Financial and Strategic Objectives of supply chain
- Category: Supply Chain Management
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In this section we will discuss the basic beliefs and attitudes that organizations want to promote as well as recognizing that there can be different pressures on owners and managers at different stages of a company’s life as it moves from start up, through growth and maybe to some form of end stage.
These developments will be driven by the financial aims set by the owners and translated into objectives to be achieved by the selection of the correct strategic objectives which have a chance of being successfully delivered. If immediate pressures or threats are encountered which require urgent evaluation and action then this can reduce the opportunity to focus on the supply chain relationships. A consideration of the possibilities of actively managing and becoming involved in the supply chain is dependent on there being time to think about the medium and long term.
All business, governmental and third (charity or voluntary) sector activities have objectives, of which some at least will be about money. It might be about profit maximization or just survival in difficult market places or it might be about delivering social or political value to interested constituents. The common denominator is frequently money as it is a convenient way to keep score. Money can be used as a proxy to demonstrate better customer satisfaction than a competitor or more effective and efficient service delivery, at a less than budgeted level, in a public service context.
These are over-riding objectives for if the customers or receivers of the products or services are not satisfied then sooner or later the delivering organization will be remodeled or replaced in some fashion. In the private sector this would be demonstrated by the losing of market share to a competitor with the consequential need to downsize the workforce, abandon market sectors or exit from the business completely. In the public sector it would result in a political reexamination and restructuring or replacement of the delivery people and processes.
Thus the financial and strategic objectives are the paramount ones but we do need to recognize that there are different stages in an organization’s life at which the priorities and the solutions might have to change. There is a dynamic in business in which the need for change is greater or smaller and the speed of the required reaction is faster or slower but the need for change is the one constant. Organizations that can recognize the need for change, make the right choices in designing the appropriate responses to the need and can implement the changes successfully, are the ones in which there will be employment opportunities and the potential to build a lasting organization which continues to keep their customers and other stakeholders satisfied.
The key message from this consideration is that there are never ‘right or universal’ answers to these questions and each organization will, at different times and with different leaders, make different choices. The dynamic of change therefore requires us all to reappraise these strategic choices on a regular basis with the recognition that further changes will be required as the demand and supply environment changes over time.
In this book therefore there can be no prescriptions of what is the correct choice seen from a distance. All managers and their teams need to be equipped with the tools of analysis and the knowledge of how to make things happen in this dynamic, complicated and, as we shall see, globally interconnected world.
However, above the financial objectives there should lie some basic beliefs or values, which define what the organization is prepared to do and what it certainly will NOT do. These ethical questions are many but will include attitudes to customer satisfaction; corruption wherever it occurs; slavery; environmental impact; fairness and equity in inter organizational and inter personal relationships; employee measurement, reward and involvement; compliance with legislative intent as well as details; and tax evasion and avoidance.
The temptations to meet the financial objectives at the expense of the ethical ones are always there in all societies but might be greater in certain places at certain times. In recent years it seems like individuals at all levels in some financial service organizations saw their customers as ignorant and easy to take advantage of, at great advantage to the abusive so called ‘servant’ of the customer. Of course customers are also not always pure in their own ethical behavior.
With a world view that believes that the only one that matters is me and I will do everything I can to take advantage of any weakness I can find so that my personal position is strengthened, then we have a very competitive but wasteful situation in which longer term success is more difficult, although the short term benefit for some, can be great.
For global supply chains operating in different cultures with many different attitudes and historical approaches and having more or less time to develop what might be called a societal conscience, these are real and difficult questions to answer and to live with the consequences. We must always remember that the so called developed nations have frequently had people in their histories who have behaved as badly as those we vilify in other countries today and yet were regarded as great leaders or business people and duly recognized and rewarded in their own time.
Two other values related issues should also be considered early in an organization’s life. These are the views about citizenship and political sensitivities. The later might be associated with the corruption issue but might be a recognition that a government (national or local) that was once neutral if not supportive might turn against some activity in some way or see the need for a greater share (up to 100% in a nationalization process).
Such considerations might be included as part of the risk profile developed by the managers and should be factored into all risk calculations. Here again, over time, the risk appetite of the key stakeholders in the organization might change making previously agreed decisions no longer appropriate for the now differently perceived risk profiles in the supply, demand and regulatory environments.
Citizenship considerations reflect how the organization wants to be regarded in its immediate locality. Does it want to be seen as a good neighbour who does what they can to look after the amenity of the area, pay its suppliers on time and provide employment opportunities for a variety of local people as well as sub-contract business opportunities for local businesses. Such a good citizen can build loyal supporters in the community who can influence the political environment as well.
