Word of the year: Supply chain

Word of the year: Supply chain

Every year, Oxford University Press, the publisher of the Oxford English Dictionary, announces its UK and US words of the year (WOTY). Sometimes (such as last year) the word is the same: climate emergency. Sometimes the word differs.  And sometimes, (2015) it is not a word at all: it is an emoji of a face with tears of joy.

There are no published rules for selection, and it is not even necessary for the word of the year to have even been coined within the previous year. However, the word needs to have been in regular use, or well-known in that period.

I recognize that there are probably some early favorites for this year. Pandemic, coronavirus disease 2019 (COVID-19), quarantine, and social distancing attract early money; however, I would make a case for “supply chain.” In fact, watching our leaders on television, I hear that word more and more. 

The coining of “supply chain” and “supply chain management” are commonly attributed to British logistician and consultant Keith Oliver, who used them publicly in an interview with Arnold Orndorff of the Financial Times in June 1982. That timing seems premature. In 1982, most industry participants were still learning to use the word “logistics.” 

Prior to 1979, transportation — or traffic — was a standalone function which was responsible for arranging inbound and outbound movement of goods. The function was largely siloed from related functions such as merchandising, purchasing, and manufacturing. The corporate relationships were distinct and often involved one silo “tossing problems over the wall” to another. Because transportation was mostly regulated, routing decisions were frequently based on personal relationships — there was nothing to distinguish carriers.

These silos started to deteriorate in the late 1970s when transportation underwent a wave of deregulation. The policy driver was stagflation confronting the economy and high interest rates imposed by Federal Reserve chairman Paul Volcker to break the inflationary cycle.

Before deregulation, shippers had to choose amongst a small assortment of carriers — all offering the same tariff pricing. Now, shippers had the option of negotiating confidential contracts with carriers to more specifically meet their requirements. The impact was immense and transformational.

  • “Economic Order Quantity” became the new financial metric. This model required heretofore unimaginable coordination between purchasing, warehousing, and transportation functions. These coalesced into logistics.

  • Economies of scope and scale became critical. Transportation is at its base an asset-based, network-operating business, and carriers across all modes avidly sought these benefits. The most common strategies were executed through acquisitions (e.g., airlines and railroads) and just organic growth (e.g., truckload and parcel.) 

“Logistics” an old military term came to refer to the movement, storage, and flow of goods, services and information inside and outside the organization. Because of high interest rates, “Just in Time” (JIT) inventory became an early feature of this new practice. 

In the 1980s, outsourcing and offshoring became common. As corporate raiders increasingly looked at “unlocking” value from hidebound corporations, CEOs (and their boards) realized that they could either transform their organizations or allow their replacements to do the same.  

Third-party logistics providers (3PLs) filled the gap as companies shed these functions as part of their financial reengineering. Often, 3PLs absorbed assets (e.g., tractors, trailers and warehouses) and personnel to enable their customers to transform fixed costs into variable.

While logistics was mostly focused on the internal mechanics of a company, its shortcomings soon emerged. Companies were not standalone entities; rather, they were increasingly part of complex networks. Logistics gave way to “supply chain management” (SCM), which envisioned collaboration between suppliers, customers, and other stakeholders to boost efficiency.  

In its earliest forms, SCM referred to the the integration of goods, information, and funds (as well as all processes) as raw materials were transformed into final products. As with logistics, new industries (e.g., lead logistics providers, or LLPs; and 4PLs) and practices (e.g., Vendor Managed Inventory, or VMI) emerged.

SCM would not have evolved as quickly as it did had it not been for Y2K. Because of the fears of IT Armageddon, corporate boards and managements immediately spent immense sums prior to the end of 1999 in order to have compliant technology. Enterprise resource planning (ERP) and transportation management systems (TMSs) became widespread in less than a decade. These, along with the internet, transformed business overnight. 

The successor to SCM is not yet clear-cut, albeit not for a lack of challengers. Various experts maintain that the rise of nanotechnology will provide real-time information to artificial intelligence (AI) solutions optimally controlling end-to-end processes among numerous stakeholders. Some believe that robotics will transform workflows; others maintain that collaboration will be enhanced through technologies such as blockchain. Other technology providers espouse the benefits of digital control towers and predictive analytics.

Two things remain immutable: despite the rise of 3D printing, products will need to be manufactured and then transported. These challenges are clear in today’s COVID-19 world. The lack of required items is the subject of daily press conferences laden with the term “supply chain.” Manufacturers of dearly needed medical supplies (from personal protection equipment to ventilators) are lacking necessary raw materials (e.g., non-woven polypropylene) and components (e.g., ventilator turbines).  

This is a combination of reduced manufacturing and the inability to transport what is available:

  • The grounding of passenger aircraft has removed a great deal of air capacity necessary to move critical supplies.

  • Ocean carriers are rapidly reducing capacity so that vessels do not operate empty.

  • Trucking capacity is constrained by lockdowns and drivers seeking to avoid “hot zones.”

However, these challenges are “supply” — not “supply chain” — issues. They represent a return to a time 40 years when purchasing, manufacturing and transportation all functioned in separate silos.   

The problem is not a lack of coordination, but a failure for all three — purchasing, manufacturing and transportation — to operate with necessary resiliency and redundancy in a time of a global emergency. Of course, this hollowing out was made possible by the “efficiencies” enabled by SCM. So maybe it should be the WOTY.

Contact Ted Prince at ted@tigercoolexpress.com.