Management Skills and Human Factors
Managing an SME in an integrated supply chain is a complex task, and participation in multiple chains adds to the complexity. Rapid changes in the business environment, shorter product life cycles, and increasing customer demands require a robust management team that is willing and able to respond to changes. Not only have the demands for quality, cost, service, and delivery increased, but the range of required capabilities, techniques, and skills has grown more complex. Simultaneous with continuing day-to-day operations, managers of SMEs may be under pressure to remake their businesses to meet anticipated demands.
LEADERSHIP, VISION, AND STRATEGIC DIRECTION
Corporate management has traditionally focused primarily on the internal workings of the firm. However, supply chain integration and the changing global manufacturing environment now require that management devote more attention outside of the firm. More frequent interactions with customers and suppliers are important components in a strategy responsive to evolving business opportunities. Indeed, in a world of evolving opportunities and advantages, managing change and innovation is becoming a required core competency. Managers must be able to assess the changing business landscape, lead the enterprise in a visionary manner, and create and operate an evolving, integrated chain of appropriate capabilities both within and outside of the corporation. As the pace of business change accelerates, management must have the drive and determination to reinvent the company as necessary to meet changing needs.
For instance, a company may have to adapt its operations to achieve preferred supplier status when a customer reduces the number of supply chain participants. Then, as a surviving preferred supplier, the SME may have to assume increased strategic responsibility, accepting larger roles in product design, service, and coordination of the output from its own suppliers to provide seamless, total solutions to the OEM.
As the business world evolves at an increasing rate, no lead in capabilities lasts forever. Companies with extensive investments in today's technologies may be reluctant to replace them with new technologies. This hesitancy can provide a window of opportunity for others. Thus, incumbents must avoid becoming complacent, and outsiders must be alert for opportunities. At the same time, the tendency toward long-term relationships and joint investments makes it increasingly difficult for newcomers to unseat incumbents in an integrated chain. Some incumbent suppliers are assured of the business as long as they remain competitive. Because of the rapid rate of change in many industries, opportunities arise and disappear frequently, and taking advantage of these opportunities can be expensive. Therefore, opportunities must be carefully selected so as not to exhaust an SME's limited resources. Mapping of requirements and capabilities (see Chapter 12) can be useful for assessing and prioritizing opportunities.
Many SMEs do little formal business planning. A 1999 survey of 500 businesses with fewer than 500 employees revealed that only 13 percent have an annual budget in writing, 14 percent have an annual business plan in writing, and 12 percent have a long-range plan in writing. Many respondents indicated that in the "real world" life is simple: their annual plan is in their head and their annual budget consists essentially of "sell as much as possible, make payroll, and keep the lights on" (Wall Street Journal, September 7, 1999).
Developing a strategy or business plan need not be an elaborate process, but it should involve more than just an annual budget. At a minimum, the plan should define a vision for the company and identify specific steps and timetables for achieving the vision. It should also address each of the key topics identified in this report and present financial projections for the next several years. It should zero in on core competencies and outline plans for additional value-added services.
For small enterprises, the plan can focus on a small number of activities. An SME may be able to make a substantial profit by focusing on one critical product or process or by providing convenient, low-cost production capacity to meet surges in OEM demand. Therefore, despite the need to be aware of changes in technology and customer requirements, the optimum strategy for a small SME may be to excel in one carefully defined capability and retain merely adequate capabilities in other
requirements of an integrated chain. The committee believes strongly in the value of business planning and suggests that SMEs that are unwilling or incapable of preparing business plans are unlikely to be successful in integrated supply chains.
Recommendation. Although extensive formal planning may not be justified, it is becoming imperative that small and medium-sized manufacturing enterprises periodically pause from the rush of daily business to survey their business environment of rapidly changing technologies and customer requirements and develop a brief, formal business plan.
SUPPLY CHAIN INTEGRATION
Few SMEs have availed themselves of the benefits of integrating their own supply chains, a core competency that can have a huge effect on their success or failure. Management expertise in forecasting markets and technological directions, selection of the right portfolio of capabilities, and correct decisions regarding internal investments and outsourcing can largely determine a company's competitive advantage. Despite the natural desire to retain capabilities in house, an SME must be brutally analytical in deciding (1) which capabilities are essential for its competitive edge or can be done at lower cost in house, and (2) which are noncore competencies that can be outsourced at lower cost as part of a well integrated supply chain. Retaining knowledge, for example, is important. But outsourcing surge production capacity and noncore capabilities, such as information technologies to lower cost providers can often reduce operating costs and allow an SME to concentrate on the remaining in-house operations. Internal development, acquisitions, or expansion of the capabilities of external segments of the supply chain can fill gaps in the corporate capability chain. The right approach depends on many factors, including the availability of capital and the need to retain control of capabilities that provide competitive advantage.
