How to create a supply chain center of excellence that works

Significant business change and fluctuating levels of complexity make it extremely difficult for companies with multiple, independent supply chains to achieve internal supply chain alignment across divisions. Fast-moving consumer goods (FMCG), consumer packaged goods (CPG), retail, and electronics companies can be especially vulnerable to misaligned or fractured supply chains in the face of volatile consumer demand, short product life cycles, erratic supply, and high transportation costs.

To address those and other challenges, some companies have established supply chain centers of excellence (CoEs). A CoE is a designated specialty group within the firm that works together to drive supply chain innovation, collaboration, and excellence across the organization. While many companies use "center of excellence" to refer to anything that is centralized or perhaps outsourced, in this article the term refers to centers of competency focused on supply chain design and flow-path analysis, route planning, inventory deployment, and related advanced analytics. These organizations often serve to unite companies across their supply chain silos. (See the sidebar, "Who could benefit from a CoE?")

CoE experts excel at using models to conduct sensitivity analyses and hypothesis testing. They use their analytical skills to interpret wider data trends for long-term supply chain planning. Since the supply chain best practices that CoEs engender rely on multiple types of data from innumerable information technology (IT) sources, these experts must be capable not only of collecting and cleansing the data (a critical step for accurate supply chain network modeling), but also of building models, conducting sophisticated analyses, and sharing repeatable supply chain insights and knowledge across the organization.

As part of their purview, the CoE team often develops and manages an enterprisewide focus on balanced metrics (also known as holistic or aligned metrics) that can overcome business units' biases while reflecting the different aspects of the supply chain. These metrics can be used to measure supply chain performance and costs spanning inventory, transportation, warehousing, manufacturing, procurement, and customer service functions. Accordingly, well-run CoEs ensure the best use of talent and resources; reduce transportation, inventory, and warehousing costs; and improve customer service levels while ensuring more effective management of inventory-deployment costs across multiple supply chains. Typically, however, they have limited (if any) operational responsibility.

CoEs thrive if they are viewed as bringing long-term strategic benefit to the organization. Their success rides on strong executive support and a thoughtfully developed long-term plan. Well-administered and carefully nurtured CoEs can inspire superior, long-term supply chain results that drive the changes needed for a company to be market-responsive.

In fact, research conducted by the analyst firm Supply Chain Insights¹ found that companies with well-resourced, well-oiled CoE teams are more likely to describe themselves as "strategic," "proactive," and internally aligned and functioning from "the outside in" or "from the customer back." These companies rely on their CoE teams (whether centrally or virtually located) to develop models; identify, propose, and manage internal supply chain design projects; and oversee supply chain-design consulting engagements.

Six tips for developing an effective CoE
On the surface, centers of excellence may sound like a panacea for supply chain management challenges. However, although they have provided significant value for some companies and their supply chains, they have proved less useful for others. The decision to adopt a CoE strategy therefore comes with a few notable caveats, and ensuring a CoE's long-term viability and sustainability requires some candid self-analysis as well as proactive change management. When done right, a CoE can be a valuable asset that produces long-lasting benefits. With that in mind, here are six guidelines for establishing a successful supply chain center of excellence:

1. Start with a CoE readiness assessment. Before you can begin to develop a CoE, you must know whether you have or can acquire the skills and talent that will be needed to support it. That requires undertaking an honest assessment of whether your company has what it takes to operate a dedicated CoE. Among the questions to ask yourself: Do you have both the critical mass of work and the financial resources required to justify establishing and maintaining a CoE organization? Are you capable of developing high-performance teams? Can your culture attract and retain people with analytical skills in mathematical, inventory, network-design, or transportation modeling? Does your company do a good job of mentoring, developing, and retaining highly skilled professionals?

To get the right people on the CoE team, look for supply chain professionals who have both the aptitude and the passion for analytical modeling, and provide them with rich, diverse experiences. Consider tapping into the supply chain talent as well as the research on best practices at a nearby university with a strong supply chain or operations research program. To help CoE experts stay on top of cutting-edge techniques and practices, you'll also need to provide them with mentoring and skills-development programs that enable them to not only maintain deep expertise, but to also effectively mentor more-junior members. In essence, your CoE needs leaders with both technical and soft skills.

2. Ensure strong executive sponsorship and guidance. Your high-performing CoE team needs to report to a senior-level executive sponsor who has the power to enable them to carve out time to focus on supply chain improvement projects. With sponsorship at the highest corporate level, your CoE team won't become an isolated "island" whose analyses are filed away and never put to use, but rather will lead the way on key supply chain standardization and improvement efforts.

Your CoE team will benefit if you also develop a proactive, cross-functional or cross-divisional steering committee that includes your company's major constituencies. This committee can stay abreast of—and be involved with and internally promote—the CoE's best practices and successes. This will be key to opening doors and overcoming resistance to CoE activities like data gathering and assessing supply chain performance, as well as resistance to making significant operational changes.

