The future of supply chain management

and its use of technology

- Logistics - Apr 02, 2014

Follow @ supplychaind
by Anthony Tarantino, PhD
Many of todays leading supply chain organisations rely on large enterprise
resource planning (ERP) systems and a variety of point solutions for
planning and execution.
Even in the largest organisations, Excel is often the tool of choice for
analysis. If modelling is used, it is typically limited to Excel-based
spreadsheets.
Advanced analytical and modelling tools, widely used in financial
organisations, are not typically deployed to support manufacturing supply
chains.
This is ironic because the problems commonly faced by global supply
chains are more complex than those faced by financial institutions: evershrinking product life cycles, labour arbitrage out-sourcing and off-shoring,
product and sustainability regulation complexity, growing IP litigation, shortlived brand loyalty, etc.
Todays supply chain leaders use a variety of best practices, but they are
rarely integrated as part of an overall solution. The analytical tools used to

support these best practices rarely rise to the levels of sophistication

commonly used in finance. As a result the effectiveness and utility of these
disparate and ad hoc best practices are limited.
The leading supply chain operations of today typically employ some of the
following best practices that rely heavily on technology tools and
applications:

Centers of Excellence (CoE)

Cost to Serve (CtoS)

Supply Chain Network Design

Segmentation

Demand Driven Supply Chain

The leaders of the future will continue to use these best practices but will
come to realise the need to be fully integrated and utilise the types of
advanced analytics and modelling used by todays financial institutions.
The benefits will increase in proportion to the levels of integration and
analytical sophistication. The good news is that these analytical and
modelling tools exist today, mandated for large financial institutions by
Basel II, Basel III, Solvency II, and Dodd-Frank regulatory requirements.
Many supply chain organisations have attempted to use modelling with
mixed results. Here are three scenarios leading to skepticism for the use of
supply chain models:
1. In some cases the model never produces results. This can occur due
to a lack of expertise by the modellers, or an overly ambitious and complex
project charter (models work best with limited variables.)

2. In other cases models are created that do not indicate the need to
change from the current state, so the users of the model deem it a failure.
Actually the model was a success because it validated the utility of current
practices.
3. Finally there are cases where the model results are wrong. Major
contributors:

The modelling team lacks the needed qualitative and quantitative

expertise. All quantitative modelling starts with qualitative assumptions.
This requires a team with cross-functional expertise: experienced supply
chain professionals to provide the qualitative assumptions for the models,
and expert quantitative modellers to create and run the models.
The battles between quants and quals date back many years. Both
approaches have value, but quants have dominated arguing they can
model any scenario. History teaches us otherwise.

The modelling team is biased. Failure may result from a bias on

the part of the modelling team. This was a major problem in the global
financial crisis in which PhD-level quants created models at the behest of
their bosses that justified high risk investments. These models failed simple
common sense tests.
Here is a vision of what the future can bring by integrating todays best
practices and utilising advanced modelling techniques that are widely used
in finance today:
Center of Excellence
The leaders will create a Center of Excellence (CoE) for strategic change
management that champions best practices, standardisation, and
continuing education.

It will be a standing group of cross-functionally trained subject matter

experts with strong expertise in quantitative and qualitative analytics,
program management, and change management. Like the financial
institutions of today, CoEs of the future will require staff quants, experts in
quantitative modelling.
The banking industry has trained a large population of experts who can be
adapted to support supply chain management.
Cost-to-serve
The CoE will conduct periodic and ad hoc Cost-to-Serve analyses as a
foundation for Supply Chain Networking and Segmentation exercises; costto-serve analysis that will be more holistic than todays by including social
responsibility and sustainably.
Cost-to-serve analysis was offered up as a low cost alternative to earlier
activity-based cost accounting (ABC). To be successful, cost-to-serve
analysis requires robust modelling techniques, otherwise it will struggle to
capture true end-to-end cost.
Supply chain network design
The CoE will work with its modelling quants and quals to conduct a Supply
Chain Network Design. The CoE will continue to update the network
design with needed changes in customer preferences, systems,
automation, products, competitors, regulations, supplier capabilities,
politics, and labour. It will also conduct What if? scenarios.
Segmentation
Revisions to Cost to Serve and Supply Chain Network Design and will
trigger updates to and what if? scenarios in the current state
segmentation. Segmentation may be needed due to product complexity,

demand volatility, margin pressure, supply chain risk and resiliency, lead
time variations, and supply chain risk. Here are the changes we can expect
in next generation segmentation:
Unlike current ad hoc programs, segmentation analytics will become an
ongoing effort as market and supply chain conditions can change with little
warning.
Segmentation efforts will move qualitative based data analysis to a true
data-driven quantitative analytics. Advanced modelling techniques will be
deployed that look at millions of data points and consider such attributes as
product reliability, complexity, life cycles, margin pressure, lead time, lead
time volatility, and competition entry barriers.
Dengrograms, (a tree diagram to illustrate hierarchical clustering), will be
used to suggest the optimal clustering of segments. Selecting and updating
product line segments is critical as it balances the costs and benefits of
product offerings greater numbers of segments may offer the highest
customer satisfaction levels, but the cost may be prohibitive. Too few
segments may offer the lowest costs but open the door to more responsive
competitors.
Cloud-based and demand-driven supply chain
The results of the supply chain network design, cost-to-serve, and
segmentation will create a cloud-based and demand-driven supply chain
with multi-tier supplier visibility and collaboration in near real time.
A heterogeneous blend of best-of-breed solutions will come into play. Multitier visibility means that the end customer can look and collaborate beyond
their contract manufacturing assembly houses down to critical component
and assembly suppliers to identify and resolve potential problems.

The future is bright for supply chain management. Its influence has grown
significantly from the old days when it reported to manufacturing. The talent
pool has also grown to the point that supply chain is viewed as a lucrative
career and attracted highly skilled and motivated individuals.
The best practices and technology needed to support the next generation
supply chain exist today. The key will be integrating these best practices
and applying more advanced technology and analytics in use in other
industries.

Anthony Tarantino, PhD

March 2014
agtarantino@hotmail.com
562-818-3275

Anthony Tarantino, PhD, has over 25 years of supply chain management

leadership experience in both industry and Big Four consulting. For the last
four years he has supported Ciscos Supply Chain Operations. He also has
eight years of consulting and teaching experience in finance, supporting
IBMs global banking practice, leading BearingPointsHigh Tech SOX
practice, and teaching at Santa Clara University.