Supply chain management is a competitive differentiator for many types of businesses, and CEOs who neglect it may be putting their firms in jeopardy. So say Slone, the executive vice president of supply chain at OfficeMax, and 2 of his colleagues at the University of Tennessee. The authors identify key areas where CEOs tin influence their supply chains and show them how to assess the influence they currently exert.
Practiced SCM starts with finding the right people to lead a visitor’s supply chain operation, from the most senior on downward the ranks. CEOs need to participate in hiring a top-notch supply team that volition utilize client-focused metrics and best-do benchmarking to bring most cantankerous-functional alignment and achieve efficiencies, which the CEOs should personally review. Articulating the strategies to reach those goals—including effective use of supply chain technologies—and rewarding the employees, suppliers, and customers who make positive contributions are part and package of SCM success.
Sales and operations planning is an essential component of SCM. A well-devised Southward&OP process tin can eliminate cross-functional disconnects and thereby reduce production complexity and obsolete inventory—two serious threats to the supply chain. This arroyo should also extend to business planning, promotional programs, and customer-contract negotiations, with their inherent supply chain ramifications.
Even the best supply chain planning can exist undermined, however, if its telescopic is just brusque-term. For example, sales strategies that don’t align monthly and quarterly goals with long-term SCM objectives tin can atomic number 82 to end-of-period surges, with potentially plush consequences for your company and its suppliers, partners, and customers. Attention to the supply chain requires attention to the long haul.
The Idea in Cursory
Do you lot know how your company’s supply chain is performing? If not, you lot run a risk alienating customers and suppliers, eroding shareholder value, and losing control of your fixed costs. These are dangerous mistakes, specially in manufacturing, retail, or distribution, where a poorly managed supply chain can put you out of business.
To turn your supply concatenation into a powerful competitive weapon, yous need to use vi key practices, advise Slone, Mentzer, and Dittmann. These include hiring only tiptop-notch supply concatenation professionals, staying electric current on supply chain technologies, and establishing rewards and incentives that encourage employees and vendors to support your supply concatenation goals.
Supply chain direction is a complex, technology-driven discipline that reaches beyond functions, business processes, and corporate boundaries. Main these authors’ recommendations, and you lot deftly handle that complexity, ensuring your supply concatenation delivers as it should.
The Idea in Practice
Slone, Mentzer, and Dittmann suggest these practices for smart supply chain direction:
Pick the right leaders.
Supply concatenation management can’t be competently managed by the uninitiated. Ensure senior supply chain executives have a groundwork in SCM, through formal educational activity, significant experience, or both. Extend this best-and-brightest principle downward to entry-level hiring.
Initiate benchmarking and select metrics.
Conduct external all-time-practice benchmarking on key aspects of supply chain functioning, such as inventory turns, availability of goods, and SKU organization costs. Set goals for metrics based on benchmarking. Define metrics in means that generate useful information; for example, “expert availability” ways orders delivered to customers on time.
Plant rewards encouraging suppliers and employees to support your supply chain goals.
A manufacturer’southward CEO created an almanac million-dollar bonus pool to reward employees who contributed to saving $3 1000000 a year through reform of the company’s supply chain. The first year of the programme, employees’ cooperation netted savings of $3.75 1000000. The company besides gained suppliers’ support for the reforms past sharing, fifty/l, savings owing to suppliers’ efforts.
Keep upward with technology and trends.
Stay current with supply chain technology advances (such as software and devices supporting production planning, inventory management, and warehousing) and process tools (such every bit Vi Sigma) applied to the entire supply chain. Sympathise how your firm is currently using technologies, and ask challenging questions before adopting new tools.
Gene supply concatenation management into concern plans.
Make supply chain considerations core components of operations, sales and marketing planning, as well as contract negotiations with customers and partners. Watch for inconsistencies undermining your strategic aims.