CoEs have a tendency to go "off mission." Ironically, this is often the result of doing great work or having great people. As a CoE attains success it can become a catchall for special projects, solving emergencies, and powerful sponsors' pet projects. To prevent this, the senior sponsor and steering committee need to protect the mission of the CoE with an actively managed work-inflow process.

3. Provide good analytical tools. The CoE team often is tasked with reviewing different supply chain technologies and analyzing critical technology gaps and priorities for the organization's short- and long-term supply chain needs and business requirements. CoE experts will analyze a supply chain solution's time-to-value, its return on investment (ROI), and the time needed to close capability gaps. They'll also be able to address business-critical issues, like linking supply chain technologies and strategies to large customers' needs and demands.

Like other good craftsmen, CoE experts like to work with good tools. You'll be best served if you enable your CoE team to choose the feature-rich and robust technology they need to drive supply chain analyses.

4. Bring core CoE team members together in one place. Although it is entirely possible to create a virtual center of excellence by having experts across the company collaborate electronically, they often can be more effective if they work together in the same location. One reason is that doing so can improve communication and collaboration. For example, supply chain design is extremely complex, and the analyses lend themselves to sitting side-by-side and graphically depicting and explaining ideas. A centralized group can also help to resolve another common concern: it's hard for an expert to have credibility across the company when he or she is remote and attached to a particular business unit. And finally, a centrally located department promotes the most efficient use of a limited talent pool, allowing experts to focus on the CoE's mission rather than having to juggle responsibilities on both a business-unit and a corporate level.

5. Develop a clear and meaningful career path for CoE team members. While many companies guide would-be supply chain executives through rotations in functions such as inbound logistics, distribution, and procurement, few develop a meaningful career path for the technical-minded individuals populating their CoE teams. These experts, with their advanced degrees in computer science, operations research, data analytics, or supply chain management, enjoy problem solving and the challenge of improving enterprise systems and processes. They may be excited by the process of analyzing and determining which warehouses should be opened and which should be closed, but they would feel challenged and overwhelmed if they had to manage the actual closing of a distribution center and the relocation of inventory to other operations. It can be difficult to keep their work varied and intellectually stimulating; they rarely want to take on repetitive tasks or duties, and they also tend to like working on varied types of models and analyses.

Ideally, a career path for CoE experts will both challenge their technical competency and protect those rare and valuable members who have both strong technical skills and a high degree of management acumen. However, more-technical CoE employees rarely have a Master of Business Administration (MBA) degree; as a result, their recommendations—no matter how technically sound—may meet opposition. Moreover, although those serving in junior CoE roles may be technically competent managers, they may lack business credibility because they are perceived as not thoroughly understanding the business yet.

Finally, a strong career path is important because CoEs can become overreliant on a single resource: the "resident expert." You'll extend your CoE team's longevity and viability by putting a transition or succession plan in place that ensures the center will continue to run smoothly if your resident expert leaves the group. Keep in mind, though, that the new resident expert will need some time to master his or her new role.

6. Know when to call in reinforcements. Many managers assume that a center of excellence must be entirely internal. Yet the reality for many firms is that they lack the critical mass of work and access to talent in very specialized areas that will enable them to support a fully functional, exclusively internal organization. Additionally, the demanding nature of CoE projects, sometimes accompanied by short timelines, means that it's possible for almost any team to become overwhelmed or to confront a technical challenge that's beyond their expertise. When a project's demands outstrip available capacity, or when projects are quite different than those the CoE has previously managed, CoE leaders may want to consider supplementing the center's capabilities with external resources.

In our experience, the hybrid model (that is, a blend of internal and external resources) is the structure that consistently delivers the highest value for most organizations. It is also the only sustainable model given the significant challenges associated with creating and successfully maintaining a CoE, as well as the many failures of CoEs built on internal-only models, which are often caused by the lack of a critical mass of skills.

Careful consideration
Setting up a center of excellence is not an easy or obvious decision, and there is certainly risk involved. Some have delivered great results, and others have performed unsatisfactorily. In fact, the previously cited research by Supply Chain Insights found that CoEs only work satisfactorily about 50 percent of the time.

Before embarking on the effort and expense of developing a supply chain CoE, then, you should give careful consideration to whether you have the right culture, work environment, business problems, sponsorship, and developmental paths to build and maintain it. If the answer to one or more of these questions is "no," then the next question is whether the deficiency is easily correctable. If you find that the answer to this question is also "no," then a reasonable alternative to consider would be either supplementing your capabilities with external support or focusing on driving value through improved performance in the functional supply chain areas. Either of these alternatives is a better solution than attempting to run a CoE that doesn't have the backing or resources it needs to succeed.

But if you do have the right business needs, culture, and resources, then the potential benefits of establishing a supply chain center of excellence may well justify the cost and effort. The opportunity to analyze metrics, supply chain performance, total cost to serve, and other important success factors across the entire company and then use that analysis to help set policies and develop the best outlook for the business as a whole is a worthy goal.

Note:
1. Supply Chain Insights, "Driving Supply Chain Excellence: Insights on the Use of a Supply Chain Center of Excellence," June 2015.