Bridging Silos
Avoiding the gaps in corporate performance
It takes a lot more for a company to succeed than for each employee to do his part.
A company is composed of many opposing interests. Product designers want the best materials, but purchasing managers want the cheapest. The finance department wants the leanest possible inventories, but the sales department wants large stocks in order to sell big orders with a promise of quick delivery.
The competing departments are like the proverbial blind men exploring an elephant, each perceiving the animal from a narrow perspective. These management silos can undermine the best business resiliency plans and pose problems for supply-chain and risk management.
“It would be wrong to think there wouldn’t be silos in any organization,” says Nick Wildgoose, supply-chain product manager at Zurich Financial Services in London. “Teams and groups will always form. It’s an anthropological phenomenon. The key is making sure they pull in the right direction.”
Companies have a number of ways to overcome silos: directives from the top executives, adjusting incentives and bonuses to reflect wider responsibilities and risks, using matrix organization, and collecting and analyzing information to rethink processes and reduce risks.
“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control,” investor Warren Buffet recently wrote. That applies not just to financial institutions but to all companies, says Mr. Wildgoose.
“Companies in all sectors need to organize supply-chain risk in a holistic, strategic way, as something that drives profitability and shareholder value,” he says. “That needs to be driven from the C-suite level [or a corporation’s most important senior executives].”
Some companies create positions for professionals whose job is to look at risk management of the organization as a whole, notes Bob Ritchie, professor of risk management at Lancashire Business School, at the University of Central Lancashire in Preston, U.K., and founder of the Institute for Supply Chain Risk Management. “Risk management has the capacity to straddle all sides of a business,” he says. “At the end of the day, it’s the whole package that works in selling your product or service.”
Another thing top executives can do to overcome silos is to broaden the structure of incentives and bonuses. Usually, the manager responsible for the manufacturing plant has incentives based on production utilization, while the procurement manager’s incentives are calculated on the savings he generates. Rather than doing what’s optimal for the company as a whole, each does what’s optimal for his own performance criteria.
Stephan M. Wagner, professor of supply chain management at the Swiss Federal Institute of Technology Zurich, tells of an appliance maker whose strategic differentiation was quality. Amid problems, it found that the purchasing manager had been buying cheap parts. He was unaware of the company strategy, he wasn’t part of bigger decision-making discussions and, above all, his bonus depended on keeping costs down.
To avoid this, some companies are shifting bonuses to a wider measure of company performance, with a smaller percentage based on the environment the manager can directly influence, Dr. Wagner says.
With a little forensic work, a company can also calculate the cost of risk as well as of savings, to better determine performance. A cheap supplier might not look as attractive if the contract stipulates a supplement for weekend work, or if a disruption means using air freight instead of sea shipment, says Mr. Wildgoose of Zurich Financial Services. “You might have quite a small savings in the unit cost of an item, but a big loss if a main production plant has to be closed for a few days.”
Such costs aren’t always pulled together, because they aren’t always as easy to define as supply chain-disruption costs, appearing instead as increased logistical costs or material variances. “A good finance person will highlight the variances and what needs to be done to change them, but they need to recognize these interrelationships,” he says.
A silo problem is a people problem, says Dr. Wagner. Some engineering firms get around this by using cross-functional teams, especially for the launch of new products. Such short-term groupings originally intended to reduce costs by involving purchasing managers at the design stage. Now they also are being used to execute the supply chain in a way that reduces risk exposure.
A company that excels in this area is Cisco Systems Inc., the San Jose, California, information technology giant. Cisco adopted a matrix organization as a way to drive innovation, but has found other benefits: speeding growth and reducing supply-chain risk. Highly autonomous councils and boards work on projects, led by executives who are working on multiple major company agendas in parallel.
Kevin Harrington, vice president of global business operations in the customer value-chain management organization at Cisco, compares it to piloting 30 cars at top speed down a crowded 16-lane highway. “The only way to do that is to get out of the box of hierarchy.”
Thinking about supply-chain risk when a product is still on the drawing board allows Cisco to “take a more aggressive posture in controlling our destiny throughout the product life cycle,” he adds.
Cisco also incorporates risk management into employee performance. It devised a resiliency index of weighted factors that the manager of each business unit would be accountable for. “We talk in terms of performance expectations and cost. We explain what’s expected, and partners are free to organize around those any way they want,” Mr. Harrington says. “A collaborative undercurrent runs really thick around here,” he adds.
Companies have silos because they make performance easy to measure, says Dr. Wagner of the Zurich Technology Institute. Silos develop along the lines of job functions or geography.
Good companies break down silos by implementing cross-functional teams and getting purchasing managers involved in product development, says Dr. Wagner.
Silo-fighting “has to be improved on a continuous basis,” he adds. “The effects fade away if you don’t launch new initiatives all the time. … Overcoming silos can be done, but it’s never finished.”
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