A railroad’due south terminals are evaluated only on how many railcars are moved with each available locomotive. Concluding managers are not encouraged to think strategically about where their high-value orders are. If the railway’s most assisting customers’ materials happen to exist on shorter trains, they sit down. In 1 case, goods shipped past a $100 million client regularly missed commitment because locomotives were diverted to longer trains loaded with marginally profitable goods.
Resist the tyranny of short-term thinking.
Discourage use of deep discounts at quarter’s end to “make the numbers.” Discounts train your supply chain partners to delay ownership until the stop of each quarter. That triggers low sales in the first 2 months of the next quarter, which prompts more discounts. The price to you: overtime during heavy buying, wasted labor during slow months, and higher inventory costs before the side by side “surge.”
Click here for an interactive tool to test your supply chain leadership potential.
A supply chain executive walked the long hallway to his CEO’due south office ane afternoon, rapidly marshaling the arguments he would apply to advocate for a global sales and operations planning, or Due south&OP, process. The goal: Convince the CEO that S&OP is indispensable to creating a world-class global supply chain, which in turn would become a major competitive advantage for the company. Information technology seemed like a straightforward exercise, and the supply chain executive was prepared for any questions or challenges the CEO might throw at him. Only as he neared the boss’southward office, questions of his ain leaped to mind: “Why practise I have to sell this plan? Why is the CEO not demanding it from me? I ought to be explaining why we’re not moving faster rather than justifying S&OP in the kickoff place!”
The respond to the supply concatenation executive’south question is a surprisingly common one: He was non being pushed to motility faster because his CEO didn’t appreciate the business-critical nature of the supply concatenation operation. This lack of awareness was most incomprehensible to the executive—however there information technology was. (Perhaps, he thought, it was a failing of his own skills as a leader and advocate.) He knew, of grade, that many worthy priorities compete for the CEO’s attention and that non all of them manage to gain it. Still, in an industry where supply chain excellence is decisively important for operational efficiency, working-upper-case letter direction, and ultimately the bottom line, a CEO ought to be fully engaged in this function of the business concern. Naturally, in some industries, supply chain excellence doesn’t matter nearly equally much. “But this isn’t one of them,” the executive thought.
Every chat with the dominate has the potential to exist a turning bespeak, to produce a long-awaited eureka moment. And so, armed with the rich and persuasive vocabulary of concern opportunity, the supply chain executive proceeded into the CEO’s office, ready to brand his case.
Nosotros have a case to make as well. In this commodity, we advise CEOs not to go unwitting weak links in their companies’ own supply concatenation strategies. The costs of neglecting important matters of supply chain direction are dissentious to any type of business for which SCM is potentially a competitive differentiator (most notably, manufacturing, retail, and distribution). CEOs should get involved.
We take divided the supply chain domain into seven central areas where CEOs can exert either a positive or a negative influence. Each area is illuminated with existent-world examples, taken largely from our confidential conversations with CEOs, supply chain executives, and other business organization leaders. Nosotros besides illustrate the increase in return on avails that a CEO-led reform of the supply concatenation activity tin yield (see the exhibit “The Supply Chain Value Chain”). Finally, we nowadays a cocky-evaluation tool, encompassing the seven primal areas, that CEOs can use to assess their level of engagement in and agreement of SCM bug.
Picking the Right Leaders
A CEO would never appoint a person with little or no manufacturing background to get the senior leader responsible for manufacturing. Nor would on-the-job grooming always exist appropriate for the head of sales or finance. Yet, nosotros know of several big companies where the senior supply chain person came into that role with no supply concatenation background whatever.
Nosotros conducted an informal poll of 27 supply chain executives working at large manufacturers and retailers, and found that five had majored in supply chain direction as undergraduates, four others had earned MBAs in the field, and five more had taken SCM executive development courses. The other xiii supply chain executives had no training or feel in the discipline before they took on their assignments.
What explains this misguided trend? We believe that many CEOs fail to realize that supply chain has become such a complicated set of activities—touching many business functions and processes, reaching beyond the enterprise, powered by fast-irresolute technologies, and presenting a range of strategic opportunities—that it can’t be competently managed by the uninitiated, no matter how generally capable they might exist. Senior supply chain executives need to have a background in SCM: formal education, significant prior feel, or both.
