Business Strategy and Capabilities

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The concept of business strategy has existed for a very long time. Pinning down the exact date may be difficult – from The Art of War written about 2,500 years ago to the invisible hand of Adam Smith in the mid-eighteenth century – however, that is not important. The most important part in the continuum of strategy is the actual execution of strategy, because that alone produces the advantages theorized by a strategy. But the execution of a strategy does not produce advantages directly, rather it simply creates business capabilities that in turn creates the competitive advantages enabling a corporation to win.

While a lot has been said on business strategy since Michael Porter came up with his three generic strategies, most of the later concepts  are simply variations of these three. The three generic strategies of cost, differentiation, and focus  continue to be the true basis of all competitive advantage simply because these are the three lowest common denominators of all business activity that consists of selling (hence the cost) product and services (hence the differentiation) to customers (hence the focus).

The ability of a business strategy to drive the required business capabilities is the key to creating successful functional strategies such as the strategy for supply chains. While the concept of a functional strategy is not quite well main-stream yet, it happens to be the missing link in the strategy continuum for a long time – and this is the crux of my book on supply chain strategy, though lately some other people have also started talking about how capabilities mandated by the business strategy can drive the competitive advantages. 

imageIn the winter 2010 issue 61 of the strategy+business magazine, in an article titled, “How The Top Innovators Keep Winning”, the authors argue that it isn’t the amount of money companies spend on research and development that makes them successful, rather it is the particular combination of talent, knowledge, team structures, tools, and processes — the capabilities — that successful companies put together to enable their innovation efforts, and thus create products and services they can successfully take to market. I fully agree with this view point, the capabilities of a corporation are really the only distinct advantages over the competition – specially when seen in their broader context, and these capabilities are created only through a relentless pursuit of understanding what the business strategy mandates and a continuous assessment of “capability gaps” compared to the mandate.

While a lot of supply chain strategy thinking is stuck around the keywords like lean, agile, postponement, speculation, and so on – the real advantages from a supply chain can only be created after a thoughtful assessment of the business mandate and an assessment of existing capabilities. How can one go about doing that? Explore several practical methodologies and real deliverables in my 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.

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.

Advantage: Bar Codes (for now)

Supply Chain Digest’s series on Supply Chain by the Numbers for Week of Jan. 13, 2011 cites a Kroger pilot with read rates exceeding 98.5%. The pilot is built around reducing the manual imagetouches during the check-out process. As the products move through the tunnel, their bar-codes are read and accounted for, an OCR (optical character recognition) system supports the bar-code reader by identifying products where the bar-codes may be unreadable. Any items that could not be “read” using the bar-code reader or the OCR device are handled manually at the end of the tunnel to finish the check-out. This was showcased in the recently concluded NRF 2011.

The system can potentially reduce billions of manual touches during the check-our process as well as provide substantial improvements in loss-prevention and inventory accuracy processes. All of which should provide Kroger with definite cost-savings and a much improved replenishment capability in its stores.

Another possible inference? SC Digest says that, “the development of the system is obviously a bet that item-level RFID tags capable of being read en-masse or at high speeds are not coming to the grocery industry any time soon – else Kroger or any retailer would not have made the investment in this UPC-based technology”. This view is corroborated by Kroger’s CEO as well.

Where does that leave RFID at least for now? Well, RFID is in a great revival as well – with a host of retailers adopting RFID technology to manage their store replenishments from their back-rooms as well as to manage their receiving and shipping operations in the warehouses by adopting RFID tags at case, pallet, and/or LPN levels, in addition to renewed efforts to kick-start the item-level tagging.

American Apparel reports 99+% inventory accuracy in their store pilots, Wal-Mart re-launched its RFID efforts at item-level with apparel. J.C. Penney has been another big retailer actively toying with the RFID tags to better manage its supply chain as well as stores. Once the technology matures and item-level tagging becomes mainstream, the POS & check-out processes should also be able to leverage RFID tags!

 

© 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.

