Connecting Strategy to Supply Chain

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Going from business strategy development to creating tangible competitive advantages is a long journey. Because no strategy, however brilliant, produces results unless executed.

Therefore, to be useful, a strategy must be implemented. This means that the strategy that establishes the business goals, through which competitive advantage will be created, must then be expanded to articulate actions that will take the business toward its strategic goals. This whole process can be thought of as consisting of three basic steps:

1. Strategy development, that is, the process of evaluating the internal and external imperatives, analyzing the industry, products, and customers, and defining an overriding principle of how the company will try to grow. This is equivalent to defining the ‘‘what’’ and ‘‘why’’ of the problem.

2. Strategy planning is the process of assessing the current state of the corporation and evaluating various alternatives that can be potentially considered to achieve the stated imperatives of the business strategy. This step consists of analysis, evaluation, articulation, and prioritization of these alternatives, in effect defining the ‘‘how’’ of the problem.

3. Strategy implementation is the process of starting and managing the individual projects to implement the favored alternative from step two.

image While most companies have some level of formally defined process for developing a business strategy (step 1 above) and an ongoing slew of projects (step 3 above) creating new capabilities and enhancing existing ones, most do not have a formal process for the activities identified in the strategy planning step. Strategy+business, a management magazine also recognized this gap in a recent article, even though they did not distinguish between the planning and execution phases as above. While the planning phase focus on gap-imageassessment of a firm’s business capabilities, therefore determining what must be done, strategy execution emphasizes the actual execution activities: program management, project management, change management, communication, training, and all other organizational aspects for successful execution. While that is important, the intermediate analysis provided by strategy planning is the missing link in most modern corporations in any recognizable formal fashion. In absence of this planning step, corporations fail to establish and prioritize the execution efforts that are aligned with the goals of the business strategy, and fail to identify and prioritize the filling of specific capability gaps.

This middle step of strategy planning, is what I call functional strategy. This is the step where firms must assess their business capabilities and determine (1) what capabilities they must build that are aligned to their business strategy and (2) how they must build them to create differentiators to create competitive advantage. This is where the business functions such as supply chain fit-in. This is where a firm needs to assess their current and required supply-chain capabilities to identify the gaps and prioritize their investments in building those missing capabilities. This also gets emphasized in the quoted article above.

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Joining the business strategy to the functional strategy by assessing your supply-chain capabilities is the key to building successful supply chains. The final piece of execution is what I call deployment strategy falls into place when real projects enabling specific process are planned, budgeted, spun off, and executed. Understanding this continuum from the business strategy to functional to deployment is key to successfully creating competitive advantages to support your business objectives. For more on the process of building effective supply chains, read my latest book on supply chain strategy.

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

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Effective Supply Chains and the Organization

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In a recent article, McKinsey argues that to be successful, future supply chains will require a rethinking of the internal organizations – where the focus is on collaboration rather than competition. I could not agree more.

The conventional departmental silos in the companies were originally a simple outcome of complex business processes without any intelligent system support. As computer systems evolved, the gap between the complexity of a process and the ability of a technology solution to support the process has narrowed consistently. This has provided businesses with new opportunities to break-down these silos and create nearly integrated (and automated) processes with real-time feedback among processes. Starting with the ERP systems in 1980s, this trend has continued with systems like MRP, DRP, and the current supply-chain systems that have the ability to provide an end-to-end automation of most complex business processes to reduce costs, increase efficiencies and enrich information quality that improves the overall experience for everyone involved in the process – employees, customers, vendors, and service providers.

However, the organizational change to leverage such powerful integrated process capabilities has somewhat lagged behind. Modern supply chains can cover a very large scope of the operations – from demand forecasting through purchasing and manufacturing to the distribution and service of a firm’s products and services. Unfortunately, a large number of companies still view these through the conventional silos of departmental thinking and in doing so, potentially sacrificing some of the efficiencies possible through such systems, though the trend is encouraging. An AMR survey (Supply Chain Gets a Promotion by Kevin O’Marah) found that the number of respondents who said that their supply chain reports to the president/CEO/GM, who owns overall P&L responsibility rose from 51% in 2009 to 62% in 2010. While the integrated view is evolving, 62% is still a long ways to go!

imageIn the referenced article, Is your top team undermining your supply chain, McKinsey makes similar arguments and primarily lists three tensions among organizational silos, supply chain versus sales, supply chain versus service, and supply chain versus product proliferation. I agree with this view – while the availability of packaged software solutions and technologies brings capability parity to an extent, the true competitive advantage is generally a result of a complex interplay of business capabilities, process superiority, and organizational capabilities. To be truly effective, supply chains of the future will not only have to design and build effective capabilities to address ever-evolving business needs, but also effective organizations to leverage such capabilities.

