Q&A with Tom Linton (Sr. Advisor, McKinsey; Ex-Chief Procurement and Supply Chain Officer, Flex)
Multi-Tier Supply Chain Visibility – what is it?
We are in the early stages of a supply chain revolution. But, before we attempt to dissect this, let’s rewind to the beginning.
Over the last 100 years or so, the supply chain has been a straightforward, easily visible, 2-dimensional linear-type process. You have suppliers, planning, materials and manufacturing logistics followed by the distributor, wholesaler dealer and then end-user. All software thus far in the supply chain journey has been created such that they are transactional systems.
What’s happening now is that the process is moving towards a 3-dimensional model. The emphasis and need for sustainability, visibility and agility is steering the supply chain in a multi-level direction.
What is three-dimensional visibility in the supply chain?
Well, we first have to ask ourselves, how do we get deep into the system of the supply chain and understand visibility? And this is not in a transactional way but how do we understand visibility in a three-dimensional way? This is the transformation that's occurring - all startups and all the people that are attacking these visibility issues are actually coming into that multi-level view of a supply chain which is giving us visibility to what comes next.
So, doing a 3-D dissection, it will provide you with where your future prediction comes from.
What are the 3 V’s of the Supply Chain from a 3-dimensional perspective?
The 3 V’s of the supply chain – velocity, variability and visibility. In general, our aim is to increase velocity, reduce variability and improve the visibility in the supply chain using six sigma. This 3-dimensional revolution seems focused on just the visibility aspect-what of variability and velocity?
Well, simply put, the supply chain is effectively ‘materials in motion’ as it’s essentially a balance sheet in the motion of a company. The success of ‘motion’ i.e. movement within a supply chain is directly dependent on and measured by speed and time. Obviously, supply chains operate in a time dimension, therefore, it has to focus on the speed aspect of that time because the longer you hold inventory the more expensive it becomes, especially if you're holding fresh produce such as fish which has a natural shelf-life that must be adhered to in order to not make a loss. But if you are holding material inventory in the business it becomes a cash burn on the company.
Up to now, we measured inventory turns, but we now have to think about the speed and the flow of this entire system and measure it much more precisely. Anything that causes friction in your supply chain needs to be attacked like cancer, so companies that focus on speed win.
Simply put, whether you are a novice or a professional with 20-years’ experience in supply chain management, if you find yourself in a position of not knowing what to do, focus on speed because speed always wins. Speed gives you more revenue, speed lowers your cost of goods sold, speed decreases your cash consumption, and speed increases your customer satisfaction.
Look at the Amazon flywheel effect or the clock speed of the business – they all improve speed.
Speed means customer satisfaction, goods sold, and revenue increases whilst total operational costs reduce and therefore agility improves!
However, as simple as this sounds, in reality, it is very difficult to obtain and maintain because global sourcing, the aim being to obtain materials or products at the lowest cost possible, introduces increased lead times thus speed/velocity is pretty much out the window. Why pay double, triple or even quadruple the cost of materials from Europe when you can get the same thing for less from say, India, China or Vietnam for example?
How do you find the balance between velocity and global sourcing?
In retrospect admittedly, that's a supply chain conundrum we have created for today, however, we are now entering a post-global world. From the current supply chain standpoint with covid-19 disruptions restrictions on movement of goods, we need things closer to the point of consumption.
Why do we want to do that?
Well, the first law of physics in supply chain management is the law of proximity. You want things closer together, not far apart. If you're getting raw material from one place and you're moving it to another and you're shipping it back and forth, it takes time, which is our enemy. It adds to the cost and doesn't help customer satisfaction thus impacting on revenue.
Every effort should be made by companies to build supply chains which are regional in nature and close to the point of consumption. This also helps with sustainability and the environment with less fuel consumption.
Now the current problem is, supply chains that have been built since the 1970s with the focus on chasing low cost i.e. a lot of labour was moved to China.
China, however, now costs more than direct labour in India or direct labour in Mexico. So now we've got China becoming a high-cost country. The advantage China has is they have excellent productivity in terms of resources, and then they have an excellent ability to maintain competitive costs because they have supply chains which are built around their factories.
