Meet Supply Chain 2010

GRAND RAPIDS — In 2006, the Eli Broad School of Management at MichiganStateUniversity began a comprehensive study to examine the future of supply chain management. Through a lengthy supply chain audit of Delphi Corp., the multibillion-dollar automotive supplier, and dozens of interviews with academics and companies such as Kellogg’s, British Petroleum and Harley Davidson, the school, one of the nation’s top two supply chain programs, determined what it believed to be an accurate prediction for supply chain management circa 2010.

“What we found is that the supply chain is not going to be about buying things. It will be about managing relationships,” said Steven Melnyk, MSU professor of operations and supply chain management, during a presentation at last week’s Midwest Supply Chain Management Conference and Exposition at SteelcaseUniversity

The study found a significant difference in what the industry values today and what practitioners expect will be important five years from now. According to the study, the largest concerns today, in order, are avoiding disruptions, on-time delivery and leadership — evidence of a tactical approach to supply chain management, primarily driven by cost.

Concerns in the next decade will likely be intellectual property protection, process development, managing supplier relationships, trust, talent retention and raw material costs — issues better suited to a strategic supply chain model.

“The supply chain we’re now facing is strategic. … Innovation is going to be the next battlefield,” he said. “And we’ve only really just glimpsed supply chain innovation.”

While easier said than done, the MSU study suggests that companies should concentrate less on cutting cost out of their supply chain and more on creating radical innovation. In support of this, he noted that the stock of publicly traded companies identified as supply chain innovators almost always performs better than their competitors’ stock.

Examples include Wal-Mart, the streamlined retail giant that mined its then 460 terabyte database (roughly twice the size of the World Wide Web) to accurately predict that strawberry Pop Tarts and beer would be the top-selling items in Florida’s 2004 hurricane disaster zone. Apple’s iconic iPod was largely designed by its suppliers. Toyota cornered the hybrid engine supplier base at the expense of the Big 3 automakers.

The study also produced a controversial suggestion for companies to accomplish the strategic model. “There are some supply network paradoxes here, and you’re going to need some talented people to sell it to management,” Melnyk said “There is something wrong with a supply chain where suppliers are going bankrupt. Innovation is more important than cutting costs. And, unfortunately, you cannot have radical innovation in a lean system. You need slack for radical innovation. … Lean is out.”

To a large degree, Melnyk explained, today’s supply chain systems are not lean at all, but fragile. “If it works right, it’s great,” he said. “But if one link is upset, it all falls apart.”

On several levels, the study suggested the largest threat to a resilient supply chain is China. Sourcing product from China produced disastrous results for many of the responding companies. Those results included late or lost cargo, improper specifications and blatant piracy. One Fortune 500 company was convinced that within five years, China — which today exports roughly 90 percent of its production — will reach a trade balance. Within 10 to 20 years, when potentially 750 million Chinese adults between the ages of 20 to 40 create history’s largest buying power, that imbalance could be reversed.

“What will happen when China becomes a net importer?” Melnyk asked. “There is barely any infrastructure there. The Chinese railroad system is equal in sophistication to the U.S. in 1861. … At capacity, they could take up to 70 percent of the world’s steel production.”

U.S. raw material procurement has already felt a significant impact from the growth of the Chinese economy. In the coming years, that is only likely to get worse.

“The green movement is going to take hold even more in the supply chain,” Melnyk said. “Packaging is going to be revolutionized or eliminated. We’re going to have to figure out ways to recycle everything. And it’s got nothing to do with being green — it’s because you’re going to have to compete for your raw materials.”

Earlier in the day, keynote speaker Christopher Olesky, president of ATEK Companies, mirrored Melnyk’s comments, suggesting that the key to supply chain success will be finding opportunity in collaboration and supplier relationships.