By Robeel Haq
Al Tayer’s Brian Shepherd shares his experience of creating and maintaining high performance supply chains in the Middle East.
Inside Edge|~|insideedge2.jpg|~|Brian Shepherd (Al Tayer)|~|I recently read an article where ‘supply chain’ was defined as ‘product lifecycle processes supporting physical information, financial, and knowledge flows for moving products and services from suppliers to end users.’
Two points in this definition immediately crossed my mind. Firstly, it was the first time I had seen a definition of supply chain that actually mentioned product lifecycle. However, this is extremely important when considering how to achieve supply chain excellence.
The second point was the mention of end users. As a test, I asked a number of people involved in various functions within a retail supply chain to define what the phrase ‘supply chain’ meant to them. The buyer saw it as the process from when an order is placed to delivery to the warehouse. The marketing person saw it as the process from the manufacturer to the final customer. The warehouse manager saw it as the process from the freight forwarder through the warehouse to the store, while the salesperson just saw it as the process from the warehouse to the store. Finally the accountant had no real definition except to say ‘it depends how much it costs.’
This story clearly illustrates what various players within a supply chain immediately recognised as being important in their specific line of responsibility. There is nothing wrong with this, except that only one of the five actually mentioned the customer. Most people think of a supply chain purely in terms of procurement and logistics, but it goes much deeper than that. Indeed, the excellence of a supply chain starts and ends with the customer. After all, if the customer did not exist, there would not be a supply chain.
Alongside end users our initial definition also mentioned product lifecycle. This is also vital, as to demonstrate excellence in the performance of a supply chain, it is essential that the lifecycle refers to both the initial sale, as well the aftermarket lifecycle. This is key, as creating a perfect supply chain for a motor vehicle, for instance, without considering the efficiency of the supply chain for spare parts would be very inconvenient for the customer. Again, we return to the initial contention that the supply chain starts and end with the customer.
Of course, it should be remembered that not all supply chains follow the same practices and mindsets. However, while I am certainly not an expert on all of the various supply chains that exist, I will offer some guidelines, strategies and possible solutions based on my experience in the retail business, and in the Middle East in particular, that may apply across the board.
WHY SUPPLY CHAINS FAIL
I believe that it is necessary to examine the basic reasons why supply chains fail and to then look for how to overcome these failures. This list is by no means conclusive, but hopefully it does address some of the prime problem areas.
1) Strategy: How many companies have actually set out and documented a supply chain strategy and shared this with their suppliers and, possibly, their customers. Most logistics managers would probably claim that their company does have a strategy of sorts, but have all the players bought into the strategy? It is a fact of business today in the Middle East — and in Dubai, in particular —that the pace of business does not allow people to work to a strategic plan. In other words, everyone has their own agenda.
Putting it very plainly, the supply chain philosophy used in the Middle East can be summed up in one word ‘bukra’ or ‘tomorrow.’ However, is this just an excuse to justify a case of demand outstripping supply or is this really the case. I, for one, would read it very much as a case of poor planning and follow-up. Instead, a strategic plan needs the four C’s, co-ordination, communication, co-operation and, finally but most importantly, commitment.
2) The supply chain becomes the value chain: Michael Porter of Harvard Business School has alerted managers and strategists to the central importance of competitive relativities in achieving success in the workplace. This is the concept of the value chain. “Competitive advantage cannot be understood by looking at an organisation as a whole,” he says.
“It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product, which creates a basis for differentiation… The value chain disaggregates an organisation into its strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation. An organisation gains competitive advantage by performing these strategically important activities more cheaply and better than its competitors.”
The implication of Porter’s thesis is that an organisation should look at each step of its value chain and assess whether it has a real competitive advantage in that activity. If it does not, the argument goes, then perhaps it should consider outsourcing that activity to a partner that can provide a cost or value advantage. This logic is now widely accepted and it has led to the dramatic upsurge in outsourcing activity that can be witnessed in almost every industry. However, outsourcing has made supply chains more complex and hence made the need for effective supply chain management even more pressing.
It must be recognised that the concept of supply chain management is in fact no more than an extension of the logic of logistics. Logistics management is primarily concerned with the optimisation of flows within an organisation, while supply chain management recognises that integration by itself is not enough.
3) Improving customer satisfaction through supply chain performance: In the past, the ground rules for marketing success were obvious: a strong brand backed up by large advertising budgets and aggressive selling. This is no longer so. Now, organisations create superior value for their customers and consumers by managing core processes better than their competitors. Jorma Ollila the chairman of Nokia, once said the following: ‘Our experienced and unique way of operating is what we see as increasingly putting us ahead of the competition. As we move forward in this complex industry, winning will be less about what we do, but more about the way we do it.’
Everyone knows how Nokia, hardly unheard of in the early 1990s, has taken on the might of the Japanese and other Asian manufacturers and become a household word today.
How to improve customer satisfaction can be conveniently summarised as the 4 R’s.
Responsiveness: In today’s just-in time world the ability to respond to customers’ precise requirements in ever-shortening timeframes has become critical. To achieve this, organisations must be more demand-driven than forecast-driven. Agility is the key word in achieving this transition, not just within the company, but across the whole supply chain.