This model of having complete supply chains centred around their factories should be how Europe, Asia and North America should develop a European, Asian and North American supply chain respectively – by reducing proximity it reduces the expense and increases revenue as time is no longer the enemy impacting cost negatively. So, we have to somehow do this – companies are being encouraged to relocate their suppliers. If you're going to build things in North America or you're going to build things in Europe, you want your suppliers to be ring-fencing your facility. You want them to be within proximity to your buildings. And this is the challenge we face today, and this is what's going to happen long-term. This is the multi-layer supply chain that will result in success for companies in this new-age.
How can you achieve a multi-layer Supply Chain that can successfully work?
The answer to this is tackling the current trend of invisibility that exists in the supply chain. Invisibility is the thing that needs tackling to achieve a multi-layer supply chain that will work. Invisibility has resulted in the loss of the structural importance of how things flow and a loss of sight of how all the physics of the supply chain needs to fit together better. This has played a part in the reduction of velocity and agility.
For example, people over the last 20, to 30 years, have given up control of their supply chains to first tiers or second tiers due to outsourcing. These create walls where opaque walls back to your visibility point you can't see through. Why? Because commercial companies don't want you to see through all the way through these supply chains. In other words, if you are outsourcing to a tier-one automotive, the automotive companies really don't often see past that tier one. So, this has created a problem because surprises that then creep up on you, it's too late to respond. You don't see it fast enough. With visibility, you see the disruption and things in advance.
I really think supply chain design companies need to spend more time really thinking through their footprint, really thinking through their design, physical design, the physics of your supply chain, not just the digital, but the physics and the digital together. And then they're going to see the improvements that they need to make.
How can visibility be introduced into the classical Supply Chain?
In the classical supply chain, you have secondary suppliers, manufacturers, distributors, wholesaler dealers and then end-users. For suppliers, typically have a number of parties involved, thus extending the supply chain, which in turn increases cost and creates complicated multi-layers thus complicating the multi-level visibility.
Now, Tesla, for example, has decided to reduce their multi-level supply chain by bypassing the dealership level and selling their vehicles directly to the customer thus creating approximately a 60% vertical supply chain. They have applied the law of proximity such that by taking out the dealership they have created closer proximity between themselves and the consumer meaning an increase in velocity and revenue by getting the product to the end-user faster and not having to have a transactional flow with the dealership/agent. This has also meant higher productivity with a less complex multi-layer supply chain model.
It sounds like a genius solution but how feasible is this model for other companies?
Well, if you think about it when you have people who are like agent or brokers or middlemen or anything in the middle of the transactional flow. It impacts the speed of the business. So, I'm not saying we need to go back to the 1800 and vertical integration where you make the steel and you build the buildings and all that kind of thing. But there is some benefit to thinking about how, do you make sure that your control over your supply chain is under your administration somehow and it's not blocked, unfortunately.
I remember when I was a chief terminal officer of LG, I was doing business with Qualcomm at the time, and I was having some difficulty getting a clear picture of supply-demand from Qualcomm when they were doing business with TSMC in Taiwan, because TSMC would have been the tier two to Qualcomm and then the chips would go into the LG phones. So, I took the chief technology officer from LG and we flew to Taiwan. I said, we're going to take the power away from Qualcomm and we're going to go visit Taiwan Semiconductor because we're the end customer at the food chain? We're the top guy.
We went to the bottom guy and we learned a lot about the supply chain from TSMC, about what was happening with the supply-demand picture. Qualcomm was not happy. They were upset. They said, Why are you visiting my supplier? I said, they're not your supplier. They're my supplier. You're my supplier. And you will do as we say because it's like if you're in the ocean, the shark doesn't negotiate with the fish and the fish don't negotiate with the shrimp. You have to have a power flow from the top of a supply chain.
It doesn't flow from the bottom. And every time power flows from the bottom like when intel and Windows and Microsoft started up, it disrupted the PC.
In other words, you have to think about supply chains in terms of how the power is used and how it executes itself. I think Tesla has got the correct idea. But the problem is I think they've got more trouble ahead just because you can say you want to do something, but if you don't have the mechanism to do it effectively, you could have problems.
How are we going to improve?
Since COVID, visibility becomes supply chain is a big buzzword. There's a huge venture capital money going into big startups. They are into Nasdaq and Flaunting. But on the other hand, I don't see a lot of people using those software’s because I have direct communication in the industry. Quite a lot of people I work with, two or three big corporates in the world right now, acknowledge not everybody can afford them.