 

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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

Supply Chain as Strategic Asset

My second book on supply chain was released over this weekend. It is titled, “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”.

This book investigates the relationship between some of the well-known business strategies and how they affect the selection of the supply chain strategy. As technology is the de-facto enabler of business capabilities in current times, therefore, the book also provides a good overview of the prevalent practices in developing and pursuing effective technology strategy that will best support the business needs.

The objective of this book is to explore the relationship between the three strategies: business strategy that sets the goals, supply chain strategies that define the business capabilities to achieve the business goals, and the technology strategy that enables building the business capabilities effectively. I believe that senior executives who understand this synergistic relationship can transform their companies most effectively by prioritizing the capital investments that are fully aligned with the business goals of the firm and hence provide the best returns on the investments. The book is full of real-life cases from the industry supporting the view points presented to create an effective supply chain strategy.

Next steps:

Read Read Excerpt- Chapter 1 (PDF)
  Read Excerpt- Index (PDF)
  Read Excerpt- Table of Contents (PDF)
Buy Buy at Amazon
  Buy at Wiley
  Buy at Barnes & Noble

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© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.

Agile as Supply Chain Strategy

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In one of my last posts, I started a series on the conventional supply chain strategies and why they are inadequate to help firms trying to design their supply chains. A few days later, I followed up with lean as a supply chain strategy. Today, I continue with the series focusing on agile as a supply chain strategy.

Agile refers to the ability to react and adapt to the changes in demand and supply situations in a supply chain. To accommodate the inherent variations in demand and supply, supply chains need to react and adapt to such changes as they happen, to minimize the disruption and optimize the objectives, such as costs, fulfillment rates, inventory, and so on. So what does it mean to have an agile supply chain?

An agile supply chain design will have redundancy built into its processes, allowing it to quickly respond to expected changes. This supply chain will be best to maximize the service levels for fulfilling demand, manufacturing personalized products, and providing excellent customer service. These objectives will drive the supply chain to keep higher levels of inventories to maintain order fulfillment targets, favor on-time deliveries over cheaper shipments, and favor quality inputs and personalized services over mass produced, commoditized goods. These supply chains will have more flexible supplier contracts that enable them to change order quantities, destinations, need dates, and even cancel the orders altogether if the demand falls off a cliff. Suppliers will typically allow such flexibility for a cost. When demand suddenly rises and the primary suppliers cannot cope with the increased demand, an agile supply chain will go to a secondary set of suppliers that would have been established in advance for maintaining supplies for such an eventuality. As purchase volumes for the secondary suppliers will be low and demand uneven, the costs of such contracts is generally higher. However, having all these layers of extra inventories, warehousing, transportation, and suppliers will provide enough buffer to the supply chain to handle most variations in demand, supply, or lead-time while maintaining its stated service levels.

Contrast this supply chain with the one based on lean as the driving principle and you will notice the contrasts.

Agile supports the natural designs of supply chain – which exist to manage variability. However, the extent of variability in the demand, lead-time, and operations must determine the amount of agility (and hence the amount of redundancy) designed into the supply chain.

Also, most firms have a large assortment of material to be managed: Raw materials, WIP, finished goods, and retail assortments almost always consist of a mixed bag of products when it comes to their demand profile. Some of these products may have a stable demand profile, while others will be more volatile. This means that the enterprise supply chain that must be designed to cater to all these types of products must be lean (to best manage the products with a stable demand) and agile (to manage others with volatile demand) simultaneously. After all, you could not run a business with a lean supply chain with the lowest cost, but that cannot respond to any changes in demand or supply. Since all demand and supply has inherent variability, such a rigidly designed supply chain will quickly build up unwanted and obsolete inventories as it is incapable of reacting to changes in demand and supply. To the same extent, one also cannot run a supply chain that is extremely responsive and manages the changes in demand and supplies precisely, because such a supply chain will have an unreasonably high cost to operate, quickly running out of working capital to support daily operations.

Therefore, I see both of these attributes as core capabilities of any supply chain design, being complementary rather than being exclusive to each other.