In all of this the mind set is important. Thinking about supply chains rather than simply focusing on the owned organization or the current employer requires that more stakeholder interests are recognized and at least some of them seen as important to the future prosperity of the business.
It is of course possible (as it has been throughout history) to see the business opportunities in a much more selfish way and economic success can be built on this worldview. The issue is, are you in it for the short term using quick fixes or are you trying to build something more sustainable and more valuable in the medium to longer term. If the latter, you might be prepared to forego short term profits for longer term growth for example.
Management is certainly about making choices!
This leads to two areas of mutual interaction, which are the evolutionary stage of the organization and the time horizon over which plans are being considered.
The average lifespan of companies in the USA is now around 15 years. Some of them continue inside new companies formed as a result of mergers or acquisitions but their initial fundamental nature has changed. Other organizational types (including governments, military and religious orders) survive much longer than business ones generally speaking but for the moment we will concentrate on the business ones.
All business organizations go through the same kinds of phases, all be it at different speeds. There is start up, growth and finally an end game of some kind, be it decline or take over or failure.
In the start up phase we have argued that this is where the big philosophical issues should have been considered and stances taken and embedded in the culture of the business but the reality is often just about survival and paying the immediate bills. More small businesses fail after all because they have not managed the cash flow (balancing income with outgoings) than fail because of lack of customers.
Of course we need good customers, especially ones who pay their bills, ideally on time. While customer satisfaction is very important it cannot be at any cost since if the customer is being selfish they can demand service but not pay a fair rate for it. Suppliers recognize that there is a cost to serve particular customers. It is a hard number to define but some customers are just too expensive and do not justify more investment to support their demands when they return so little on the investment.
The start up phase is also the stage at which business relationships need to be built quickly yet it can take time to recognize if a customer or a supplier is actually considerate of your position and prepared to allow you to create a successful set of repeat business transactions with them. Choice of business partners at this stage is also a crucial decision to make since the cost of making changes later on can be high.
The essence of the supply or value chain view of the world is that few if any organizations can afford to own all of the resources they need to transact with their chosen customer groups. They therefore need to gain access to complementary resources provided by other organizations to put a complete product/service package together to fulfill their promises to their customers.
The start up company has limited resources, no history and no way to demonstrate their capability or reliability to business partners so it will often revolve around the personalities of key people to persuade others to give them a chance. Thus the risk appetite of the potential partners must also be considered so that some mutual benefits can be articulated and then realized.
The entrepreneur who succeeds at the start up stage is not always happy to follow the organization through to later stages so management structures often change and new managers are recruited to take the company forward. Meantime, the entrepreneur often moves on to new opportunities and creates a series of start-ups.
A large proportion of start-ups fail in the first three years so beyond that time there is a chance that the supply chains have been established, are functioning at least satisfactorily if not yet optimally and that organization structures, personnel and customer markets are stabilizing. As the company thinks of its future it might have more time to reflect and plan rather than just react to opportunities and stresses.
Hopefully the opportunities to build a really effective supply chain have not been damaged in the focus on surviving and establishing the business. Business partners who have been supportive during these challenging years should be considered now to see if they are ready to support the company further into the future. There will now be data on attitudes, performance, innovation potential, ability to share and coordinate which can be built into more robust agreements to build the extended supply chain capability that we will discuss later in this book. However business partners, even if the current relationship is mutually rewarding, still have options and might not choose to follow where a partner is heading. In such situations the relationship process might be somewhat or totally fractured as a new alignment with other partners is sought.
Existing businesses, growing and ending
For the businesses that survives what might be described as the infant mortality stage of its lifecycle, then we have new considerations. There can be a plateauing process for some businesses where the activity level is seen as satisfactory, returns are acceptable and prospects are seen to be satisfactory. When the business is still owned by the founder, and especially if there are other family members employed, the focus is on continuity and the minimization of risk.
Such businesses do not seek new challenges if the risks are seen as too high. Instead the owner runs the business almost like a hobby and is happy to generate enough income for all concerned so that the lifestyle that has been created can be maintained. Often such businesses are very caring about their employees and the organization feels like an extended family even if it is one in which the matriarch or patriarch still exerts close control. For such businesses a critical issue can be succession planning since often the inheriting family will, by definition, not have the entrepreneurial drive that the founder displayed.
Such family businesses are the foundation of many economies and responsible for high proportions of total employment. There are often highly expert in their chosen fields but in choosing such business to work with, a partner organization must also recognize their self imposed limitations and constraints and limited risk appetite. B020, wind could ring ■£
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The growing business has a different driver pushing it ahead. Here the need to grow, generate increased revenue, recruit new skills, attack new markets and develop new goods and services means that the skills needed in the start up are soon left behind but also too is the control of the founder who needs professional help to manage the transition to the bigger organization. In some cases, as already discussed, the founder is not so interested in this stage and will exit the company in some way, by selling shares willingly or as a result of internal challenge and a forced sale.