Reliability: Many organisations carry safety stock because of uncertainties. It may be uncertainty about future demand or suppliers’ ability to meet delivery deadlines or about the quality of materials or components. The key to improving logistics processes in this regard is pipeline visibility, as end-to-end visibility will inevitably improve the reliability of response.
Resilience: Today’s market is characterised by high levels of turbulence and volatility. In the past, the supply chain was driven by cost minimisation or service optimisation, whereas today the design has to be on resilience. There is clear evidence that the tendency of many companies to seek out low cost solutions because of pressure on margins may have led to leaner but more vulnerable supply chains. Resilient supply chains recognise the importance of strategic inventory and the selective use of spare capacity to cope with surge effects.
Relationships: Supply chain management by definition is about the management of relationships across complex networks of companies that, whilst legally independent, are in reality inter-dependent. Successful supply chains will be those that are governed by a constant search for win-win solutions based upon mutuality and trust.
4) Setting Service Standards: Customer satisfaction is fully dependent upon service performance. If this is to be controlled, then one must have predetermined, set standards. Ultimately, the only standard to be achieved is 100% conformity to customer expectations. In other words, to have a complete match between what the customer expects and what you are willing and able to provide. Below, are some some of these key areas where standards are essential.
Order cycle time: This is the elapsed time from customer order to delivery.
Stock availability: This relates to the percentage of demand for specific items that can be met from available inventory.
Order size constraints: It is a fact of business that customers demand just-in-time deliveries, generally of smaller quantities. Do you have the flexibility to cope with this range of customer demands?
Ordering convenience: Are you accessible and easy to do business with? Do your customers see you as reliable? Are your systems compatible?
Frequency of delivery: The current trend worldwide is that customers require delivery in shorter, specified timeframes. How do you shape up?
Delivery reliability: What proportion of orders is delivered on time? This is a reflection not just of delivery performance, but also of stock availability and order processing performance.
Documentation: A large number of service failures are from this source.
Claims procedures: What are the main causes of claims? How quickly are they dealt with? What is the service recovery plan?
Order completeness: What percentage of orders is delivered complete?
Technical Support: What aftersales support is provided?
Order status information: Are customers continually informed about the status of their orders?
Going through this list of standards, I am sure that very few Middle East organisations can lay claim to setting or fulfilling even half of these standards.
5) The impact of logistics and customer service on marketing: Traditionally, marketing has focused on the end customer, or consumer, by seeking to promote brand values and to generate a ‘demand pull’ for the company’s products. However, this is not now sufficient by itself. Because of the swing in power in many marketing channels from manufacturers towards distributors, it is now vital to develop the strongest possible relationships with such intermediaries. In other words, suppliers need to create a customer franchise, as well as a consumer franchise. This is particularly relevant in the Middle East market, where the power generally lies in the hands of the distributor.
Having addressed all of the foregoing, it must be asked how these strategies, standards and activities can be applied here in the Middle East. The answer is with a great deal of difficulty.
Firstly, it should be noted that there are very few constraints to operating an effective supply chain in the UAE, apart from the distance from the supply source. Transportation options are also limited to sea and air, unless one is prepared to take the chance of road services through Turkey, Syria, Jordan and Saudi Arabia. However, customs and other ministerial requirements in the UAE are generally straightforward, provided one follows the correct procedures. Infrastructure and clearance systems are also world class.
Free zones in the UAE also offer the flexibility to centralise operations and to then re-export to other GCC countries and beyond. A large number of reputable and worldwide 3PLs are also present in the UAE, which offer a selection of supply chain services if a company opts to outsource. These suppliers can also offer a great deal of assistance and expertise in setting up operations, particularly the logistics aspects within a supply chain. This is worth considering, as why re-invent the wheel and set up your own logistics operation, when one already exists.
Aside from the UAE, the rest of the countries in the GCC — with the possible exceptions of Bahrain and Oman - have created restrictive bottlenecks that hinder successful supply chain operations. Government bureaucracy and customs requirements, for instance, very often upset the supply chain, even though every effort has been taken to comply with the required regulations. I have yet to come across an organisation that has not experienced difficulties in maintaining an efficient and uninterrupted flow of supplies into many GCC states, most particularly the Kingdom of Saudi Arabia.
Overcome these difficulties is not easy, so you need to ensure that your suppliers and related organisations are well aware of the constraints and requirements of importing goods into the Middle East. It is also worth aiming to standardise processes as far as possible for operations across the region, even though each GCC country has different regulations. Employing locally respected and experienced forwarders and clearing agents can also great help in cutting through the red tape.
In terms of inventory, it is best to hub through a centralised facility in one of Dubai’s free zones. This will be more costly than the direct deliveries, but centralise control on a region level. Companies should also increase their inventory holdings to overcome any possible obstacles. Of course, this goes against modern supply chain best practices, but it does provide a buffer in the event of delays. Also, it is vital to continually update the company’s supply chain manual to include revised regulations and procedures.
Overall though, supply chains must be flexible, so as to manage and adapt to all probabilities. Without this flexibility, it will not be possible to maintain a high performance supply chain, particularly in the Middle East.
Written by Brian Shepherd (Al Tayer)||**||