How can a supply chain be both lean and agile at the same time? A firm can regard both lean and agile strategies as process drivers for designing individual supply chain processes rather than as being all-encompassing strategies for developing a supply chain as a whole. In this context, they become the principles that practitioners can use to develop standard processes that leverage one of these attributes even as process exceptions leverages the other. For example, a firm may establish a store-based inventory policy using the lean principle to cover the supply lead-time from the primary warehouse to the store. While the lean design drives their standard replenishment to the store, the process to handle exceptions to manage stock-outs may leverage agile principles, allowing priority replenishments to the store from a set of alternate sources in order to avoid losing substantial sales revenues.

Successful supply chains are designed to be lean and agile at the same time: The example of Wal-Mart illustrates the complementary use of lean and agile design principles in designing a supply chain that is highly effective. Therefore, the question of whether a supply chain should be lean or agile becomes a rhetorical question. Any large enterprise cannot have a rigidly designed supply chain that is either lean or agile. Rather, both of these aspects of lean and agile are required in designing an effective supply chain to support the business.

 

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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

Lean as a Supply Chain Strategy

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In my last post, I started a series on the conventional supply chain strategies and why they are inadequate to help firms trying to design their supply chains. This continues the series with the focus on lean as a supply chain strategy.

Lean primarily refers to elimination of waste and is the basic philosophy that originated as part of Toyota Production Systems, with its emphasis on the elimination of waste (muda). Therefore, this philosophy is based on reducing the cost by eliminating activities that do not directly add any value. Cost can be reduced in two ways: (1) by identifying and eliminating the wasteful activities that don’t add any value and (2) by enhancing the efficiency of a required activity so that the throughput of the process can be increased. A lot of supply chain activities can directly leverage this thinking. Most execution activities in a supply chain can benefit from lean thinking, such as picking, packing, loading, and unloading in a warehouse; routing of shipments in transportation; labor activities on receiving docks at warehouses, stores, and manufacturing plants; and so on.

Loading a container ship

What does a lean design for a supply chain mean? A lean supply chain design requires that supply chains minimize the cost of operations at all levels. Lean requires that the supply chain uses the least amount of resources to efficiently complete its job. The primary resources in a supply chain are inventory, warehouses, trucks, people, and working capital. A lean supply chain will be designed to have minimal inventories in the system, minimal amount of warehousing space required to store these inventories, and optimized shipments to reduce the cost of moving inventory. A lean supply chain will also be designed to establish long-term, stable supply contracts with the lowest negotiated cost, but typically without any substantial ability to change ordered quantities, delivery destinations, and required need dates after the order has been placed. Lean design will most likely not engage secondary suppliers, because a second tier of suppliers is expensive to maintain. All of these factors will reduce the costs of the supply chain operations, making it extremely cost-efficient, but will also constrain the supply chain’s ability to adapt to any changes in demand, supply, or other resources, due to the built-in rigidity of the design.

And therein, lies the rub: Low inventories make the supply chain vulnerable to not being able to fulfill orders if the demand suddenly spikes or if there are changes in demand that were not foreseen. Inability to change orders with the suppliers also constrains the supply chain’s ability to react to any changes in demand and may saddle the supply chain with unwanted inventory. Having no secondary suppliers also limits the ability of the supply chain to reacting to spikes in demand and/or exposes it to supply failures from the primary suppliers. The focus on being lean prevents this supply chain from building redundancy by design which reduces supply chain’s ability to manage variability.

On the other hand, the only reason for supply chains to exist is to manage variability! So a lean focus ion supply chain design actually goes against the very basic nature of the supply chains. However, if the lean focus is seen simply as the most efficient way to execute business operations (which include a fair amount of agility to respond to natural volatility in demand), then it can be used to design effective supply chains. Also – if lean is a supply chain strategy that is good in certain conditions, I would like to know when is lean not good? When should a firm spend more money than is absolutely required to organize its operations?

Also, most firms have a large assortment of material to be managed: Raw materials, WIP, finished goods, and retail assortments almost always consist of a mixed bag of products when it comes to their demand profile. While some products may have a stable demand profile, others will be more volatile to manage. This means that the enterprise supply chain that must be designed to cater to all these types of products must be lean (to best manage the products with a stable demand) and agile (to manage others with volatile demand) simultaneously. After all, you could not run a business with a lean supply chain with the lowest cost, but that cannot respond to any changes in demand or supply. Since all demand and supply has inherent variability, such a rigidly designed supply chain will quickly build up unwanted and obsolete inventories as it is incapable of reacting to changes in demand and supply. Of course, too much emphasis on creating agility may be expensive and may also not provide the best design as we shall see when we discuss agile as a supply chain strategy.