Supply Chain Agenda: Meeting Customer Requirements

Capgemini says 58% percent of the supply chain managers surveyed said that their main business driver for 2010 is “Meeting (changing) customer requirements”. Overall spend on supply chain initiatives is projected to go up as well. Summary of results from their survey:

  • More than half want to start or continue with operational excellence
  • Trend for centralization of supply chains continues
  • It investments are back with 3-12% increase for supply chain projects over 2009
  • Sustainability gets more traction

Read the full report at: Capgemini Consulting research: Customer back on top of the supply chain agenda in 2010

Sustainable Thinking in Supply Chains: A Long way to Go

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Supply chains have the biggest potential to boost sustainable business practices, because supply chain processes control a very large number of  enterprise activities including manufacturing and logistics that directly contribute to environmental degradation.

However, sustainable thinking in supply chains is still on the backburner for most of the corporations. A new McKinsey survey found that supply chain management ranked eighth in corporations’ view of where sustainability matters. Only “attracting and retaining talent” trailed supply chain management in this list. It shows that most companies view sustainability more as a marketing fad than a real shift in business environment. While there is a lot of rhetoric, the action is largely missing. According to the survey, “more than 50 percent of executives consider sustainability—the management of environmental, social, and governance issues—“very” or “extremely” important in a wide range of areas,
including new-product development, reputation building, and overall corporate strategy……”. However, when it comes to action, “only around 30 percent of executives say their companies actively seek opportunities to invest in sustainability or embed it in their business practices”. Some more interesting facts from the survey:

When asked about the “Top reasons for addressing sustainability issues”, companies ranked,

  • “Maintaining or improving corporate reputation” as their top most reason to adopt sustainability,
  • “Improving operational efficiency and lowering costs” came third and “Regulatory risk” was in eighth place.

In response to “Where sustainability matters”,

  • “Managing corporate reputation, brands” was on top, with,
  • “Planning investments” and “Purchasing, supply chain management” in seventh and eighth positions respectively.

To read the source article from McKinsey, click on the link: How Companies Manage Sustainability.

 

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

 

Demand Planning: Essential to Your Success (Part 2)

If you had to pick a single process that has the largest impact on the company’s plans and operations, what would it be? Better pick demand planning since it is the starting point for a lot of processes that collectively make retailers hum.image_thumb12

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In part 1 of this series, we presented various business processes that can benefit from a single source of projected demand. These processes included planning and execution functions in supply chain and merchandising functions spread over a long time horizon. The exhibit below provides a quick summary of the processes covered in the first part of this series.   imageIn this part, we present how retailers can proceed to create a single source of forecasted demand to drive their processes and align their functional plans with their operations.

Creating a Single Version of Demand

So far, we have seen that projected demand drives a number of diverse processes in a company. Given this versatility of the demand planning process and potential use of demand forecasts driving many other processes, one would think that companies will have a single forecast to ensure alignment among all the downstream processes. This however, remains a myth. In reality, companies routinely use many different demand forecasts to drive their processes for planning and execution. It is not uncommon to have different historical data as well as techniques used to generate forecasts that drive different processes. For example, the long term demand projections generated for merchandise planning are routinely an affair of a budgetary projection that reflects more of the firm’s financial growth targets rather than any statistically indicated growth trends. Same is true for aggregate demand projections used for network planning.This disconnect is only partly due to the lack of awareness. The other major reason is lack of proper tools for demand planning. Most corporations just do not have the right tools to maintain a single source of demand forecasts to address all the above processes. It is common to have a statistical demand forecasting application used for the execution processes, but then have a simpler, often subjective tool for addressing the needs of the mid and long-range planning processes that also need forecasted demand. This leads to inconsistent demand projections being used for different processes leading to plans that are misaligned with the operations. Lack of alignment between plans and operations causes misguided capital investments, infeasible plans, and unmet targets for revenue, profitability & budgets. They also lead to under or over capacity in the network, inventories, and the resources.To avoid this misalignment, firms must get out of the siloed mentality and ensure that functional plans that share critical inputs like projected demand are based on using a single source of truth for such data. This is not very hard to achieve if corporations are aware of the different functional requirements and implement a single solution for creating demand forecasts driving all their planning and operational needs. This can be achieved by establishing clear process goals and having a tool capable of manipulating the demand forecasts in many different ways to address the unique but closely related requirements of these separate business functions.

