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A Historical Lesson for Supply Firms

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 

Bottom LineLooking at trends over time, it’s clear that C-suite executives in supply chain management must be flexible in their organizational structure and that decentralization drives more profit.

In the era of globalization, chief purchasing officers (CPOs) at large supply companies play an increasingly important and ever-expanding role. They’re charged with keeping costs down among their network of manufacturers, subcontractors, and distributors, while ensuring that the quality of the finished product remains high. But as sources of competition and opportunity blossom worldwide, they must also answer shareholders’ demands that they maintain a sustainable and responsible business model—all, of course, while posting profits.

As if these crucial day-to-day responsibilities aren’t enough, the authors of a new study suggest that the real key to success for CPOs and their firms lies in overcoming another, more daunting reality: the particularly volatile nature of supply chain management. And to forecast the future, the authors suggest, it’s worth taking a look at the past.

Accordingly, the authors analyzed a sample of large North American supply-oriented firms between 1987 and 2011, a span of time crucial to the world economy. During this period, we saw the fall of the Berlin Wall; the emergence of China as a financial force; and several recessions affecting the global marketplace, alongside sweeping shifts in society, technology, and the environment.

These shake-ups were mirrored by the frequent structural changes made by firms in the supply sector. Historically, the debate surrounding the organization of these companies has focused on centralization—that is, how much strategic power is concentrated in headquarters versus subsidiary offices. In theory, more centralized companies can better standardize their products and protocols, reduce costs through the efficient allocation of resources, and foster higher levels of knowledge and expertise among employees who work closely with one another. Decentralization, on the other hand, can allow firms to improve their services and cost effectiveness by driving the responsibility for decision making toward the managers of subsidiaries, while also engendering better working relationships and knowledge exchanges between suppliers and their clients at the end of the chain.

The debate over which approach to take clearly rages on. Narrowing in on the period between 2003 and 2011—a time in which the world both saw the rise of globalization and suffered through a devastating economic downturn—the authors found that 52 percent of supply firms overhauled their organizational format, presumably to better adjust to a rapidly changing business landscape. Of these companies, 47 percent pursued a higher degree of centralization, and 53 percent moved to decentralize their supply chains.

In those eight years, the authors write, structural reorganization had a decided effect on the performance of most firms, in terms of return on assets and sales growth. The more profitable supply-side companies tended to decentralize, the analysis showed, whereas struggling firms were more likely to both centralize their operations and bring in a new CPO—most likely in an attempt to rein in costs and ensure the supply chain would meet the most urgent needs of the corporate home office.

The decentralization pattern, in particular, yields some counterintuitive wisdom, the authors note. Although decentralization tends to detract from the potential benefits of having a large company with its attendant financial muscle, companies can actually gain more clout in the marketplace when they decentralize , because of their increased ability to negotiate with clients and source much-needed but far-flung resources. Top executives may even see valuable opportunities beyond the supply realm when they extend autonomy to business units that are making intimate connections with clients, the authors add.

Companies can actually gain more clout in the marketplace when they decentralize.

Turnover in the executive suite has also increased at supply firms, according to the authors. A decade ago, CEOs spent an average of 10-plus years in their position, but in recent years their average tenure has dropped to about seven years. And CPOs also spend about 25 percent less time in the job, down from an average of 6.1 years in 1987 to 4.6 years in 2011.

That means the onus for planning and executing long-term initiatives must necessarily be on the managers who report to the CPO, who have to balance future considerations against the pressure to make immediate decisions in a fast-moving economy. Likewise, the authors found, the relationship between the CPO and his or her supervisor is vital in overcoming corporate obstacles, establishing the right agenda, and giving the supply wing the appropriate stature within the organization.

Indeed, the study also holds lessons for CEOs who cling to the notion that a rigid company-wide structure should extend to the supply division. The occasional shift in the level of centralization must be expected and handled appropriately, the authors note. In practice, this probably means establishing a type of hybrid organization that can veer toward or away from centralization, depending on the economic climate.

Of course, most CPOs would naturally prefer to demonstrate their worth by centralizing activities, allowing them greater oversight of corporate spending, supply chain operations, and other firm-wide initiatives. Because decentralization goes against CPOs’ instincts, they might have to be prodded into loosening the reins. But as this comprehensive historical study shows, CPOs will more than likely face the imperative to switch up their priorities and organizational outlook at several points during their career. “In this respect,” the authors write, “CPOs must be ambidextrous, with skills in maneuvering their organization in both directions.”

Source: Supply Organizations in North America: A 24 Year Perspective on Roles and Responsibilities 1987–2011, by P. Fraser Johnson (Western University), Asad Shafiq (Western University), Amrou Awaysheh (Indiana University), and Michiel Leenders (Western University), Journal of Purchasing and Supply Management, June 2014, vol. 20, no. 2
 

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A Historical Lesson for Supply Firms