Internal supply chain alignment is just as important as cooperation with external partners for gaining competitive success and satisfied customers. From procurement to sales and operations planning (S&OP), each functional area is critical to success. But this success hinges on the level of collaboration between the respective functions.
The aim of supply chain management is for all functions, including external stakeholders, to work together to achieve a common end: delivering products as efficiently as possible to customers anywhere, anytime. Dispersed teams across an organisation can’t ignore the fact that they need each other, and their individual actions and decisions can have an impact (positive or negative) on the operation of the supply chain.
Similar principles apply within the manufacturing organisation, where functions and departments are the key players. In this instance, procurement, for example, cannot focus only on price, purchase price variance or reducing excess inventory. These objectives must be secondary to meeting the needs of the production floor. Similarly, production’s primary focus should be meeting the master schedule, which is tied directly to sales, customers and the demand plan through sales and operations planning.
You could argue that internal supply chain alignment should, theoretically, be easier to achieve because internal resources are within the span of control of an organisation’s leadership. Why, then, is it so difficult for supply chain functions to improve alignment and performance despite huge effort and investment?
A possible answer to this vexing question could be the fact, that, while alignment with external resources can be specified in the terms of the contractual relationship, internal alignment may be hampered by legacy incentives or silo thinking that aren’t tied to supply chain priorities. As a result, improvement efforts fall well short of expectations and, in some instances, may even result in conflict between functions.
Changing this kind of internal ethos can be rather challenging. That’s why the most critical component in establishing internal supply chain alignment is to make that alignment an integral part of the operational model, business strategy and culture. Read the article Overcoming the five hurdles to business excellence for some good advice in this regard.
Three practices to optimise alignment
The following three practices – which most likely already exist in your organisation to some extent – will help bolster your alignment efforts:
1. Introduce or refine Enterprise Resource Planning (ERP)
One of the most significant barriers to internal alignment is inadequate IT infrastructure, with systems that either do not talk to one another or are poorly managed.
IT systems can enable three interrelated critical success factors:
- Centralised information – IT investments can connect different systems and provide a holistic picture of risk and opportunity across the organisation’s end-to-end supply chain
- Measurement of key performance indicators (KPIs) – performance evaluation at any level requires a defined set of key indicators and metrics
- Actionable reports – IT systems can analyse useful information and present it in actionable formats
The fundamental purpose of an ERP system is to gather, store and distribute information that defines your business. Through the distribution of information, ERP helps to coordinate the activities of the various business functions, such as inventory, production and procurement, which again has one single objective: serving the customer in the most effective and efficient way.
Everything, in fact, starts with the customer. The demand plan anticipates what the customer will want in the foreseeable future and forms the main input to S&OP, where a production plan is developed to best meet that demand while making the best use of available resources. The production plan is then deconstructed into a more detailed master production schedule (MPS), which drives the complete material requirements plan. This plan comprises a list of specific tasks and priorities for the manufacturing, procurement and supporting functions.
Find out how a leading plastics manufacturer combined S&OP with its ERP system to significantly improve customer satisfaction.
2. Initiate a change management programme
The focus of change management is on the wider impact of change, particularly on people and how they, as individuals and teams, move from the current situation to the new one. The change in question could range from a simple process change, to major organisational restructuring involving many employees. What’s important is that all stakeholders need to be involved from the outset. For example, the individual functions within the organisation must be focused and incentivised to deliver to the alignment plan. To do that, leadership must:
- Continually focus on the S&OP plan and master schedule when creating and communicating directions and expectations to employees
- Develop and implement individual incentives for employees to respect the plan-driven priorities and dates
- Establish the metrics against which employees are judged that support the plan
- Play down traditional incentives, for example, bonuses tied to performance measurements such as efficiency, utilisation and volume-based measures
Management will probably still want to measure and monitor things like efficiency and production numbers because entrenched management structures and accounting processes will likely demand that they remain in place. But this kind of internally focused measurement is not related to supply chain needs, and must not be allowed to take precedence over the supply chain-driven measurements and incentives.
3. Align incentives end to end
Internal performance evaluations and bonus structures need to match the aligned metrics that have been set. Remember that people react to how they are measured. If you pay someone a bonus for, say, producing more parts per shift, they’ll be incentivised to ignore the scheduled priorities developed in the aligned plan. They’ll also cherry-pick the jobs that are most likely to result in better production reports and, therefore, a higher bonus.
To develop and maintain internal alignment, employees must be bound to supply chain priorities through incentives that are linked to S&OP. Build a robust S&OP process and drive your sales and marketing teams with objectives that aren’t at odds with your supply chain objectives. A common failure is when sales and marketing have no incentive to control inventory. They’ll inflate the forecast instead to guarantee availability which, more often than not, results in excess inventory.
Strategically aligned supply chains put your organisation in a much better position to win in today’s challenging business environment. But plans don’t execute themselves. It’s up to the leadership team to introduce appropriate actions, systems and incentives to foster collaboration and keep functional teams focused on achieving the common goal: customer satisfaction.
|The TRACC framework helps organisations build standardised and integrated good practice and performance capacity across their Plan, Source, Make and Deliver functions. Simultaneously it accelerates their collaboration and alignment capacity to build world class end-to-end value chains, enabling the organisation itself to become the ultimate source of sustainable competitive advantage.|