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The Road to Shanghai
is Paved with Materials

The expanding role of the global supply chain manager as vertically integrated companies are reconfigured into Virtual Enterprises. Relationship management has morphed radically from vendor management to the creation and orchestration of ever flexible networks of partners and alliances that exist around the world.

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First, Some Ancient History….

When I began my career in Supply Chain in the early 1980s, I held the distinguished title of Materials Manager, which sounds pretty mundane today. In the prior decade, manufacturing companies had awakened to the financial reality that the cost of materials generally constituted at least 80% of their cost of goods sold, and thus they needed professionals focused and organized to manage this significant cost. We still largely existed in a world of vertically integrated companies, and thus much of our management attention still turned inward on vertically integrated functions such as production planning, scheduling, and warehousing. Purchasing and Transportation (remember those terms) did provide the need to manage outside the enterprise, but as I’ll discuss, it was a much smaller and simpler world where more often than not our suppliers were domestically based. The Materials Manager sat at the Operations table (equal to his counterpart the Production Manager, a voice to be reckoned with), but his/her position was often referred to as a real “hot seat.” I once interviewed for a position where the Plant Manager jokingly suggested that I did not fit the image of his typical Materials Manager – a crusty guy with sleeves rolled up and a half-chewed cigar hanging out the side of his mouth!

The Purchasing and Transportation functions forced us to worry about vendors and processes which were external to our factory walls and to whom we were heavily dependent, much more than we consciously recognized at the time, perhaps. Vendor selection consisted mostly of finding the lowest price, and then proceeding to calculate the optimum purchase order size using EOQs  (Economic Order Qty.). We studied the Uniform Commercial Code (UCC) so as to carefully structure contracts and term and conditions, and were largely measured by an impressive sounding metric called PPV (Purchase Price Variance). The Outsource question had entered into our lexicon as a business solution to be considered to achieve cost reduction, but the scope and depth of the analysis was limited, and did not always lead to good, mature decisions. Supply disruptions such as labor strikes might surprise us and seem insurmountable (#$%& happens!), but if we were good, we would have significantly increased our safety stock to cover the shut-down. Our Information Technology expertise was gauged by how well we understood the intricacies of MRP and then MRPII, while leading edge companies were utilizing EDI capabilities in their vendor interactions.

By the end of the 80s, the winds of change were blowing from Asia as Materials people were studying and trying to implement interesting concepts such as JIT and Zero Inventories that we had imported from Japan. The Asian Tigers were beginning to flex their muscles and become important to US companies and markets as suppliers of steel, automobiles, and consumer electronic goods, mostly. The Materials function did not yet shine with much star power and the seat was still hot, but the chair was growing in stature and size as it prepared to go global.

Fast Forward to the 21st Century….

Of course, we all know that much has transpired in the intervening period to radically transform the form and function of US manufacturing companies. Vertical companies have re-configured to become Virtual Enterprises (HP), while some corporations of recent vintage simply created themselves in that image (Dell, Cisco). We now have a new era of business entities formulating which our ChainLink CRO, Bill McBeath, has described as Federations (Li & Fung). All the while, the appetite of the US economy has become increasingly fed by international suppliers as out-sourcing evolved to off-shoring in the quest of US corporations to take advantage of lower cost labor and foreign suppliers.

So what did this mean for our crusty Materials Man? The charter of the modern Supply Chain Manager (SCM), as well as the skill-set and knowledge required to be successful in this role have expanded and become increasingly diverse, just as the geographical scope and complexity of the supplier networks have exploded on a global basis. The importance and scope of the Production Manager severely declined as their factories were shuttered, while the Materials Manager moved up to a new title and role, the Global Supply Chain Manager (GSCM), and earned a seat at the corporate table. Oh, but the seat is still hot!

“Most skills and competencies needed to excel in logistics and supply-chain management are the same skills and competencies needed to excel at disaster relief operations.”
Matt Waller, Professor Marketing & Logistics, Univ. of Arkansas

This issue of Parallax View issue explores in detail some of the aspects of this expanded role. But let’s now briefly touch on some of those.

Relationship management has morphed radically from vendor management to the creation and orchestration of ever flexible networks of partners and alliances that exist around the world. We now must deal with entities who may simultaneously be customers, partners, and competitors, dependent on the market or geography! For corporations seeking continued growth, globalization has proliferated on two levels – both markets and the supply base. The out-sourcing dilemma evolved in complexity as we must now also determine in what global location to perform value-added activities, continually chase lower cost labor from nation to nation, and sometimes even bring those activities back to the US.

All of this global Relationship management means that the modern GSCM must understand or at least have resources at hand to help them understand Legal issues far beyond what was required in yesteryear. For example, Europe has environmental regulations that are much more stringent than the US, while many less developed nations where suppliers are located may have lax labor laws which create the potential for human rights violations. Intellectual Property (IP) protections in foreign lands may not be adequate, and create risks to market growth or retention. These legal issues often intertwine with Human Resource (HR) concerns as GSCMs learn to deal with a culturally diverse supply base whose ideas about business ethics may be considerably different, and even violate US business law.

Gone are the days when the scope of Finance expertise required by a SCM focused on Purchase Price and PPV. The successful GSCM of today must comprehend and create more sophisticated financial models that analyze Total Cost of Ownership (TCO) while incorporating foreign taxation considerations and currency fluctuations. In industries such as high tech where material costs from suppliers are on a consistently declining curve, GSCMs must be aggressive in taking advantage of that cost decrease through lean inventories and innovative price/payment techniques.  Reduction of material cost still reigns as the key opportunity area of COGS, but the expertise of the GSCM in today’s world must be much more sophisticated and expansive in understanding how to accomplish that.

In the world of Information Technology (IT), the functionality has naturally become focused on managing the external supply network in the tracking and transaction of goods.  The forecasting, planning, and decision-making needs of the enterprise in whatever form are still there, but are much more complex due to the increased complexity of the supply networks. Meanwhile, a multiplicity of niche software applications and technological capabilities have appeared to meet the various needs, but without consistent industry-wide standards. GSCMs face a confusing world in making strategic decisions about how to take advantage of the available technology.

Finally, last and perhaps most daunting of the new expanded challenges of the GSCM lies with Risk Management. We need only recite the recent events of 9/11, SARS, the Indonesian tsunami, and the threat of an Avian Flu pandemic to shiver at their potential business risks. Management of supply risks has always been critical to long-term business viability, but as we have expanded around the globe, we have increased our exposure to larger and less controllable risks, many of which include risks to the health of our human capital.

“You can’t separate a company’s financial performance and how it is viewed by investors from that company’s supply chain performance.”  Tim Main, CEO, Jabil Circuits

The modern day GSCM has traveled some global miles since the days when I started my career. The challenges and expertise required have grown in scope and complexity in direct proportion to the expansion of the role. The great news for professionals willing to venture into the field lies with the increased star power of the role in corporate echelons. Most visionary CEOs now recognize its importance to competitive advantage and include it as part of their strategic initiatives. Since all the other relevant terminology has evolved, we’ll ditch the “hot seat” analogy and simply say, welcome to the spotlight!

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