Barriers to Integration
As SMEs strive to integrate their own supply chains, they must be aware of several barriers that can impede the integration process. First, and foremost, they must overcome the tendency of participants to work for their own advantage with little regard for the effects on other participants or the supply chain as a whole. Optimization of one part of the supply chain frequently results in suboptimization of the entire system. Greater benefits can usually be attained for all participants by optimizing the system as a whole. Other integration challenges can include:
lack of clearly defined, mutually acceptable goals
lack of clearly identified mutual benefits
lack of in-depth commitment to and nurturing of relationships
lack of metrics or inappropriate metrics for evaluating performance
incompatibility of capabilities in communications and/or electronic design technologies
lack of, or breakdown in, mutual trust and respect
clashing corporate cultures
legal barriers, including intellectual property, liability, and antitrust issues
government procurement policies and regulations
Forces beyond the control of supply chain partners can sometimes undermine the best efforts at integration. The ability to foresee these challenges, understand the capabilities and limitations of supply chain participants, and formulate effective responses are critical skills for supply chain managers. With these skills and an understanding of the dynamics and interrelationships of the supply chain, timely, effective responses to disruptions and imbalances can be implemented.
Supply chain effectiveness can always be improved. The challenge is to prioritize opportunities correctly, allocate scarce resources, and devote the time and expertise necessary to harvest these opportunities. SMEs that understand supply chain integration and carefully pursue the right opportunities can achieve a substantial competitive advantage.
Participation in integrated supply chains requires management skills that may be different from the command-and-control style of management found in many traditional SMEs. A change from the command-and-control style to a leadership-and-facilitation style can be difficult, especially in a privately owned SME. According to Bellman in Getting Things Done when You Are NOT in Charge, participants must learn to work in support of the goals of the integrated chain while simultaneously striving to realize the goals of the individual enterprise. At times, an SME may have to compromise aspects of its independence in the interest of "team play" and consensus. Moving from a command-and-control model to a model characterized by shared interests, shared resources, and shared risk may be uncomfortable for traditional managers and can require considerable time and effort (Bellman, 1993).
Managing in the "information age" also requires skills in guiding the
informal human networks that develop in corporations and integrated supply chains. Much of the essential knowledge in an organization comes from hands-on experience and informal human networks that are embedded in the corporate hierarchy. Those who guide change must learn to harness the power of these networks, which are often in tension with the management hierarchy. According to Karen Stephenson of UCLA's Anderson School of Business, "hierarchies are about authority and are rigid, but networks are about how things actually get done and are thus adaptable and constantly shifting. If this mismatch becomes pronounced enough, the network can destroy the hierarchy" (Washington Post, March 6, 1999).
Decision-making capabilities are, in some ways, more critical in SMEs than in large companies. Large companies have greater financial depth and a wider range of business opportunities; a wrong decision (e.g., customer selection, equipment investment, or technology acquisition) will not cripple the enterprise. SMEs have fewer resources and can afford fewer mistakes. Committing a significant portion of an SME's resources (i.e., people, equipment, and financial resources) to one customer or project can preclude participation in others.
RISK AND INNOVATION
To succeed in the changing supply chain environment, SME management must be willing to take carefully calculated risks to promote innovation and maintain their company's competitive advantage. Paradoxically, trying to maintain the status quo and avoiding risk is, in itself, a risky strategy. Pursuing a diverse customer base can help an SME mitigate some business risk, although the added customers may create additional and conflicting demands. Thus, an SME must aggressively eliminate bad customers, pursue good ones, and improve relationships by building and nurturing trust. For instance, it may be advantageous for an SME to be tightly linked to one key customer or supply chain for a while, even at the risk of becoming essentially a captive. This approach, although risky and seldom recommended, may actually constitute a lower risk than trying to invest to meet the conflicting demands of multiple customers.
SMEs are often assumed to have a significant advantage in their ability to tolerate "radical" new ideas and to nurture innovators rather than smother them with bureaucracy, tradition, and the status quo. Peter Drucker, writing in Forbes, supports the importance of an innovative environment, emphasizing that management's job includes creating and managing an innovative environment. "A management that does not learn to innovate will not last long" (Drucker, 1998).