Finally, the cost focus serves much better a generic business strategy as suggested by Michael Porter because a cost focus can be used effectively to drive any corporate function, such as accounting, human resources, merchandising, production planning, engineering and so on: There is nothing specific about the cost focus that would make it work any extra magic for supply chain than what it can do for any other corporate function, and hence its inability to drive supply chain strategy!

Summarizing,

  • Supply chains must manage variability and an exclusive focus on lean prevents supply chains to be designed effectively for managing natural variability and hence from doing their most important job.
  • As most firms have several products to manage and these products have widely varying demand and lead-time patterns, the enterprise supply chain must be designed to work for all these products without undue focus on a single characteristic.
  • There is nothing special about the cost focus that helps driving supply chain strategy any more than it can do for any other corporate function. To that extent it remains an effective business strategy, but not a supply chain strategy.

 

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© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

Supply Chain Strategies: Time to Refresh?

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Conventional thinking on supply chain strategies has been quite restricted to a few major concepts. My objective in presenting this series is to review these concepts, critique where they fall short, and finally, present an alternate way to think of supply chain strategies – that will actually help you build capabilities and design effective supply chains. Designed, ground up for creating and sustaining competitive advantages rather than simply filling up feature/functionality gaps to automate your operations.

image There is a reasonable bulk of literature available on supply chain strategies. Most of the literature surveyed presents similar concepts by varying names in different contexts. They tend to typify the supply chains as being one of four types: lean, agile, speculation, or postponement-oriented. Hau Lee of Stanford identifies four types as Efficient, Risk Hedging, Responsive, and Agile, which are quite similar to the earlier characterizations but with subtle differences. Similar themes are repeated but all of them suffer from the same problem: They are all so generic that they frequently drive the business strategy rather than being driven by it. The level of abstraction precludes the possibility of going into specific details, which are useful in designing the business capabilities for a real-life supply chain. Being lean, for example, is viewed as simply a cost-reduction strategy and will be just as applicable to supply chains as it will be to human resource management or any other business function in a corporation. With that amount of directive, do these concepts really qualify as supply chain strategy?

In the next few days, I will review the following four basic concepts that appear time and again as supply chain strategies. I will argue why they fall short of being of “strategic value” and what alternatives exist. Till then, the briefs below will have to suffice:

  • Lean – The supply chain strategy concept that revolves singularly around cost-reduction abilities of a well-designed and well-run supply chain. (Why would you ever build a supply chain that is not optimized for cost?).
  • Agile – The supply chain strategy with a singular focus on creating responsiveness. (Is there such a thing as an unresponsive, yet effective supply chain?).
  • Postponement – The strategy concept based on the idea that supply allocations or creation of finished goods should be postponed as long as possible towards the time of actual demand. (Great concept, but is it really applicable to you – when you are in build-to-stock business model for a commodity item? What if you were manufacturing staples?).
  • Speculation – The strategy based on the idea of leveraging economies of scale to reduce the incremental cost of supplies for addressing incremental demand. (Once again, great concept, but what if your business model is not suited to a build-to-stock scenario? What if your business’s value proposition lies in providing custom-tailored jackets?)

Next few weeks, I will expand on each one of them and finally conclude with a supply chain design paradigm that will allow you to actually build an effective supply chain rather than chasing the phantom strategy concepts that are too abstract to be useful in a real-life scenario! Keep tuned.

 

Related Articles:

  1. Strategy Alignment: Poor State of Affairs
  2. Business Strategy & Supply Chains
  3. Business, Functional & Deployment Strategy Alignment for Supply Chains

 

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chains? How they work, what they afford, and how to design one? Check out my books on Supply Chain Management at Amazon.

The 700-billion Dollar Supply Chain Opportunity

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Logipi has recently started a blog talk radio show. It is on every Thursday at http://www.blogtalkradio.com/logipi/.

On September 2, I spoke with Dustin on the supply chain opportunity still available to companies in America. Here is an audio blog of my interview or scroll down to read the script.

Dustin: Vivek, welcome to the show, before we start, I would let you introduce to our audience

Vivek: Absolutely – my name is Vivek Sehgal and I work for Manhattan Associates that is a best-of-breed solution provider in the supply chain applications area. We have over 1200 customers world-wide and most of the largest retailers use our solutions. I have consulted in the supply chain solutions space for a long time and have implemented these solutions at several large US corporations in retail, CPG, and hi-tech sectors. I have also written two books on supply chain, one on the supply chain processes and the other on supply chain strategy planning, both of which are published by John Wiley and available at all major book stores and online at Amazon.

