“Gentlemen, the officer who doesn’t know his communications and supply, as well as his tactics, is totally useless.”
– Gen. George S. Patton
The military focus on logistics and supply chain management dates back to ancient times. Sun Tzu wrote that the longer the distance and the larger the forces, the higher the cost. Von Clausewitz argued that denial of supply cripples campaigns. Eisenhower said wars are won or lost primarily because of the supply chain.
What about business? Can the supply chain make or break a business?
Many great supply chains have turned solid businesses into huge successes. Likewise, great products and companies have often fallen because their supply chains failed. While the idea of business-as-battlefield is perhaps a bit melodramatic, the game of business in manufacturing, wholesale, or retail is won or lost primarily on the strength of the supply chain.
I would go as far as to say that the world of finance and information relies on a great supply chain. Consider the SEC inquiries into the high frequency and speed of trading among brokers on Wall Street. The survival of these trading houses depends on their ability to make trades as quickly as possible and as often as possible. The physical placement of their computers in the right location, connected to the right part of the network, provides these firms a logistical advantage. Similar challenges are faced by intelligence organizations, which have to meet a high demand for information that answers questions relevant to national security. If you don't have your communications and supply as tight as your tactics and strategy, you are screwed.
If we can agree that an enterprise’s supply chain is vital, then it should be simple to agree that the goals of the supply chain must fully align with the goals of the business.
What is the goal of a supply chain? To determine the goal of the supply chain, we must identify the goal of the business it supports.
If you think that the answer to my question is obvious, then you have not seen as many confused companies and business leaders as I have. Many businesses wander in the wilderness with vague goals. While some will argue that the goal of a specific business enterprise is not generic, that it must be custom-built for the business, I disagree. I believe that all businesses share the same fundamental goal — to make money. If a business does not make money, it dies. Before any of the "Do No Evil" or "Create Cool Things" or "Make the World a Better Place" can happen, the enterprise must make money.
Let’s construct a superior business goal. It will be fun, I promise.
I hold two fundamental beliefs about business goals.
First: The owners of a business have the sole right to determine the goal of that enterprise.
There are many reasons why entrepreneurs start businesses. Some want to make piles of money, while others want to change the world. The goal of a closely-held small business or a hugely popular public company like Facebook may be nothing more than the social manifesto of the founder! Still, I think we can agree that the goal of 99 percent of all businesses can be seen from the viewpoint of the owners and investors.
Second: From the viewpoint of investors and owners of a business enterprise, that company’s goal is - Make More Money, Now and Tomorrow
It is that simple!
That goal ensures the survival of the enterprise. That goal repays the debts the enterprise incurs. That goal provides the return the investors seek. That goal supports the payroll of the people employed by the enterprise. That goal generates the revenue to pay the taxes that support the social fabric. That goal ensures that the business can grow and prosper.
By setting make more money, now and in the future as its goal, the enterprise generates the funds to support all the other missions the managers and owners want to pursue. Even non-profit organizations must adhere to this prime directive: make more money, now and in the future.
Isn’t it obvious?
So, what is the classical goal of supply chain management? Let’s look at the classical goals and definitions of supply chain management to see if they are strong enough to deliver on the prime directive: make more money, now and in the future.
The Goal of Supply Chain Management Is to Reduce Organizational Inefficiencies.
What? Oh, I don’t think that works. Let’s look at the classical definition of supply chain management:
Supply chain management is a process-oriented approach that oversees materials, finances, and information as each moves in a process, such as from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies.
Please wake me up! We can thank consultants for coining the term supply chain. Who came up with this definition? It sounds like the product of a committee. Okay, I know I am being harsh. But these are insufficient as goals.
It is not clear exactly how reducing organizational inefficiencies benefits the prime directive. The goal gives me a vague feeling, and I doubt that the reduction of organizational inefficiencies makes more money, now and in the future.
Last week I received a résume from a senior supply chain officer who was looking for a new job. The résume highlighted the officer's many initiatives that had lowered costs by increasing productivity. I was about to dismiss the savings claims until the writer mentioned a staff and labor headcount reduction. Increasing productivity does not make the business more money. There are only two ways a company makes more money from an improvement in productivity; people are removed, or sales increase. Everything else is a fantasy.
Too many managers and leaders forget that the goal is not to lower costs; it is to make more money. Nothing in the officer's resume illustrated how he had helped his company to make more money. Sure, he had cut costs, but he did not talk about how his organization had improved sales. Cost cutting can only go so far, and it has a limited effect on Operating Cash Flow generation. More revenue combined with lower operating costs and a faster turn of working capital makes more money.
Look at the classical definition. You can see a task presented — to watch the flow of stuff, money, and information. What is the objective of the task? It DOES NOT say.
Looking at the classical goal and definition of supply chain management through the lens of Management by Objectives, I declare this definition and goal insufficient.
Call me silly or old-fashioned. Through experience, I have found the best practical thinking about successful management is the seminal work of one of the best students of management, Peter Drucker. This thinking is embodied in his text, The Practice of Management. Let’s study in detail Peter’s thoughts on management by objectives and self-control.
“An effective management must direct the vision and efforts of all managers toward a common goal. It must ensure that the individual manager understands what results are demanded of him. It must ensure that the superior understands what to expect at each of his subordinate managers. It must motivate each manager to maximum efforts in the right direction. And while encouraging high standards of workmanship, it must make them the means to the ends of business performance rather than the ends in themselves."
— The Practice of Management, p. 126
This Is a Clear Directive to Align Goals Throughout an Organization.
Paraphrasing, to be effective:
"By definition, a manager is responsible for the contribution that his component makes to the larger unit above him and eventually to the enterprise. His performance aims upward rather than downward. This means that the goals of each manager's job must be defined by the contribution he has to make to the success of the larger unit of which he is a part. Being a manager demands the assumption of a genuine responsibility. Precisely because his aims should reflect the objective needs of the business, rather than merely what the individual manager wants, he must commit himself to them with a positive act of assent. He must know and understand the ultimate business goals, what is expected of him and why, what he will be measured against and how.”
— The Practice of Management, pp. 128–129
This is a clear description of what managers must include in their goals to build alignment throughout the enterprise.
To be effective:
With these criteria in place, looking through the lens of Management by Objectives, how do you rate the strength of the classical definitions and goals of supply chain management? Do you get a strong connection between the goal of “reducing organizational inefficiencies” and the prime directive to make more money, now and in the future? Does the definition “a process-oriented approach that oversees materials, finances and information” help you clearly understand how you contribute to the prime directive?
If you cannot say, "Yes, the classical goal and definition of supply chain management meets the criteria above," then you must agree that the goal and definition are insufficient to support the prime directive.
So we must fortify the goal.