Consider the following unexceptional analogy of the risks when CEOs don’t recognize this need. At a major durable goods company, i of the very talented rising stars moved from marketing to pb the supply concatenation function. He was beingness groomed for a much larger role in the corporation, and this assignment was deemed to adjust his groundwork well. Unfortunately, soon after he took over, an abrupt swing in demand, coupled with a major problem in introducing a few new products, triggered a crisis that put the supply of an entire product line at chance. An experienced supply chain person would have seen the trouble immediately and reacted aggressively. In this instance, however, no appropriate activeness was taken for virtually ii months—far besides long to avert a major disruption in supply for the firm’s customers. The bear on on performance was astringent, and the new leader of the office constitute himself climbing a nearly-vertical learning bend in the midst of a major crisis—conspicuously a prescription for disaster. Inside a yr the rising star, at present tarnished, was moved to another area. The CEO learned from this feel and brought in a seasoned SCM good from outside the company to set matters right. Within some other year’s time, the supply concatenation area had been turned effectually.
Only a CEO who is upwards to appointment on supply chain practices and trends can properly evaluate a supply chain executive’s functioning. Nosotros know of CEOs who, defective this insight, have retained executives whose noesis is years out of appointment. Every bit long as SCM remains a black box to the CEO, so likewise will a supply chain leader’s possible deficiencies.
As long as supply chain management remains a black box to the CEO, and so also volition a supply chain leader’s possible deficiencies.
Aware CEOs should insist that only the best supply chain professionals be hired—and should review new hires, not simply at senior levels but possibly at lower ranks, where top-notch supply concatenation talent is also needed. Companies that understand this reality benefit from information technology. For example, when I was at Whirlpool, we had the opportunity to hire xiii new people for its supply chain organization. I set out to recruit the brightest supply concatenation MBAs from leading schools such every bit the University of Tennessee and Michigan Land (read the details in “Leading a Supply Chain Turnaround,” HBR October 2004). Leaders at Whirlpool viewed this cohort as its supply chain future—a truthful renaissance of talent.
The CEO of i textile manufacturer extends this all-time-and-brightest principle downward to entry-level hiring: “Supply chain direction philosophy so permeates our organization that…if nosotros tin just get quality supply chain management MBAs to bring together our company, they’ll move rapidly through the determination-making hierarchy and never be tempted to leave us.” This company regularly recruits at major supply concatenation direction schools—most productively during recessions, when other companies cutting back on hiring and top talent can exist recruited more easily.
Initiating Benchmarking and Devising Metrics
The almost effective supply chains achieve the greatest possible availability of goods at optimal levels of inventory, transportation, and warehousing dollars. Specifying goals for comeback in these areas requires knowing where you stand up now. A CEO ought to be able to listing and explain the factors affecting availability, working capital, and cost; she should push the organisation to do supply concatenation benchmarking and best-practice analysis—and should review the results personally.
However, many firms fail to conduct external best-exercise benchmarking. For case, a large pharmaceutical company was comfortable with inventory turns of almost 2.0—fifty-fifty though its competitors were doing much better, freeing hundreds of millions of dollars in cash by aggressively managing inventory and overall working capital. Other firms develop and report unrevealing, internally focused supply chain metrics that may really conceal problems by neglecting crucial data. For example, ane construction materials manufacturer reported “good availability” if inventory to fulfill a new order was simply somewhere in the organization, whether or not the order was really delivered to the customer on time. OfficeMax used to report in-stocks at an SKU, or visitor-broad, level—not at the store level. When I arrived as the new supply concatenation executive, nosotros gradually instituted a process of measuring and reporting store in-stocks the way the customer experiences them: daily and by specific shop location.
