It wasn’t all that long ago, really, that the concept of the ‘supply chain’ itself was new and confusing. Top executives realized there was more at stake in moving goods from Point A to Point B than traditional logistics but, in the absence of established managerial cannons, uncertainty prevailed about how to proceed. Consultants were quick to fill the void, formulating notions of ‘best practices,’ typically drawn from early adopter-models like Wal-Mart and Dell.

With these ‘universal’ postulates (embodied in the building blocks of SCOR, the Supply Chain Council’s Supply-Chain Operations Reference model), supply chain management moved off the loading dock and into its first stage of professionalism. Traffic managers became supply chain executives.

Trouble is, as academics who study such things have come to learn, when it comes to something as complex and fundamental as the supply chain, there really is no such thing as ‘best practices’ that can be universally copied. What may be the best supply chain model for a company trying to achieve competitive advantage through one approach (for example, offering the broadest product line in the market) isn’t going to work for another company in another industry (whose strategy might be to shape demand to supply).

And with this realization—that there are different ways to organize supply chains depending on different company objectives, competitive conditions and long-term macro economic changes—supply chain management entered the cusp of the next stage of professionalization.

Leading the way in this ‘Stage Two’ professionalization is landmark research underway at M.I.T.’s Center for Transportation and Logistics, a multi-year multi-million dollar project called Supply Chain 2020 (SC2020). A measure of its perceived importance—and the likely impact it will ultimately have in re-orienting corporate supply chains—is its roster of corporate partners, which includes the likes of Intel, Procter and Gamble, and Texas Instruments. When finished, it promises to be a landmark in the evolution of global enterprise.

“We call the project Supply Chain 2020 for two reasons, “explains research director Larry Lapide. “It suggests wide-ranging 20/20 vision and also the future. We’re trying to figure out what the supply chain will look like in 2020 by asking, ‘How might the world change and how might supply chains have to react to such changes?’ It’s the rare company that can project its supply chain even a few years ahead, which makes the relatively long-term perspective of this project all the more invaluable to our corporate partners.”

Given the uncertainty of looking out even several years, how does SC2020 propose to see two decades into the future?

The schematic research design goes something like this: an ‘excellent’ supply chain is one which supports a company’s strategic goals; there are a range of different fundamental principles which can sustain excellent supply chains; and based on the appropriate principles for an organization, specific supply chain operating practices are tailored to fit with each other. At the same time, on a macro level, there are ‘scenarios’ defining the economic context within which the company’s supply chain must succeed (for example, the same practices that worked in an era of cheap energy won’t be appropriate as fuel becomes more expensive).

The task for Lapide and his SC2020 colleagues is thus to identify ‘excellent’ supply chains, determine operational practices, and deduce their underlying principles. Then comes ‘the future’ part of the project, to sketch out a variety of possible global scenarios for the year 2020, which bona fide excellent supply chains will have to be able to handle.

Although SC2020 won’t end up with any kind of ‘one size fits all’ prescriptions, by completion of the study supply chain executives will be armed with principles to enable them to better prepare for the future.

It is this long-range perspective and constant scrutiny that constitutes the essence of the next wave of professionalism. In order to get a first-hand look at how SC2020 is laying the foundation for that professionalism, I recently traveled to M.I.T. to visit Lapide and his colleagues.

Macro factors

Larry Lapide is a cracker-jack smart, fast-talking Brooklyn-born Ph.D. (Wharton, operations research), with a masters in electrical engineering (M.I.T.). In 2004, after several decades of business experience and consulting (lastly at AMR Research where he was VP, Supply Chain Strategies), during which time he was named by one journal as one of the four top thought leaders in the supply chain area, he joined the SC2020 project.

“What we think we have here is one of the first times researchers are looking underneath the hood of the supply chain to ask, ‘What really makes things work?’ instead of saying, ‘Company X’ has great growth and great profit so it must exemplify supply chain excellence.’”

One of the key points he recurrently returns to is that financial performance itself doesn’t necessarily mean supply chain excellence (“there are companies that live off their brands with ineffective supply chains”) nor do lackluster results automatically indict the supply chain (“Amazon built an excellent supply chain, even though they don’t necessarily make money”).

The first phase of research, completed in 2005, identified the supply chain leaders in a broad range of industries. Unlike much other research, which would have stopped at this point (and posited best practices based on these companies), SC2020 proceed from here to the evolving business strategies, operating models, practices and principles helping to drive improved performance. This was by way of prelude to identifying the principles by which the supply chain in such companies is aligned to corporate objectives.

