New Supply Chain Design Imperative

Bookmark and Share

If you have been following along this series on supply chain strategy so far, you would have gone through the conventional supply chain strategies of Lean, Agile, Speculation, and Postponement. In each one of these strategy reviews, I explained why they fall short of guiding a supply chain design in any meaningful way, finally introducing the supply chain sphere of influence and the need to identify what drives your supply chain.

With that context, let me introduce the new imperative for designing effective supply chains. This is based on recognizing the two basic facts about designing supply chain strategy:

  1. Supply chains can only manage demand, supply, inventory, and resources. Therefore, any strategy mandating supply chains to do anything else is not going to help. The supply chain driver is largely determined by the characteristics of the industry, products, and customers. The combinations of these attributes establish the basic nature and constraints of the supply chain capability requirements and therefore, it is largely not an option to be selected.
  2. Supply chains exist only to support a business, therefore, a supply chain strategy must sub-ordinate to the business strategy. This means that supply chain strategy cannot be designed in a vacuum, but must be aligned with an explicit business strategy. This is an explicit choice on behalf of the business and depends on the business model that a firm wants to pursue.

These two principles are shown graphically in the picture below. On the horizontal axis, identify the main supply chain driver from the supply chain sphere of influence. On the vertical axis, identify the main business driver (I have shown only cost or differentiation) that defines your business strategy/model. Remember these two align with the two core principles above. The business strategy driver helps in designing the main supply chain process orientation, for example, a cost-driven business will drive supply chain processes designed for asset-efficiency and high resource-utilization. The supply chain driver helps in designing how the exceptions will be handled within the supply chains – what happens when supplies don’t match demand, or enough inventories don’t exist within the network. Together, these drivers help design processes that match the organizational business objectives while simultaneously addressing the operational needs. And that together creates competitive advantage.

image

For example, if you selected a demand driven supply chain with cost as business strategy (cell 1 above, think of a typical retail supply chain), you would be designing processes with the intent of creating operational efficiencies while a supply chain with inventory as a driver and differentiation as the business strategy (cell 2, think of a typical aircraft maintenance supply chain) will focus on processes to provide flexibility in quick inventory deployments within the network. These characteristics are shown the picture below.

image   

Of course, the supply chain design in the other cells intersecting at other possible combinations will follow their own prominent characteristics to suit the combined effect of business driver and the nature of supply chain operations mandated by the industry, product, and customer characteristics. These are discussed in detail in my book on supply chain strategy.

This is a new design imperative, a new concept, for designing effective supply chain strategy and building processes that create competitive advantages aligned with the needs of the business strategy of the firm – that is the basic theme of leveraging supply chains as an asset. While the conventional supply chain strategies will give you all the buzz-words, it is only through understanding the business goals and operational requirements, that you can actually build a supply chain strategy that is effective.

Next, I will cover some of the key characteristics of supply chain processes that must be designed for building competitive advantage and reaching your business goals.

 

Related Articles:

© 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.

Advertisements

What Drives Your Supply Chain?

Bookmark and Share

The objective of presenting the supply chain’s sphere of influence was to establish a very basic, though often missed, fact that supply chains can directly affect only these four components that they directly control. Therefore, any strategy we formulate for supply chain design must directly establish the behavior of one or more of these four components. Of course, one of these four components must be identified as the primary driver to resolve plan conflicts and to establish the pecking order among the supply chain processes.

image Which one of the four components should ideally drive the supply chain in a firm? Should it be demand, supply, inventory, or resources? The answer depends on a number of factors, some of which we have seen in the review of the existing supply chain strategies. The industry segment, types of products, attributes of demand, attributes of supply, and finally, the selected business strategy are all factors that need to be analyzed to answer the question of what must drive a supply chain. A grocery firm with cost as the business strategy will have a dramatically different supply chain compared to that of a grocery store that selects differentiation as its business strategy. Both supply chains will have some common characteristics because they are both in the same industry segment (retail, grocery). For example, they will both require the ability to replenish their stores frequently for fresh produce and perishables, they will both have to develop temperature controlled distribution capabilities, and so on. However, the grocer with differentiation as its business strategy may decide to differentiate itself by developing a supply chain for its produce that tracks its whole life cycle from the farm-to-the-shelf and provides this visibility to the customers to verify the claims of freshness, organic growth, sustainable farming, fair labor, or any similar differentiators that the customers may pay for. While development and maintenance of such capabilities will add supply chain costs for this grocer, it would also create a passionate and loyal customer base for them. In contrast, the supply chain capabilities for the grocer with the cost-based strategy may simply focus on more traditional ways of sourcing from the cheapest suppliers, optimizing inventories and shipping costs, and discounting products near their expiration dates.

The differentiation based business strategy, therefore, drives its own requirements for the supply chain capabilities that are different from those of the cost based business strategy, while both the firms must also have a basic set of common capabilities. In this example, what is driving the two supply chains? While both of the grocery retailers need to be demand-driven, the one with differentiation as their business strategy must balance this against the supply driven aspects, simply because they will have to manage many more constraints on the supply side, controlling quality through the assortment they carry, the sourcing that must support their policy of freshness, fair labor practices, organic fertilizers, and so on.