Many firms measure just what they tin can assess hands. Few of those nosotros piece of work with know the total arrangement cost of the SKUs they carry or take the trouble to measure the truthful cost of obsolete inventory. Likewise, we know of few companies that put inventory carrying toll on internal sales financial statements. Even those that include this measure out typically count only interest cost, ignoring the other inventory costs of obsolescence, of warehousing, and—most serious of all—of draining investment capital away from other, more assisting projects.
When metrics are accurate and functionally aligned, magic tin happen. Whirlpool, for example, put in place a set up of metrics to rail the effectiveness of SCM in reducing working capital. As a result, the visitor dramatically reduced working-capital letter DSO (days sales outstanding) and at present is a leader in the appliance industry on this metric.
How should a CEO get involved in a program of metrics? First, ensure that whatsoever tool purporting to evaluate customer service assesses the company’s performance from the client’s viewpoint. Then, make sure the metric’south effectiveness is confirmed direct with several of the company’s best customers. True cost to serve, determined on an activity basis, should exist part of the CEO’s metrics dashboard. Total avails employed, including both physical and working capital, should exist measured and analyzed in relation to supply chain operation. Furthermore, the CEO should run across testify that goals are based on benchmarks of all-time practices and that they are shared cross-functionally.
Setting Incentives for Supportive Behavior
Armed with the confidence that all-time-practise benchmarks take been used to gear up advisable goals and to effectively measure the progress toward them, CEOs should likewise establish advantage and incentive programs to encourage employees to behave in ways that benefit the overall firm, non merely their own functions. At one retail business concern whose supply concatenation executive spoke with the states, the purchasing, logistics, and merchandising managers work in cross-functional teams and are measured—and rewarded—co-ordinate to supply chain metrics that assess purchasing costs, logistics costs of getting the product to the shop (besides called “landed costs”), and the selling price in the store. Not surprisingly, these cross-functional teams drive supply chain performance to earn their bonuses.
The CEO, and sole possessor, of a grocery products manufacturer saw fifty-fifty more than dramatic results when he led the organization through an extensive analysis of its supply concatenation processes. The result was an aggressive strategic plan to take advantage of SCM throughout the firm and too with its partners. The overall goal—to save the visitor an estimated $iii million a twelvemonth—directly targeted the bottom line. The only challenges to the strategic plan were requirements for meaning collaboration with six key suppliers and three cardinal retailers, and for major changes in how the manufacturer managed various aspects of its internal operations. The strategic-planning process culminated when the CEO met with the executive team to review the plan’s rollout over a 2-year horizon. In the center of this meeting, he paused to observe, “You’re talking about putting $3 million a year in my pocket, and it’s only occurred to me that I’m the just one in the room excited about information technology.” On the spot, he pledged to create a special annual million-dollar bonus puddle above and across the company’s normal bonus system. Any employee who could demonstrate having played a meaning role in the success of the supply chain plan would go a portion of the puddle. The CEO defined success every bit achieving the $3 million bottom-line comeback.
“Any yr in which that happens, the special bonus pool exists,” he said. He and so instructed his three direct reports to devise a metric-and-compensation organisation (which he would review) for measuring individuals’ contributions to the success of the plan and to decide how bonuses should exist paid out. Suddenly, everyone in the company became an SCM enthusiast.
The owner of this company was a very clever human being. How exercise you brand certain you can articulate a $3 1000000 hurdle? You aim far above information technology. In the first year of implementing the supply chain reform programme and its special bonus, the bottom line improved non by $3 million—but $3.75 million. Employees were then intent on achieving the $3 million goal that they actually overachieved, in effect paying for three-fourths of their own bonuses.
Equally for those six key suppliers, the CEO of the grocery products manufacturer met personally with the CEOs of each, explained the strategy thoroughly, and pledged that for any year in which a supplier fully cooperated and the improvement goal was achieved, the company would not press the supplier for cost cuts. Moreover, any savings to the firm directly attributable to the supplier’s efforts would exist shared l/50. In essence, the suppliers were now being paid to help the company make its supply chain strategy work. Similar arrangements were made with the retailers. As a upshot, the manufacturer now had a supply concatenation whose six fundamental suppliers and 3 cardinal retailers all worked in concert—and were rewarded for doing so—to make the strategic plan succeed. Not surprisingly, it did.
