What the CEO Needs to Know – About Value Flow and World-Class Supply Chain Management

What the CEO Needs to KnowMost CEOs do not understand what World-Class Procurement and Supply Chain Management (PSCM) is, or how to implement it in their organisation. In our experience most CEOs rely on outdated and outmoded organisational structures with misaligned KPIs across Functions. Why is this, and how can it be resolved?

Outdated Silo Thinking

Having undertaken hundreds of IIAPS benchmarking exercises in a wide range of organisations it is clear that companies rely on outdated and outmoded organisational structures. Most organisations have a traditional Board structure with a wide number of Functions (such as Strategy, Finance, Marketing, HR, IT, Legal, Operations etc.) represented directly or indirectly.

The PSCM Function is normally not directly represented at Board level. Most often the PSCM Function reports to the Finance Function or, in some more advanced companies, through the Operations Function. Sometimes the PSCM Function’s reporting line is divided between the Operations Function for Direct/Production supply items/spend; but the Finance Function controls Indirect/Non-Production supply items/spend.

Traditional Operating Models - Silo Management

Unfortunately these approaches are all based on what is now outdated and outmoded Silo Management thinking, dating back to a much earlier era of heavily insourced manufacturing production within national economies; strongly influenced by late 19th Century thinking about the efficacy of clear divisions of labour within the organisation.

Misaligned KPIs

The major problem with Silo Management is that it destroys effective Value Flow Management within an organisation. This is because organisational Functions engage in constant turf wars, and each believes that its Function, rather than any of the others, is uniquely relevant and strategically important to the delivery of value in the organisation.

Such defensive turf wars get in the way of the effective delivery of value and also lead to a misalignment of KPIs. For example, it is common practice for Marketing to have KPIs that reward sales and revenue generation; while Operations may have KPIs that reward uptime, on-time delivery and productive effectiveness; but PSCM normally only has one KPI that rewards continuous cost reduction.

The inevitable consequence of this approach is revealed in a simple example, which we have witnessed many times.

The Argument between FunctionsOrganisations reward Marketing for increasing revenue and sales, but without understanding whether Operations can actually produce the goods profitably or on-time or to the quality required by the customer. Normally the internal culprit for this misalignment in our modern outsourced world of production and supply is ultimately seen as the PSCM Function. This is because PSCM is measured by its ability to deliver lower costs and often, therefore, cannot deliver the supply of the necessary items to meet the quality, cost and delivery requirements required by Operations and promised by Marketing to the customer.

Resolving the Silo Management & Misalignment Malaise

Ultimately everyone in the organisation suffers from this failure to deliver value to the customer. The company alienates or loses its customers and also fails to appropriate value for itself from the sale of its goods/services, resulting in declining profitability and market share.

Why does this misalignment occur so regularly? The simple answer is because Silo Management structures and KPIs create barriers to the understanding of the flow of value through and within the organisation. There is a need throughout the organisation for the flow of value from external supply, through internal production to external sales to be thoroughly understood, so that all Functions within the organisation are measured by appropriate KPIs. These should always be linked to the direct impact of each specific Function on the quality, delivery and cost of the supply items that must be sourced and transformed into higher value-added goods/services for end customers.

It follows that if this type of Value Flow Management with aligned Functional KPIs is to be used to manage organisations in the future, it also raises serious questions about the current way of thinking about the importance of particular Functions, and which should be represented at Board level. World-class organisations do not just accept the need for aligned Functional KPIs focused on Value Flow Management, they also radically change their organisational power structures internally.

Value Flow Operating Model

In most advanced organisations of the future historic outdated and outmoded Silo Management structures will be replaced by much leaner and focused, but aligned, Board structures, that continually monitor the flow of value through and within the organisation.

In these organisations Boards will have only 5 Members: The CEO; a Chief Financial & Administrative Officer (CFAO) representing all indirect Functions and cost centres; a Chief Marketing Officer (CMO) focusing on customer wants and needs; a Chief Internal Supply Officer (CISO) creating the internal supply of goods and/or services; and, last but not least, a Chief External Supply Officer (CESO) responsible for all external procurement and supply chain management.

The KPIs of these five key officers will be primarily aligned with their direct impact on the quality, cost and delivery of the goods/services that pass through the organisation from external suppliers to end customers. That is aligned world-class marketing and sales; world-class production; and, world-class procurement and supply chain management.

Few, if any, organisations currently even begin to understand the misalignment of KPIs and Silos. Maybe your CEO needs to understand why creating a value flow logic is so important?  If you think he/she does need to understand why, then please do send them a link to this blog.

For more information on IIAPS thinking please visit the IIAPS website.

The International Institute for Advanced Purchasing & Supply (IIAPS) is dedicated to the raising of international standards in purchasing and supply management so that real business value - improvements in the quality, cost and delivery performance of supply - is delivered to organisations.