receive an orbit chart packet comparing them to their peer group. Feel free to DM me on LinkedIn if you'd like to attend. The session is from 9 AM - 4 PM in the Atrium of the ISyE “Main” Building," Georgia Tech campus, Atlanta, GA.