Keeping Up with Supply Chain Technologies and Trends
Many of the most-promising supply concatenation opportunities are made possible by sophisticated technologies that a CEO should take the time to empathise. Supply bondage today are often densely circuitous. They entail cantankerous-functional participation (and evangelize cross-functional benefits), and they therefore deeply permeate the firm. Every bit we have simply seen, supply bondage are well-nigh successful when they inspire the cooperation of external partners. Major new software advances take enabled companies to optimize distribution and production planning, inventory management, warehousing, and transportation systems. Assorted new technologies—RFID (radio frequency identification) chips and systems, used in always-more innovative means; avant-garde bar codes; and other motorcar-readable coding schemes—have emerged to brand SCM more than sophisticated. Moreover, powerful procedure tools such as Lean and Six Sigma are now being applied to the unabridged supply chain. Still, the warehouses of many large companies still operate with 20-year-old applied science, producing incomplete and unintegrated information flows and resulting in higher costs, higher inventory, impaired supplier relations, and declining customer service. All of this puts a visitor in jeopardy.
A CEO who understands new technologies can play the important devil’due south advocate role by challenging the business case for technology adoption. Well-nigh firms that take bought leading-edge supply concatenation systems admit that they use only a fraction of the software’s functionality and an even smaller fraction of the promised capability. An attentive CEO can lend dominance to the change-management process, helping to foster user buy-in and making certain that proper vendor support, adequate training, and other resources are in place.
Moreover, CEOs who fully appreciate the challenges of deploying complex and costly systems tin help their companies avert classic missteps. The CEO of an industrial equipment manufacturer admitted that her company had fallen into one such classic trap: “We spent $eighteen million getting an ERP package up and running in our company, and all we did was bring more modern engineering to touch supply chain processes that are 40 years out of date. I expected this engineering science to bring supply chain costs downwards dramatically, and zero has changed. My mistake was expecting technology to solve a process challenge.” She is at present leading the company through a major effort to understand existing processes, identify opportunities to improve them, and adapt the new organization to support the reengineered supply chain processes.
A large global chemic visitor uses its S&OP software every bit a communications hub for anybody in the business and for selected supply concatenation partners. The system allows for real-time access to demand plans, inventory levels, and the transportation status of various different deliveries—data that in plow can be coordinated with demands from supply chain customers and entering materials from supply chain providers. Anyone in the supply chain tin can accept read-merely access to these existent-time data, just only selected individuals accept the rights to brand changes to forecasts, plans, and deliveries. This system, which sits atop the supply concatenation processes adult jointly by the company and its supply concatenation partners, is fully exploited as a competitive tool to deliver product faster and cheaper than rivals’ supply chains do. In essence, sharing information with supply chain partners creates quantum improvements in performance.
For the company to excel in the technology area, the CEO should be briefed regularly nearly and take loftier-level cognition of supply chain technologies. She should also demonstrate a thorough understanding of how the firm is applying these technologies and exist capable of asking challenging questions—and getting the right answers—earlier whatever new technology is specified, purchased, and rolled out.
Eliminating Cross-Functional Crossed Wires
Can y’all explain the role of each of your company’south functions in driving results in cross-functional areas? At a big manufacturer of consumer durables, the CEO tasked the VP of marketing with reducing SKUs by 20%. Still, the VP believed that other objectives—growing marketplace share, for case—were more of import than the SKU goal, so he made no progress toward achieving it. As he put it, “The CEO was not really serious when he said that. If I keep growing market share, he won’t bother me about SKU count.” Even though the CEO believed strongly in SKU reduction (information technology had paid big dividends at his former company), he did non know how to make it an equally urgent objective for the VP of marketing. In part, this was because the CEO didn’t understand supply chain operations well enough to know
it had paid off for his former company. That deficit compromised his power to persuade the marketing VP of his seriousness.