Establish Series of Forecasts Required

Establish what types of demand forecasts are required. Not all retailers need to create plans covering all the business processes, nor do they need to create them with the same objectives. For example, if your logistic operations are largely 3PL based, the changes in the network flow capacities can be accommodated with relatively short lead-times and a large capital outlay planning may not be required. In another example, if your distribution is largely based on cross-docking operations, the future plans should largely plan for increased number of shipping and receiving operations to accommodate growing demand rather than conventional warehouse storage. Therefore, the first step towards creating and using a single demand projection is to establish what processes are critical to a company’s continued operations and depend on forecasted demand.This means that well-defined requirements exist establishing the frequency of the forecast, level at which it will be generated, units for the forecast data, horizon definition, length of history to be consumed, data cleansing & enhancement pre-processes, and the consuming process for the forecast. This will help in evaluating the right solution and validating the feasibility of producing such forecasts from the single source of demand data.

Establish Functional Meta-data Standards

Next, understand how a single source of demand data will be modeled to cater to differing needs of individual functions. An important aspect for creating functional plans using the same demand data requires well thought out meta-data and master data models. Do the different business units and regions use common master data? Do they organize data using identical hierarchies and meta-data definitions? Make sure that all the functions use common definitions and understanding of the following meta-data structures and these structures fully address their needs.· Item master data and attributes· Item groups and hierarchies for aggregating and dis-aggregating demand data· Hierarchies for locations and organizational units· Time & horizon definitions· Retail and cost for items, discounting structures, and consistent definition for units of measure like cases, boxes, and pallets

Identify a Single Source of Demand

Identify a source of demand history that can be used for projecting demand for all functional areas. There are various options to think of: firms can use the actual point-of-sale (POS) data from the sales at stores or individual customer order data from other channels, outbound shipments from the warehouses, or receipts at the store. While the latter two may provide easier to implement processes to obtain demand history, the former usually is the best source of collecting demand data. Select a source based on the granularity of demand required and establish technology solutions to support the data being generated. If POS data is selected, remember that it needs to be collected from physically distributed stores across time-zones in relatively near-time fashion to support good-quality demand management processes.

Finally, Get a Tool that Works

Finally, get a tool that provides the flexibility to use a single source of demand history and create many different forecast series as required by the consuming processes. Of course, the solution must have the basic functional capabilities required for demand forecasting such as the ability to consume history & create forecasts: such capabilities are not part of this discussion. Check for the following capabilities to address the requirements of various processes that need demand forecasting data. What makes these solutions versatile is their ability to manipulate data, slice and dice it, and roll it up and down to create different views of the same data. Specifically, the following features create such capabilities that enable or prevent the solution from catering to all the processes mentioned above.

Dimensions and Attributes:

A good demand planning solution must allow modeling and working with the basic dimensions of demand. This also provides a flexible framework to manipulate data along these dimensions & create views that are most relevant for the process under consideration. Ask if your solution can model the three basic dimensions of product, location, and time in order to qualify the demand data and model attributes for the members of these dimensions that can then be used for quick analysis of demand by slicing and dicing the data. For example, product attributes like their sales velocity, style, targeted customer segment, or season provide good criterion for grouping and reviewing the demand at aggregated levels relevant to different processes. Having the ability to model such attributes and manipulate data using these attributes is an integral part of the solutions that would cater to different functional processes.