A growing customer or supplier company is attractive for its upside opportunities but always the partner organization needs to monitor how the growth is being managed as well as the business transactions being delivered. As a customer or supplier interacting with this kind of company one needs to be sure that internal growth management issues do not affect external performance and support.
A growing company has to generate or access sufficient funds to finance the growth process and this can come from retained profit, refinancing from the initial funders or by inviting new shareholders into the business. This can involve the attraction of Venture Capitalists (VCs) into the company. Such people often bring great business experience and contact details of useful people to the initial company but they come with expectations. These will include expectations about the way the business is run, its financial health and investment approach.
They are often only interested for a period of time after which they will try and exit the company at a level of personal profit, which, they would argue, has to be very high to justify their involvement and support.
They are sometimes accused of being too interested in getting their investments out again with a sufficient reward at a time of their choosing, which might not be in the immediate interest of the company. They certainly cannot be counted on for long term growth. So again the risk benefit of such an arrangement needs to be carefully considered. Growing businesses are also risky businesses so the VCs argue that their support is significant and they are worth the risk premium they demand.
Often their preferred exit is at the Initial Public Offering (IPO) stage when the company goes from being privately owned to being publically owned and traded on some stock exchange. A company with a successful growth performance and a believable strategy for future corporate health and capital and dividend growth which can attract lots of new investors, provides the opportunity for the VCs to exit satisfactorily and rewards the initial shareholders for their hard work and so called ‘sweat equity.
In a different situation the owners of a company might also plan to sell the company as a trading concern so that they can exit to follow other paths or perhaps just to retire on the proceeds of the sale. Here again the need to present the company in the best possible light to potential trade buyers is important and some longer term investment opportunities might be declined to make the business look more profitable to the possible buyer.
The growing company has to recruit new people to manage the increasingly complex organization and management challenges. Of course once the all-embracing responsibilities and multiple roles of the founder begin to be split up and distributed around new people the problem described as Principal and Agent arises. The founder/owner is the principal and recruits managers as his or her agents.
The principal hopes that the agent will act in their role as if they were the principal and do what the principal would do in the given circumstance but of course it does not always work like that. The agent is an employee not the owner and might have a different agenda. For example the agent might be more interested in keeping their job and choose business continuity rather than running risks to maximize profits for example.
The concept of principal and agent is true in any situation in which one person or organization contracts with another person or organization to act in their place.
Supply chains are in effect a series of links of principals and agents with the same possible problems of different agendas driving choices even when there are some basic contractual obligations agreed upon. The issue arises more often and more severely as more discretionary decision making authority is devolved to the party acting as the agent.
A further consideration is if the company is under threat is some way. There are two extremes. The first is when the business is struggling to cope with current business challenges either on the demand side (not enough people buying or sufficient customers but who do not pay reliably) or the cost side where the costs are growing faster and less controllably than the revenue from sales. In both cases action needs to be taken swiftly to rebalance the situation and this can lead to distressed sales of goods or services just to generate income for the cash flow.
Alternatively, input side costs can be slashed aggressively without much consideration of any potential long term impact on supplier relationships. In effect the problems are passed back up the chain. It might be enough in the short term to allow the business to survive but any existing relationships will have been severely strained if not broken and will take time to recover.
This brings into focus the fact that some aspects of collaborative supply chain operations are dependent on a supportive environment in which medium and long term has some meaning. If the threat to survival is real enough then all thoughts revert to personal or company survival and what will be necessary to make that possible, regardless of the impacts on others.
On the other hand, building strong inter organizational relationships and mutual understanding means that in times of serious threat the organization might have more options open to it through the support of the existing network. After all, partners on both the customer and supplier side will also incur costs if one of the network actors fails. There is likely to be some, perhaps severe, disruption to goods and cash flow and if failure of the struggling company still occurs then that resource must be replaced so a search and selection process will be needed, taking time and effort.
The owners of a company must set their own targets (influenced by their active stakeholders’ demands or expectations) for financial performance and decide on the strategies which will deliver them.
Different challenges at different stages of the company’s evolution and with different owner/manager/ shareholder situations mean that looking to work with any organization in the extended supply chain or system requires the counter party to go through a process of due diligence to really evaluate what the organization’s actual priorities are and how this will impact how they will behave in their interactions with their suppliers and customers.
Given that this will change over time, this process needs to be refreshed regularly as well as in response to some event which challenges existing arrangements or presents new opportunities or threats.i