Inventory is some other cantankerous-functional sinkhole. We have seen many cases where the sales unit will non apply markdowns to move obsolete inventory considering the CEO has allowed sales metrics to exclude the costs of carrying that inventory. The firm and so pays the conveying costs and—sometimes years later on—the cost of the inevitable markdown.
To avoid such needless inefficiencies, the CEO should exist personally involved in developing a mature Due south&OP process. SKU complication should exist tracked and decreasing, every bit should obsolete inventory. The operations and supply concatenation office should be held equally answerable with the sales and marketing function for customer service and inventory. The CEO should likewise thoroughly understand—then that he can help to harmonize—the coaction of cross-functional and supply chain priorities.
Calculation Supply Chain Insight to Business Planning
The old maxim that the loss of a horseshoe blast tin lead ultimately to the loss of a kingdom applies to business initiatives when central data is missing from the planning stage. Supply chain considerations (and expertise) should be core components of business planning, including sales and marketing promotions, and of contract negotiations with customers and partners. That’s considering unforeseen disjunctions can undermine the best strategic intentions.
A major Due north American railroad is currently struggling with this concept. Although the CEO has clearly articulated who the railroad’s most assisting customers are, this directive isn’t reflected operationally by private terminal managers, who are measured on how many railcars they move with the available locomotives. This performance metric motivates terminal managers to assign priority status to longer trains, even though that might go out the shipments of the high-value customers languishing for days in the terminal. The concluding managers aren’t thinking near where the high-value orders are. If they happen to be on shorter trains, they sit down; if not, they movement—simple. In one case, goods shipped by a $100 million customer regularly missed delivery deadlines because locomotives were consistently diverted to longer trains loaded with marginally assisting goods that didn’t require expedited shipment but got it nonetheless.
Another visitor’south marketing organisation ran a big promotion while its own factory was in the midst of a major, circuitous tooling changeover and couldn’t provide the needed volume of product. At a 3rd visitor, during pricing negotiations, a large customer was promised that all of its product would be served through the regional warehouse network rather than directly from the factory. This added a $15-per-unit of measurement cost for the company with no concession won from the customer in render. Why? The negotiators, coming from the sales function, didn’t empathise the added supply concatenation costs of the agreement.
CEOs, if fully engaged, need that relevant business concern planning and negotiations anticipate and explicitly accost important supply chain ramifications.
The takeaway bulletin: CEOs, if fully engaged, need that relevant business planning and negotiations conceptualize and explicitly address important supply chain ramifications.
Resisting the Tyranny of Brusk-Term Thinking
Sometimes a about-term focus leads to tactical decisions that conflict with one some other, creating unintended—and sometimes costly—consequences in the supply chain. CEOs should guard, in particular, against allowing quarterly pressures to dictate unprofitable long-term trends.
Consider how unnecessary quarterly variability disrupts the menstruation of goods to the marketplace. In some cases, sluggish sales for virtually of a quarter are capped by an end-of-quarter surge. In others, appurtenances movement briskly for nearly of the quarter simply to slacken in the concluding month. Both phenomena are caused by sales tactics that are misaligned with supply chain–planning objectives. Sometimes the unintended casher is a wholesaler or large retail client; one retailer confessed, “I’m building two new warehouses to have advantage of my supplier’southward end-of-quarter button.”
Take the case of a big manufacturer of consumer products whose quarterly need from many retailers followed a iii-calendar month sales pattern of low, depression, high. In a coming together with the CEO, the head of supply chain pointed out the farthermost costs and supply disruptions created by a quarterly cycle consisting of overcapacity and inventory buildup for two months, followed by rush production and delivery in the third month.