HUMAN FACTORS AND SKILLS
Barriers to effective participation in supply chains often have more to do with cultural and interpersonal issues than technical issues. Successful participation in integrated supply chains requires a high level of interpersonal skills. As is well known in the business community, long-term personal relationships between customers and suppliers are important in building a stable and growing business. Person-to-person relationships help to form bonds of trust that enhance credibility on both sides. Among the most important relationships are those between day-to-day decision-making peers at all levels of the customer and supplier organizations. Design engineers, sales executives, and logistics experts, to name a few, from each of the key participants should be working together to increase the extent of integration and mutually increase the efficiency of their processes and functions. Successful integration requires tight, cohesive relationships based on common goals between individuals at many levels and in many functions throughout the supply chain. For example, supplier manufacturing executives should develop strong relationships with the customer's procurement executives to ensure that they thoroughly understand each other's needs and capabilities. This understanding is crucial for effective decision making, meeting customer needs, and balancing available resources.
In another aspect of supply chain integration, it is becoming increasingly common for OEMs to give their assembly line operators the authority to release shipments from suppliers, allowing the operators to interact directly with their counterparts in the supplier company instead of through the formal organizations. To ensure quality, the people responsible for making parts are sometimes sent to customer facilities to gain an understanding of the customer's problems and needs. All of these interactions require trained employees who can carry out these responsibilities efficiently and constructively.
Supply chain integration and the implementation of new technologies must be planned and handled with care because all of the participants in a supply chain are independent entities. Participants tend to resist changing their work practices, especially if the benefits are perceived to be greater for other participants. These difficulties can be compounded by the human tendency to resist technologies that cannot be easily implemented. Societal beliefs in individualism and autonomy generally run contrary to the ideas of information sharing, openness, win-win negotiations, and sharing of risks and rewards, all of which are important aspects of successful integration (Baba et al., 1996). Thus, considerable leadership and people skills are necessary to achieve successful supply chain integration.
Companies that own intellectual property will naturally resist sharing their hard-earned knowledge and skills unless they are reasonably confident that (1) they can trust the other party not to steal their secrets, and (2) they have enough clout to make it highly unlikely that a theft will occur. Yet the drive toward increased supply chain integration is heavily dependent on openness. Thus, participants must find ways to craft relationships and agreements that effectively guard against the misappropriation of intellectual property.
Similar issues arise when OEMs demand detailed cost structure information from privately held suppliers. Although some of this proprietary information can be valuable for collective efforts to increase supply chain efficiency and reduce costs, privately held SMEs are justified in releasing only selected information pertinent to specific supply chain initiatives.
Successful partnering requires a shift from the traditional attitude of "what's in it for me" to a new attitude of "how can we maximize our common good and what can I do to help us achieve our mutual goals." This change in philosophy can be extremely difficult and cannot be created merely by the negotiation of a legal contract. It requires trust and a spirit of giving, both of which are difficult to create without extensive interactions between the partners over time.
Although supply chain integration often focuses on the implementation of compatible technological systems, in some cases technology can aggravate the development of trusting, cooperative relationships. At times, human issues far outweigh technological issues. Thus, progress in supply chain integration requires that improvements in human interrelationships keep pace with attempts to achieve technological integration.
Many OEMs demand that participants in their integrated supply chains upgrade their support functions. Each supply chain and each industry require somewhat different support capabilities. Defense industry suppliers, for example, must have capabilities in contracting and dealing with FAR. Demands for improvements in safety and environmental capabilities are being driven partly by government regulations and partly by good business sense. Integrated supply chains practicing just-in-time manufacturing have little slack to accommodate safety or environmental incidents.
LEARNING AND REDIRECTION
The competitiveness of SMEs in supply chains is becoming increasingly dependent on workers who can assimilate large amounts of
information and use it to make effective decisions. "Virtual manufacturing facilities" will require that operators be capable of learning new skills in a changing environment. Supervisors and plant managers will need extensive systems knowledge in addition to a thorough understanding of processes and customers. Executives, to be effective in leading and redirecting the organization, must understand changing customer requirements as well as new technologies.
The wealth of information on the Worldwide Web is virtually useless without reading and learning skills. Turning raw data and information into actionable intelligence and knowledge is a critical skill for business leaders. SMEs that are limited in their ability to learn and reshape their businesses in the face of changing environments will not be able to sustain their competitive advantage. Indeed, learning should be treated as a core competency that can be used for competitive advantage. Thus, SMEs must develop organizations that are willing and able to learn and adapt.
Recommendation. Small and medium-sized manufacturing enterprises should (1) assess and strengthen their management capabilities; (2) create a corporate environment conducive to the flexibility, change, evolving skills, and learning required by integrated supply chains; (3) integrate their own supply chains; (4) learn to deal effectively with risk; (5) develop the people skills required to integrate effectively with customer supply chains; and (6) engender a shift in corporate attitudes about supply chains from '"what's in it for me" to "how can we maximize the common good." Because all of the requisite skills are rarely resident in a single entrepreneur, whenever possible, SMEs should increase the breadth and depth of their management teams.