Hierarchies & Roll-ups:

A good solution must be able to define hierarchies for each of the main dimensions of product, location, and time mentioned above. For example, the hierarchy along the product dimension allows the users to create product categories and to aggregate demand along the levels of this hierarchy to look at demand by category, product group, department, and so on. The solution must also allow multiple hierarchical representation of the same underlying entity: this means that products can have a merchandising hierarchy that groups them together for use in merchandising processes, but they can also have an inventory group hierarchy to quickly manage the inventory levels. These groups are generally created by using the attributes and their values for the entity. For example, the inventory groups may be created by using an attribute that models the sales velocity of the products, while the merchandising categories may be a result of attributes like style, season, and the target customer segment. Having multiple hierarchies allows the users to aggregate demand data along different paths and analyze it for specific process needs.

Horizon Modeling:

The solution must allow flexible horizon modeling. This helps the users to construct a funnel-shaped horizon with finely defined time buckets for early time-periods and coarse time-buckets for future time periods. This makes the solution more responsive, faster to run, and allows for modeling longer time horizons as would be typically required for long-range planning processes. It also reduces forecasting errors by aggregating demand for the farthest time periods. For example, the immediate time periods can be defined as days, followed by weeks, followed by months and quarters. A planning horizon of a year defined with weeks will create 52 time periods, while a funnel shaped time horizon modeling first three months as 16 weeks, followed by 9 monthly periods and 2 quarters would actually allow a meaningful forecasting horizon extending up to 18 months into the future, yet having only 27 time periods for the forecast. The latter approach to modeling will be much more efficient for computing while both models will provide equal functional utility as long as supply lead-times for the products of the firm are less than 16 weeks. The shape of the funnel depends on the lead-time characteristics of the firm’s products and their procurement practices, but as long as the solution provides a flexible way of modeling, it can be implemented usefully.image

UOM & Conversions:

Finally, the demand planning solution must be able to model demand time-series in any relevant unit of measure. As mentioned above, some processes like replenishment need the projected demand data in individual product units, while others like merchandise planning needs the same data in dollars. The solution must allow for modeling multiple units of measure and provide the ability to convert from one unit to another. It should also be able to represent multiple time-series for historical and projected data since not all units of measure can be converted from one to the other. For example, when products with different physical units (one measured in meters, other in lbs.) are grouped together under a common merchandising group, they must be converted to a common unit such as dollars to make any sense: this can be achieved either by having multiple time series in dollars & other measures or by modeling retail price per unit and converting the sales in units to sales in dollars. In another example, if products are rolled up using their handling characteristics (conveyable and non-conveyable), their demand may be presented in cartons & pallets, or by weight or volume. If the solution allows for such modeling flexibility and easy conversion from one unit to another, it allows itself to be leveraged in different functional contexts required by different processes.

Summary

Demand forecasting caters to many organizational processes that are spread across the time horizon and functional boundaries. To ensure that long-term organizational plans are aligned with the short-term operational objectives and the processes across functional boundaries support each other, it is imperative that companies implement demand planning solutions that will allow them to create a single demand forecast to drive these processes. Such a forecast must use a single source of historical demand and forecasting techniques that use similar assumptions. This cross-functional alignment in plans and operations will establish process synergy, reduce plan conflicts and volatility, and create operational stability that otherwise remains elusive.In part 1 of this 2-part series, we presented the business processes that require forecasted demand to create plans that support everything from supply chain network capacity planning to every-day replenishment operations. These processes span across time and functional boundaries. We also presented how their requirements for projected demand differ by horizon, data granularity, and units.In this part, we conclude this series by presenting how companies can break the functional silos to create a single source of demand forecasts to support their plans for different processes and ensure functional alignment as well as operational stability as a result. This requires careful planning and the right tools as discussed in this concluding part 2 of our series. © 2009 Vivek Sehgal, All Rights Reserved

Supply Chain Strategy Trend Two: Environmental Consciousness

In the previous post, I highlighted the two emerging trends that will shape the future of the supply chains. This article follows up on the second of these two main trends that affect us. We will call this trend “Environmental Consciousness” as this trend primarily focuses on the changes happening in today’s manufacturing, and distribution industries in response to the enhanced awareness of the impact of these activities on the environment.