The CEO doubted that anything could be done well-nigh it—afterward all, wasn’t that the natural demand design? Well, not exactly. The CEO learned that the product in question was disposable diapers, and the fluctuations were caused entirely by his pushing the company toward the “urge to surge.” By accepting and managing to the quarterly sales numbers, the CEO was subtly signaling to retailers that when the company was falling short of its quarterly target, it would offer deep price discounts to make the numbers. Thus, retail customers regularly bought a iii-month supply in the third month of each quarter, triggering low sales in the first 2 months of the next quarter, which would cause another disbelieve surge.
As the CEO put it, “This was a real revelation for me. Babies pee at a constant rate, simply our demand was fluctuating wildly. We had trained our retail ‘partners’ to take advantage of us and order only in the third month of each quarter, when nosotros were trying to make our numbers.” The CEO afterward drove the supply chain to offer consistent price and delivery terms each month, saving tens of millions of dollars in supply chain costs. (These costs had consisted of the combined affect of overtime during the surge, downtime and wasted labor during the dull sales months, and college inventory costs in anticipation of the coming surge.) The visitor shared its savings in supply chain costs with the retail partners, effectively netting them ameliorate prices than they had enjoyed nether the former high-cost, urge-to-surge supply chain game.
Another manufacturer of consumer products illustrates a variation on the urge to surge: the urge to concur back. Demand from retail customers followed a quarterly pattern of high, loftier, low. This triggered greater production capacity and expenses in the showtime ii months, then inventory buildup during the third. Predictably, it likewise created operational disruptions for the company’s suppliers. The CEO was at a loss to explicate this quarterly seasonal pattern, which seemed to affect all of the company’s products. Similar diapers, the products were staple items in grocery stores, and there was no logical caption for the strange pattern in consumer purchasing behavior. In fact, analysis showed that almanac demand at the consumer level was adequately stable month to calendar month.
In this case, customers were being forced into ordering illogically past the company’s sales force, whose compensation programme was structured to pay a commission that included a bonus for forecasting accuracy. The sales strength realized that their sales forecasts were used to set quotas. The CEO, whose background was in sales, wanted to motivate “rigor” in arriving at these de facto quotas. Motivation came in the class of commissions that were cut in half for any sales that exceeded the quarterly forecast. As the CEO saw it, this would train salespeople to forecast accurately. If they set the forecast too high, they’d lose the bonus offered for forecasting accuracy; also low, and their commissions on higher sales would be halved.
Human nature existence what information technology is, the salespeople were motivated to aim low and and so terminate selling once they’d striking their cautious marks. Visitor lore had it that the salespeople were bully forecasters. No uncertainty they appeared to exist! The first two months of each quarter, they sold diligently until they striking their quotas, later which they refused to take any further orders from retailers. Why accept orders that would earn them merely half the usual committee and cause them to lose their bonuses?
The perverse incentives also had an impact on customer service and supply chain costs. Customer surveys revealed that retailers’ major complaint about the company was the difficulty (if not the impossibility) of obtaining its products at the stop of a quarter. Consumers cited the inexplicably cyclical lack of product availability. The CEO was, in result, paying his sales forcefulness to disrupt the company’s own supply concatenation and dissatisfy its customers—and all to reach the illusion of forecasting excellence.• • •
At present it’s time to look in the mirror. We have developed a self-evaluation tool to help y’all measure the quality and depth of your involvement in supply chain strategy by assessing the programs yous have—and oasis’t—put in place (see the showroom “Evaluate Your Level of Supply Chain Leadership”).
What should you do if you don’t score well on the evaluation?
- Start by hiring the best supply chain professionals available.
- Go personally involved in cross-functional issues similar S&OP, complexity management, and working-capital management.
- Pb the visitor away from quarter-end disruptions.
- Reward supply concatenation behavior that benefits the entire company.
- Invest personal time in learning about contempo advances, including new technologies, in the supply chain field.
- Use benchmarking and get advice from outside experts.
If you scored well, don’t waste time gloating. Build aggressively on your visitor’due south supply chain strengths, and dedicate yourself to increasing your advantage over the competition.
A version of this article appeared in the September 2007 effect of
Harvard Business organisation Review.