Instead of drilling down from external validations (using such indicators as ROI or revenue growth), Lapide and colleagues have gathered voluminous case histories from which to identify supply chain patterns. Twenty-five quantitative studies have been conducted correlating supply chain management to company performance (published as “Linking Supply Chain Practices to Operational and Financial Performance,” Ting Shen, 2005). A particularly significant theme that surfaced from this work was the finding that customer-facing performance measures proved to be more influential in correlating with supply chain success than expected, internal efficiency measures proved less important than expected. Qualitative studies were also conducted (21 case studies, 9 industries).

From this first phase of research, various characteristics of effective supply chains were identified:

• Supports, enhances and is an integral part of a company’s competitive business strategy;
• Leverages a distinctive operating model to sustain competitiveness;
• Operates well against a balanced set of operational performance objectives which include efficiency (labor productivity and supply chain costs), asset utilization (factory utilization, inventory turns, cash-to-cash cycles) and customer response (order cycle time, perfect order fulfillment, quality, speed to market); and
• Focuses on a few business practices that reinforce each other to support the operating model and best achieve operational objectives

Supply chain positioning

If there’s a single compelling insight driving this project forward, it’s the certainty that there’s no single ‘one right way’ to run a supply chain.’ The best practices institutionalized in the first decade of ‘supply chain consciousness’ can best be understood in retrospect as less about specific action agendas and more about integrating functions within a company and, subsequently, integrating companies with other companies.

While all supply chains manage variability through adjustments in the same three categories of time, capacity, and inventory, not all come up with the same equation. “Specific supply chain practices make sense because of the way a particular company is positioned,” insists Lapide. “Not because they embody some universal truth.”

He cites Wal-Mart as an example. “They really do want to be ‘Everyday Low Price’ and to do that, you have to be very efficient in asset utilization. That’s what your supply chain has to do. You carry only a few SKUs in a product line because that’s how you get volume. You sell the stuff you know how to sell already because you can provide very efficient system flow. Wal-Mart is a ‘segmentation story.’ Based on the margins of specific goods, they can make them flow differently (with options to skip nodes, cross-dock, and even stock fast-moving goods on store-ready pallets in specialized warehouses).”

Or General Motors. “Their strategy has been to be offer the broadest product line and carry the most models.” He contrasts the frustrations of this approach at GM with Toyota’s success at a different approach. “Their strategy is high quality, low cost and to evolve models over time as it makes sense. Their supply chain goes back to that fundamental proposition, ‘high quality, low cost.’ That means high degrees of collaboration with up-stream suppliers and low inventories (let the supplier carry the cost).”

Or Limited Brands, which works on the supply chain principle of inventory control vs. cycle delay. “The cost of holding goods on a boat for 30 days means you have to shorten the design cycle by 30 days in order to hit the fashion window. The opportunity cost of doing this doesn’t make sense given their business model. Better to get to store as soon as possible.”

Or Dell, whose strategy is ‘demand shaping.’ “Everyday a group of low-level managers get together to look at what’s in the warehouse. If something is in short supply, they’ll put it off the Web site that day. If it’s long, they’ll promote it that day. What they’re doing is basically changing promotions and pricing based on what they have in stock. That’s demand creation shaping activities based upon supply. In effect, they’re supply chain allows them to implement this model (‘In the short run, if I’ve got inventory I can fine tune price and promotion to move it’). They can change everyday on the Web. But IBM couldn’t use this model because it’s sales staff-driven, promotions have to be planned far in advance.”

More macros

When I came to Lapide’s Cambridge, Massachusetts office on a cold rainy morning last fall, the thrust of the project had moved into its next phase, with the focus shifting from ‘strategic first principles’ (“not operationally what you did but the reason why it worked”) to the subjective, speculative area of global economic and political dynamics destined to impact the supply chain.

“The biggest thing that’s going to change supply chains,” explained Lapide with characteristic excitement, “is macro factors.” He proceeded to list some of the ones under consideration:

• Energy and oil (“If the price of oil goes way up, there will likely be less out-sourcing because the cost of transportation will be much more important than the cost of manufacturing. We’ll tend to see more manufacturing closer to where consumption occurs”).
• Shift of economic and military power toward China, India and Russia.
• Pervasive powerful technologies, “The World is Flat” syndrome, where exchange is not between country and country or company and company but rather people to people.
• Demographics, with the developed countries getting older and the developing countries getting younger (“Are we going to have to change our workplaces to handle part-time workers who are a little older?”).
• Trade patterns (“Instead of the global free trade of today, one scenario might be three or four protectionist, closed trading blocs centering around China, Europe, Japan and the United States”).
• Environmental laws (“The industrialized world is going to have to get more green, which will mandate a lot more reverse logistics”).
• Terrorism.

Another major macro will be the social context of how manufacturing and retail is conducted, what might be called Competition/Collaboration Ratio. “Will the business environment continue to be extremely independent or, by 2020, will it be much more open and collaborative? If the latter, excellence will entail that ability to work with other companies to set up supply chains.”

