Transforming supply chains

In the field of supply chain management, there is a world of difference between how the public and private sectors operate.

World-class supply chains — such as those operated by Wal-Mart, Federal Express and Caterpillar Inc. — all demonstrate order-to-receipt times of two days or less, with near-perfect probability and considerable robustness to respond to unexpected contingencies and surge requirements.

By contrast, public-sector supply chains, such as the Defense Department's logistics systems, average about four weeks — when parts are on the shelf — and are not highly dependable or very flexible.

Yet the public sector still fiercely resists the move to world-class supply chains, despite the huge potential benefits in responsiveness, dependability, robustness and lower costs.

The tools for implementing a modern supply chain in the public sector are available and proven:

Instant, worldwide communications.

Interoperable, flexible and secure information technology.

Remote diagnostics and automated decision-making aids.

Modern, high-speed transportation.

Furthermore, the demand for the change has been growing as more and more public-sector workers see the benefits of supply chain management in their private lives, where the Internet makes it possible to get enhanced services at lower costs in everything from shopping and bill payments to theater tickets and travel arrangements.

There are several reasons for the resistance. Perhaps the most significant is that at each point in the chain — purchasing, finance, maintenance, inventory management, transportation, decision-making, manufacturing, engineering and forecasting — people feel their jobs are threatened. They are also comfortable with the old way of doing business. "It works, so why change it?" they say.

Then there are regulatory and legislative rules that discourage such changes. And there are all of the usual cultural barriers that so effectively hamper change in any monopoly environment.

Remember that there is essentially no competitive market operating here, even though the functions are often identical to those being achieved in the private sector.

The status quo, though, comes with significant risks. Take DOD, for example. Officials spend more than $80 billion annually on logistics support. As demonstrated in both the first and second Persian Gulf wars, where our warfighting capability greatly exceeded our logistics performance, the metrics clearly indicate that they do not do a world-class job, as measured in responsiveness, reliability, flexibility or, particularly, costs.

Commercial firms have found that significant performance improvements can lower costs by 10 percent to 30 percent. In this case, even a 10 percent

savings would free up $8 billion annually for much-needed military equipment modernization.

This, of course, leads to the obvious question: What will it take for the public sector to make the change? Based on a study of many successful transformations of supply chains in the commercial sector and a significant number of public-sector attempts and, more recently, partial successes, seven themes emerge for successful transformation.

1. Have committed, high-level leadership.

To capitalize on modern, information-based supply chain effectiveness and efficiencies, and to change the way an organization does business, leaders at the very top levels must get personally involved. It must be one of their top priorities. Otherwise, the barriers to change are too great.

2. Focus on core competencies and compete the rest.

Based on detailed value chain analyses, it is necessary to examine which elements of the overall end-to-end system are "inherently governmental" and/or are truly core competencies of the organization. One must then be willing to put the rest out for bid, including public/private competitions. Competition is the critical incentive needed to achieve higher performance at lower cost.

3. Outsource whenever it's appropriate.

There are organizations whose core competencies lie in many of the elements of the supply chain, and whose performance and costs are market-tested everyday. Take full advantage of them while always maintaining a competitive environment. The results indicate far higher performance and 30 percent lower costs on average when "best value" competitions are used.

4. Develop a customer focus.

Rather than focusing on a process or efficiency, world-class

operations have found that emphasizing and providing maximum end-user value will result in far greater customer satisfaction and lower costs, because money will be spent where it matters most.

5. Minimize distrust and stress security and confidentiality.

Through continuously working together and through demonstrated dependability, public and private organizations can overcome distrust. This is clearly the greatest of the cultural barriers to successful supply chain management, especially across organizations. Similarly, security/confidentiality concerns must be overcome — through explicit focus and, again, through demonstration.

6. Use the right metrics and link incentives to them.

Too often, the metrics utilized are process oriented or are only subelements of the overall supply chain. Rather, they must be end-to-end performance and cost measures, and contracts must be written to suppliers so that they contain incentives that are directly linked to those measures.

7. Adopt proven supply chain technology.

The private sector found that investments in technology — both hardware and software — were essential and would quickly pay for themselves in savings. However, this was only true if they utilized proven, off-the-shelf elements. Instead of customizing an approach that simply digitized their current processes, companies realized benefits only when they changed their processes to match the world-class approaches represented by the commercial processes.

Overall, the most critical of these seven themes is the first. Without strong top-management priority and leadership, the results will be many speeches but very slow, if any, progress. However, with such leadership — and using the lessons learned in the other six areas — the public sector can truly become world-class. Both users and taxpayers deserve such results.

Gansler is a professor at the University of Maryland School of Public Affairs, where he holds the Roger C. Lipitz Chair in Public Policy and Private Enterprise. Luby is a partner in IBM Business Consulting Services, where he leads the company's public-sector Supply Chain and Operations Solutions practice. Gansler and Luby recently edited "Transforming Government Supply Chain Management" (Rowman and Littlefield, 2003), from which this article is adapted.

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