Finally, what would be your advice on how we can improve the supply and multi-tier visibility?
Well, it starts with a plan. You've got to have a plan with everybody working on a piece of this puzzle.
But I think if you're in a corporation, you've got to be able to map this thing out and say, okay, now what tools do I use? For what purpose? And does it facilitate visibility and velocity in my company? Does it improve the flow of my business? Because if you have a stream, you can add rocks to it and then actually slow it down.
However, you don't want to control your supply chain. You want to free it up.
Every tool that you choose to use should do something to increase the flow of your business, increase the flow of your supply chain and not slow it down. And there are things out there you can add that will add by adding the software piece, you actually do slow things down rather than speed it up. So, I think being thoughtful about what you do, and choosing things that really move the needle are important, I'd be less concerned about the cost. The reason is that the benefits of achieving the correct flow without hindrance are huge.
By taking out unnecessary parts of the supply chain flow your supply chain actually gets compressed and therefore your squeeze money out of it. This is a very powerful thought. So, someone might want to spend a million dollars on this or 2 million on that and there is hesitation in the investment, but I looked at it and have pointed, that you're going to save tens of millions. Therefore, the financial guys have to get in the middle of this with the business guy, and you have to kind of look at this holistically and really understand what you can accomplish, because if you do this correctly. It's powerful for the business. Very powerful.
Bonus question: What is the correlation between the inventory and lead time?
It astonishes me still that not many people or students can really offer a simple answer. I think that's why the focus is on speed. If you reduce the total lead time, that means you reduce your inventory, therefore, you're saving cash and you can find the whole thing. It's going to take time. It's going to take a few months, a few years, but it's worth it while you got paid.
Which technology (e.g. cloud technology) do you think has the highest impact on improving this multi-tier visibility?
We are talking about IoT, we're talking about blockchain, so on and so forth. So, what do you think, which is the right technology we need to learn as supply chain people?
Well, I think a lot of people are talking about blockchain because of crypto. A lot of people talk about these. I personally like to put blockchain in crypto. I like to push that to the back of the room because the problem is before you can do blockchain, you have to really build a better visibility toolbox.
The challenge that companies have right now is so many things we talked about in the beginning, the three-dimensional issues. You can have a transactional system. Actually, blockchain is a transaction list system. There are no transactions in a blockchain. It's a trusted way of doing business. If you don't have visibility to what you're doing, you're basically going to automate a bad thing.
So, you got to fix the thing before you automate it. Otherwise, you're just going to automate something that's bad.
Therefore, get the big things right and focus on financial outcomes. Work with your financial team to work out solutions such as calculating my supply days and how much money will I save if I speed up my balance sheet in my revenue side of things, and if I speed up my supply chain, I can produce more revenue.
If I speed up my supply chain, will my customers be happier? Use these things to guide the investment and get less concerned about the millions you spend versus the tens or hundreds of millions of dollars you're going to save.
I think this is where I see a lot of companies get stuck. They see that they need to buy a piece of software that will say cost $5 million. That sounds a lot, but if you do not show the cost versus the benefit the huge mistake is not positioning it correctly. You've got to be able to go to a CEO or a board or a CFO and you got to say, look, give me this $5 million and I'll save you $500 million. It's a different argument, but people get stuck in that point because they don't understand the value of time and how when you compress the supply chain, you release cash and you free revenue and you accelerate the cost of goods through the system.
So I think this kind of thinking bigger is going to make the future of supply chain very profitable.
And as I said in the beginning, I think we're at stage one point, the supply chain that's behind us is pretty primitive. But what's coming is going to be extremely broad, deep and can be predictive. We're going to mine data out of existing supply chains. The data is already there. We just haven't mined it. It's like sitting on gold!
Any final thoughts for us?
I think we have to look really aggressively now past what COVID caused us. COVID brought supply chain problems to the top of the list, So, there's an opportunity to use the crisis to actually get some of the things that you need. I'm speaking to supply chain professionals. You've got a great time right now to go get the money, you need to go build a better supply chain. I would just encourage people to take that opportunity. Absolutely. We have the opportunity.