The Case for Supply Chain Transformation
Recently, I was in a company meeting and I heard our VP of supply chain, John Kern telling jokingly that for the first time, his family understood what he was doing. Indeed, the supply chain reminds me of IT, if everything goes well, nobody sees them. However when I can't connect to my email or I can't get my favorite brand of biscuits at the supermarket, then I notice the importance of these two important business functions.
Supply chains are getting noticed lately, in company quarterly reports, in the boardrooms and the news because they are not equipped to deal with the way the world is today. They have been hit by a triple whammy, trade wars, COVID-19 and increasingly, natural disasters attributed to global warming. Looking at these three major events, they stress the supply chains in different ways. At first, trade wars increased prices which forced companies to either absorb the extra tax costs or pass it to their customers. Then regulations kicked in and forced businesses to source material from allowed places and not others. This meant finding additional suppliers, qualifying and on-boarding them. Next COVID hit, as people were confined, the global demand for everything plummeted. Manufacturers put on the brakes and that included the chip and electronic components industry. Everybody geared up for a U shape slow down, but instead we got a V shape recovery meaning that the demand came back much faster than everybody had anticipated. This caused the biggest headache many companies have to deal with now including ourselves. The inertia of the semi conductor sector combined sudden high demand created shortages. Finally, the icing on the cake: natural disasters are starting to have a significant impact on the world economy. For example, many ingredients in Mike's Pie; such as wheat, berries, honey, soybean oil, to name a few, have been hit by weather effects.
Cisco makes products which are unfortunately much more complex than peanut butter and apple pie. We produce about one hundred thousand boards per week. Some have 14,000 components on them. We cannot ship an incomplete board to our customers, we can't install the missing capacitor in the field. Conversely, a vehicle manufacturer cannot sell a car with a missing door handle. On top of that, most companies must forecast demand and assemble products right on time. All these parts coming together are sourced from hundreds of partners we do business with and they themselves need partners to produce what they sell. In light of the triple whammy challenges we discussed above, I started to appreciate the complexity of the supply chain mechanics.
How do we address the problem? First we should recognize that we will not solve the supply just in-time situation. It is NP hard with way too many variables, we can't build a perfectly predictable system. However, we can improve our situation and make our supply chains more agile to change; more responsive to shortages. This comes through tighter collaboration between business partners. Today, the name of the game is to outsmart everybody, do whatever it takes to get what you need in order to produce what you sell. It doesn't matter if the other guy doing business with you goes broke as long as you can deliver your quota this quarter. This approach is short-sighted. It would not do any good to my company if my suppliers are stressed to the limit and start decommitting their deliveries. Finding and on- boarding reliable business partners is a long and complex process which consumes significant resources for the seeker. A long-term business relationship brings trust and consistency which are essential to successful partnerships. We are in it together, we want our suppliers and customers to be as successful as we can be, this will ultimately benefit us.
The tools and processes currently used to run supply chains don't fit that premise. Companies use a very limited and rigid set of electronic messages (EDI) to run their business and communicate basic repetitive information. These point to point transactions take months to set up, at a significant amount of time and money investment and most importantly, they are unfit to handle exceptions. By exception we mean things that are not going according to plan. Delays in shipping, strikes, maritime traffic jams, container shortages, labor shortages, are all consequences of the triple whammy. When all of this happens, the electronic communication in place stops being useful and emails and phone calls become the de-facto fall back. Overstressed planners find themselves buried under excel files they received from their suppliers, each pushing their own format and process.
At Cisco, we're looking into next generation tools which will bring the gap between rigid electronic messages (EDI) and the email chaos we find ourselves in. We need flexible means of communication which will help the humans transmit the right information to the right person or system at the right moment. We need an orchestrator which will keep a tap on the commitments of all the parties and implement a playbook which would have been negotiated by all the business partners before an actual problem arises. This collaborative approach puts the focus on readiness as a team, and will offer visibility into each other's business processes so the system as a whole will be more efficient and productive.
Gartner recognizes Cisco as a leader in supply chain operations. We are also known for our collaboration tools and distributed solutions. All the ingredients are in place, 2022 will be an exciting year for the supply chains.