While this trend has been in the making for some time, it has gained great momentum in the recent years. The rising awareness of the impact of the human activity on the environment is the subject of discussion in more and more political, social and economic forums. It is also the subject of numerous reports from World Bank’s Environmental Sustainability to Human Development Report 2007/2008 from United Nations.

Manufacturing and Distribution are two activities that affect the environment on a large scale. Manufacturing needs raw materials that come from natural resources in a number of cases, and the manufacturing process invariably needs energy to convert these raw materials into the finished products. Along the way it may produce wastes that must be treated, if toxic, before it can be released back into the environment. Distribution needs energy to move the products from one place to another and is a direct contributor to green house gases and resulting warming.

Supply chains manage manufacturing and distribution processes. And that is what brings them into sharp focus from this point of view.

While there are not many regulatory requirements that constrain the supply chain processes directly at this time, the indicators suggest that such requirements will exist pretty soon. For a look into what the future may look like, review the proposed carbon labeling act in California, http://www.carbonlabelca.org/2.html. Carbon emissions trading is already a reality in EU, and there is active talk of this system as a mechanism to control and govern the environmental effects of the industrial activities in the US as well. (Note that the US has operated cap-and-trade systems for emissions of sulfur dioxide and nitrogen oxides for year now).

Both of the above systems, namely the carbon labeling as well as the trade-and-cap systems can directly contribute towards controlling the environmental effects of manufacturing and retailing activities. Both affect the supply chain functions and its future evolution. The first achieves it through direct consumer discrimination based on the consciousness and the second one achieves it through regulation that affects the competitiveness of enterprises that are less environmental friendly than others.

While some of these measures will be voluntary and others regulatory in nature, it is clear that such measures will effectively change how we as consumers behave and react to products we buy. For example, consider the nutrition labels that were required to show the Nutrition Facts, basic per-serving nutritional information, on foods under the Nutrition Labeling and Education Act of 1990. These were introduced in 1992, and since then it has become an important part of the consumer behavior. It is not uncommon to find people checking the nutrition information in the grocery stores prior to putting the merchandise in their carts. A similar concept for carbon labeling will undoubtedly affect consumer behavior, and hence the retailer’s behavior in how these products are assorted, sourced, processed, distributed and sold.

Carbon Labeling

California’s Carbon Labeling Act of 2008 proposes to “Establish a methodology for determining and communicating the carbon footprint of a consumer product. If feasible, the state
board shall establish standards and methodologies for determining and communicating to consumers on a product label whether a product has a lower carbon footprint than the average comparable product available in the state.”

Chances are that such a methodology will include some measure of (1) energy consumed in the production of a product, and disposal of any harmful byproducts (2) energy consumed in the distribution of a product from the manufacturer to the retailer’s facilities, and finally (3) recycling characteristics of the materials used in production. Most of this information can be collected from the manufacturer and the retailer, and standardized in a format that is easy to understand and discriminate. And such labels will in turn affect the consumer preferences that drive the merchandising, sourcing, purchasing, distribution and stocking processes.

Trade-and-cap

The trade-and-cap system will primarily affect the manufacturing costs and affect the overall price paid by the consumer. Environmentally unfriendly products, even if cheap, will still have some impact in the same way as the allegations of using child labor had in recent years. This combination of regulatory and voluntary pressures will affect the consumer behavior albeit in a slightly indirect manner than the carbon labels. Managing costs eventually affects the same supply chain processes as above: merchandising, sourcing, purchasing, distribution and stocking.

The decision parameters and the metrics that define and measure these processes will change in response to these changes. So far these were primarily back-end supply chain processes that were merely enabling getting the right product at the right place at the right time and quantity. In the new context, they become front and center processes whose decisions affect the ultimate profitability and success of the company.

How will these process emerge in the future? How should they emerge? That is the subject of supply chain evolution strategy that we will continue focusing in the coming weeks.

©2008; Vivek Sehgal