Manufacturing technology itself is another factor of huge import. “Take something like nano-technology. Up to now, I make the first prototypes in the United States, then do mass manufacturing in local host countries. If I can do nano-manufacturing here in the U.S., then there would be little reason to do mass production overseas since labor costs would make up a much lesser cost component than is currently the case.”

To better understand how these models are being developed, I spoke with Mahender Singh, Research Associate and Project Manager, who is overseeing the scenario component. He was quick to point out that probability of occurrence wasn’t what he was after. These scenarios are not necessarily most likely scenarios, they are those which would most impact the supply chain.

Thus the role of these scenarios is “to force a person’s thinking outside of the domain of evolutionary trends and forecasts.” Rather than project incremental changes along a continuum, the scenarios are meant to call into question the implicit assumptions upon which supply chains are being built.

To gauge those assumptions, a comprehensive examination of published predictions was conducted to identify prevailing conventional wisdom. It projected a world heading into the future along a reasonable stable continuum. Among the points of view shared by the consensus were:

• A highly connected world;
• Open boundaries that allow free global trade;
• Supply chains that are seamlessly and entirely driven by end customers;
• Facilitation by innovative production, communication and information technologies; and
• Full sharing of information along the supply chain.

But what if, come the year 2020, one or two or several of these presumptions prove wrong? What if, say, it turns out that integrated cross-company processes are too difficult to sustain or that companies come to realize that by outsourcing ‘non-core’ functions they lose critical innovation and design competencies?

That’s where Singh’s scenarios come in. “We want to present a completely different picture of the world,” he explains. “One where something unexpectedly good or bad can happen. That way, when you’re strategizing about your supply chain into the future, you don’t lock yourself into a rigid course of action. If something happens wholly different from what you anticipated, you don’t want to say, ‘I wish I had some flexibility built into my supply chain.’”

Flexibility and resilience are going to be fundamental in the next generation of global supply chain strategy. As enterprises become increasingly supply chain-centric in the future, their mantra will have to be like the Boy Scouts—‘Be prepared!’ “Scenarios,” underscores Singh, “force you to think about strategy in a more robust way.”

Indeed, by engineering flexibility into the system from the start, managing change can even go from damage control to proactive positive initiatives. “Scenario planning opens up possibilities not seen otherwise,” explains Singh. “You don’t lock yourself into a range. Instead, you say, ‘I’ll keep an eye open for this particular thing to happen, and if it does, I’ll seize the opportunity.’ Such opportunities won’t come on a regular basis but when they arrive, they change the structure of competition.”

‘Sensors in the ground’

A key professional competency needed by supply chain executives in this coming phase is the ability to respond in a timely manner to impending macro shifts. “If I know something might happen in three to five years,” explains Lapide, “what’s the best thing to be doing now?” To react in advance requires correctly perceiving read warnings. Establishing a way to decipher these signals of change, to read what Lapide calls ‘sensors in the ground,’ correspondingly figures prominently in the SC2020 enterprise.

“What sensors are in the ground to assess that something might be changing?” Lapide asks. “I always say that when China joined the WTO and opened their markets to capitalism, that was a sensor in the ground that should have woken up a lot of companies. And, if tomorrow you wake up and China has decided to pull out of the WTO and get rid of all private property, that will change the supply chain drastically because I don’t believe the U.S. will go off to fight a war for somebody’s plant in China.”

Other sensors on the ground? “Not everybody agrees with me, but I believe the current price of oil is a sensor in the ground that says in 2020 there may not necessarily be a shortage, but companies better start thinking that oil isn’t going to be cheap like it’s been for the past several decades and what that will do to their logistics.”

Was 9/11 a sensor? “Probably. Terrorism is a way of life, what are you going to do about your supply chain given that?”

Phase 3 and beyond

Upon completion of the macro scenarios, which is expected by year’s end, the next stage in SC2020 is drilling down to the supply chain itself. Based on respective historical macros, scenarios specific to the supply chain will be developed.

Finally, and perhaps most importantly in terms of the professionalization of the supply chain, will be recommendations for corporate action. Based on the set of future scenarios and the characteristics of what it will take to be successful under each one, recommendations will be derived to help corporate organizations prepare for 2020. Since it is highly unlikely that any one future scenario will come to pass, these recommendations will need to include risk management strategies like the implementation of flexible supply chains that can adapt as strategic sensors or signposts help detect what the future might hold.

“Developing an excellent supply chain takes years of work and great discipline,” Lapide has written in the Harvard Business Review Supply Chain Strategy newsletter. “Enthusiastic supply chain managers are constantly on the prowl for the next best practice, but the real test is whether the practice truly fits the business strategy and reinforces it. By constantly keeping an eye on the strategies needed to succeed in the long run, executives can make their supply chains potent tools.” WT