Iron Fists and Supply Chain Utopias: Governance and Visibility

In 2010, at a UK conference on supply chain software, I heard an interesting reply to the often-used call for “greater collaboration” within the supply chain. The reply was from Eddie Capel, at the time the COO and head of products and engineering at Manhattan Associates. Eddie is a person I admire for his clarity of insight into supply chain practices. Eddie said that most organizations don’t really want collaboration, and that the technological barriers to collaborating were broken at least ten years ago. What Eddie suggested was that “compliance” was the real goal, not “collaboration”. Eddie’s view speaks to a shift in many industries towards supply chains anchored by one large, powerful organization that drives all significant initiatives. And what I’ll describe in this post is the way supply chain governance impacts supply chain visibility.

An Interesting Question…

Will supply chain’s naturally orientate to having one or two “anchor” organizations who dominate the other members in terms of power to set strategy, innovation, quality standards, etc. Or, will organizations naturally orientate towards equal-sized partners in their supply chains? There are additional potential arrangements, but the question generally asks “what is the most stable, probable, and ultimately successful arrangement of relative organizational power within a supply chain?” And, what effect would the various arrangements have on supply chain visibility?

We know what the king wants to see…

To begin, consider supply chains anchored to a single, powerful organization. In these situations supply chain visibility is largely dictated by the singular needs of the anchor organization. A classic example is the retailer (say, Wal-Mart) who sets up visibility in to work in progress (also called WIP) events. The visibility strategy is orientated towards sensing environments previously unknown to the retailer. Is there a parallel strategy for the producer to see the product development cycle within Wal-Mart? Probably not. In fact, that kind of visibility is very, very rare outside of CPFR initiatives (discussed below). The point here is that supply chain visibility is largely synonymous with an extension of single organizational visibility.

The socialist dream…

Now consider supply chains lacking a singular leader, an anchor with more power, vision, innovation, or leverage than the rest. I personally haven’t seen many of these supply chains, but they can exist. Financial services supply chains may be an example, where the majority of supply chain is filled with negotiated partnerships between entities with about the same power. Probably the best example of these kinds of supply chains are those that employ Collaborate Planning Forecast and Replenish (CPFR) strategies. Proctor and Gamble, Lowes, and Wal-Mart engage in CPFR initiatives when they deal with a long-term partner of similar size or power. In such a supply chain arrangement, two or more partners are in effect running joint ventures, which may include other business activities such as marketing or store operations. But, from a supply chain perspective, what is most interesting about CPFR arrangements is their integrated supply chains. Part of the integration of the supply chain is the development of joint visibility, which is unique compared to the kind of visibility initiatives launched in single-entity anchored supply chains as discussed above.

The Information Economy

One point I come back to often in defining a supply chain is the fact that it must cover multiple organizations, with value actually injected only once by the final consumer. Short of expanding the final customer count or revenue, the supply chain is a zero-sum game. Partially because of the zero-sum nature, and partially because supply chains involve repeated negotiations between the same parties, the supply chain is also an information economy. Supply chain information has a financial value, is disproportionately distributed, and disproportionately created. Visibility, for many supply chains, is about capturing value within the supply chain’s information economy. To be more specific, visibility is often used to enhance one’s position against other supply chain members in order to extract greater value from the fixed-amount entering the supply chain via the final customer.  This information economy is significantly affected by the supply chain governance. Supply chains anchored to one powerful organizations are definitely more prone to see visibility initiatives which increase information asymmetry. An increase in asymmetry is likely to see stagnant or decreasing overall supply chain effectiveness, even if it creates localized benefits for some supply chain members. Supply chains characterized by partnerships between equally powerful organizations are more likely to find value in visibility initiatives that decrease information asymmetry, and thus increase overall effectiveness while disadvantaging each individual party during negotiations.

Information isn’t always clean, of course. So it’s also worth noting that in anchored supply chains, informational distortions have an uneven impact on participants. This is because participants have differing levels of integration of the visibility intelligence into business decisions. The anchor organization, more than other participants, will see strong correlations between data quality and performance. This lies at the heart of why supply chain visibility projects often fail. In anchored supply chains there is often little impact to peripheral players when visibility fails, but massive impact to the anchor or central organizations. These incentives, combined with the unspoken mission that the anchor organization has to use visibility to improve their portion of the limited value to be shared among all supply chain participants, have proven effective at preventing initiative success over and over again.

Supply Chain as Game-Space

I’m not sure if more illustration is necessary, but here is a way to picture the information economy within a supply chain. Imagine three people playing poker, and this set of three people represent a two-organization supply chain and their single customer. In this game of poker the players play an ante fee (say one dollar), are dealt their cards, and then make a bet of another $2 or fold. The total value in the game is limited, so when one person wins, the others lose. Since two of the players form a supply-chain, their combined wealth is a measure of supply chain effectiveness. If they all start with the same amount of money, the supply chain partners have, combined, 66% of the total value available.

Now start thinking about the information economy and visibility. Imagine one of the supply chain partners is powerful enough to convince the other to show them their cards. Maybe the weaker partner won’t don’t do it every hand, but once in a while or maybe just a single card out of five for every hand. What happens in the game?

  • Information asymmetry increases between supply chain members
  • The customer’s odds of winning against the supply chain team (as a group) remains the same (seeing the cards doesn’t change them), which means no additional value is being created for the supply chain team in total.
  • The powerful supply chain member will win more hands from the weaker supply chain member, as a direct result of the information asymmetry
  • Overall supply chain performance is stagnant, while the performance of the powerful player increases at the detriment of the weaker player
  • Bluffing or lying on the part of the weaker player is a major liability for the more powerful supply chain member, but not detrimental to overall supply chain performance.

Okay, so what happens if the same game is played again and the two supply chain members share equal amounts of information? For example, what if every time one team member shows their cards it is reciprocated?  In this situation the two supply chain members will still not win more often against the customer, but will cut out all “waste” of winning and losing to each other. So, in contrast to the first situation we can expect that…

  • Information asymmetry decreases between the supply chain members
  • Bluffing or lying on the part of either supply chain member is detrimental to the other partner and to the overall supply chain performance
  • Fully equitable split of the winnings from the customer

Summarizing

Here are the key points I hope readers can take from this post, and use in their actual decision making around supply chain management:

  • There is a trend for supply chains to anchor to a single, powerful supply participant
  • For these “anchored” supply chains, the term “collaboration” is probably inappropriate as a major supply chain organizing principle. Rather, it should be replaced with “compliance”.
  • The supply chain governance structure significantly effects how visibility initiatives are targeted, executed, and the degree of risk they have to fail.
  • Anchored supply chains are likely to see increasing information asymmetry and stagnant or declining supply chain effectiveness as a result of supply chain visibility initiatives
  • Supply chain’s with a high degree of member parity will likely see decreasing or stable information asymmetry and increasing supply chain effectiveness as a result of supply chain visibility initiatives
  • The honesty or compliance incentives are not the same in anchored vs. non-anchored supply chains.
  • The impacts of poor data quality are asymmetric in anchored supply chains. This is a major risk factor that merits review by leaders considering visibility initiatives in those supply chains.

 

Leave a Reply