Dustin: Companies have been investing in building their supply chain capabilities for quite some time now, do you think there are still savings to be had through such investments?

Vivek: I do and so says the CFO magazine as well, based on their reporting of a survey by The Hackett Group. For those interested, they can go to my blog at www.supplychainmusings.com and search for my blog in June on AMR’s top 25 supply chains. Within the blog, I refer to the CFO magazine article “Good to the Last Drop” where it says that, “Opportunities still abound for doing more with less,” and then goes on to mention that, “according to a new study of the 1,000 largest U.S. companies (in terms of sales) by REL, a division of The Hackett Group. Indeed, the study concludes that those companies could wring a total of as much as $709 billion in excess cash flow from their supply chains by adjusting their inventory levels, getting their customers to pay their bills on time, and managing their accounts payable carefully…”. That is 709 billion dollars in cash-flow to be saved by building better supply chain capabilities. That as you see, is the size of the opportunity still out there to be leveraged through supply chain.

Dustin: What areas of supply chain help you in creating these savings? Can you give me some examples?

Vivek: Great question and hard to answer as well, because this is something that companies need to take time and analyze for themselves. But in general, I would say that building or improving any supply chain capability is either going to make you more efficient or going to save to direct costs – either way, you will see improvements in the cash-flow and financials of your company. Let me take an example, let us say you enhance your labor planning and scheduling processes in your warehouses – that improves your throughput in the warehouse, let us say you can handle more receipts, more pallets, cases, LPNs, you can process more orders, you can ship more orders – all of these are going to show up as improved efficiency of your warehouse assets. You can do this through automation of material handling, automation of order fulfillment process, implementing radio-frequency terminals and getting rid of the paper process or a combination of all of these… In the end, though, this is improving the efficacy of your assets and that shows up in your financial statements as improved return on assets, your investors are going to love you for that.

Another example will be inventory. If you can reduce inventory without affecting your ability to service your customers, you reduce the operating cash required to buy that inventory, transport it to your warehouses, stock it and so on – inventory reduction can have significant effect on the working capital required to run your company. And there are several things you can do to improve your inventory levels starting with implementing better demand planning and inventory optimization processes. Inventory reductions show up in reduced cost of goods and reduced working capital – both of which means increased profitability for your company.

I can go on – but again this is a huge subject and one that is close to my heart as well. I have written several articles on the relationship between supply chain efficiency and its financial impact – that are available on my blog at http://www.supplychainmusings.com.

Dustin: I read in one of your blogs, you talk about a quarter of a trillion dollars opportunity for retailers, what is behind that number?

Vivek: Oh, you are right Dustin, that number appears in the same article that we started this discussion from. Here is how I got to it: The Bureau of Economic Affairs, which is a federal agency charged with the GDP reporting, says that the US GDP for 2009 was just over 14 trillion dollars. Then, there is the Census Bureau that reports numbers on the size of the retail in the country – for 2009, the size of the retail sector was just around 4 trillion dollars. Putting the two together, retail is just over a third of the GDP in the US. Like I said in the beginning of this discussion that Hackett Group believes that the total supply chain opportunity is 709 billion dollars in excess cash flow. Out of that 709 billion dollars, then the share of retail will be at least one third, since retail contributes that much to the GDP. One third of that number is 236 billion dollars. That is the supply chain opportunity that retail industry can realize through improved cash-flow if they implement better supply chain processes.

Dustin: What do you think, the CFOs realize that and they are on-board with it?

Vivek: I guess so, let me tell you a little story. There was a time 5-6 years back, when I was part of a team with the charter of finding out where we can make biggest supply chain improvements for a retailer. Naturally, inventory planning was top of the list – we presented that to the executive team and the reaction from the CFO was that they did not want to reduce inventories because they were a cash-rich business with a very healthy cash-flow. It was shelved. Now after all those years with the recession beating them down, of course, they are trying to play catch-up! But one good thing that this recession has done – is to bring the CFOs firmly on-board with the supply chain initiatives. I think most of the CEOs now realize the potential and have made themselves more knowledgeable about the role of supply chains to achieve their financial goals. And, that I think is real good, for all of us, the investors, the companies, supply chain professionals and even the CFOs.

Dustin: That is good, what else is on your mind?

Vivek: Well, I think we can wrap-up and before we do that, I would want to remind that my second book on supply chain strategy is coming in December. It discusses the business strategy and the need to align the business strategy with supply chain strategies of the company. It is full of examples from the industry and I think will make a compelling read for supply chain professional all over. All for today from my side Dustin, and thanks!