Unlike the current strategies that tend to conclude that the supply chain must be lean or agile, speculation- or postponement-oriented, thinking through the core sphere of supply chain influence generally points to a process group belonging to one of the four components, which becomes the focus for creating competitive capabilities. This allows a specific guidance from the strategy to design, rather than providing a high-level general directive of being lean or agile. By process group, I mean the collective supply chain processes that are used to manage any one of the four components of the supply chain sphere of influence. In the example of the two grocers, the grocer with the cost-based business strategy will likely focus on inventory and resource process groups to leverage cost advantages, while the grocer with the differentiation business strategy will focus on supply process group. Remember though that these process groups only identify where the firm has the most potential to create advantages, even though they will have to develop capabilities in all process groups that bring them up to par with the competitors.

In this view of supply chain strategy, one of the four core spheres of influence is identified to be the primary sphere. This helps the firm identify where they can derive the most competitive advantages and operate optimally. For example, the demand-driven supply chain will evaluate all alternatives in response to a change with the view of minimizing their impact on the demand plans, a supply-driven supply chain will do the same to minimize their impact on the supply plans, and so on.

Retail supply chains are great examples of demand-driven supply chains. Examples for supply-driven supply chains would be in industries where supplies are limited or controlled tightly by a small set of suppliers – for example, Toyota’s manufacturing plan in China making batteries for their hybrids that needs rare-earths which are controlled by the Chinese government. Resource driven supply chains are those where the resource skills are rare or capital costs are high (requiring very high utilization) or set-up changes very expensive – for example a steel manufacturer with blast furnace whose supply chain will be managed around the furnace utilization and set-up changes. A good example of inventory driven supply-chains will be an airline’s maintenance operations where the availability of critical spares for their planes can impact their profitability in a substantial way by keeping their productive assets out of service.

In one of my next posts, I will explain how the main supply chain driver (from its sphere of influence) must be leveraged to align with the business strategy of the firm to create a practical supply chain strategy that can actually support your business requirements while simultaneously creating competitive advantages.

 

Related Articles:

 

© 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 Sphere of Influence

Bookmark and Share

Till now, we have discussed the most common of the supply chain strategies: lean, agile, speculation, and postponement. In doing so, we also highlighted the underlying concepts behind each of these so-called strategies and why they fail to deliver as supply chain strategies. Then the last post, we summarized the reasons for why the generic supply chain strategies fall short: because they fail to direct how supply chains should manage what is common across all supply chains, but rather issue call-to-action in terms of the impact of such management (cost, flexibility, etc.). This is in contrast with the generic business strategies that leverage what is common to all businesses – selling of products and services to its customers, resulting in generic strategies of cost, differentiation, and focus.

imageSo what would be an equivalent approach for supply chains: That can be answered if we can define the underlying commonality across supply chains. That is where understanding the supply chain sphere of influence is important. All supply chains have a core sphere of influence that does not change irrespective of the industry or products or customers. Therefore, a generic supply chain strategy must be formulated within this context: Manipulating the supply chain sphere of influence leads to defining the generic supply chain strategies. Supply chains directly manage the following four basic components of a firm’s value chain: Which I call the supply chain sphere of influence:

  1. Management of demand. While the end consumer demand is an independent variable, once the finished goods demand has been forecast, it is the supply chain processes that propagate the demand along the supply chain nodes. As the demand propagates through the network, supply chain processes may determine the optimal way to fulfill this demand, including where, when, and how this will happen. For the manufacturing supply chains, this propagation will take the demand to the warehouses, then to the assembly plants and factories, and finally to the raw material warehouses and vendors. Along the way, the finished goods demand will be broken down into its subassemblies, components, and raw materials using a bill of materials, as well as into its manufacturing operations and resources, using the bills of routing and resources. For retail supply chains, the propagation process will take the demand to its warehouses and then to the suppliers. Thus,while the end demand may be independent, the supply chain processes have a huge impact in managing demand through propagation and determining the fulfillment methods throughout the supply network.
  2. Management of supply. As the demand is propagated from the customer end to the supply end of the supply chain, the replenishment planning processes start creating the fulfillment plans, which results in an opposite propagation of supply to fulfill the demand at every node for every finished product, work-in-progress (WIP), or raw material. The replenishment plans finally drive the procurement process that replenishes the supply chain inventories from the firm’s suppliers. Supplies from the vendors are managed through purchasing and logistics to replenish the supply chain nodes from where the supply propagation continues toward the demand end. These processes of demand and supply planning must work in concert for a smoothly run supply chain. Managing supply with demand is the most important function of a supply chain and since neither demand nor supply is static, the agility with which they are planned and replanned differentiates one supply chain from another.
  3. Management of inventory. This is the third part of the puzzle that supply chains directly control. Inventories make it possible for the supply chains to react to the changes in supply and demand while simultaneously maintaining acceptable fulfillment rates. However, inventories add cost that directly comes from the working capital of a company and therefore, needs to be reduced as far as possible while protecting the ability of the supply chain to service the demand. Supply chain processes of inventory classification and inventory planning help the corporations achieve that balance. The quality of the inventory planning processes depends on the underlying science, accuracy of historical and forecasted demand, supply and lead-time data, and cost models for inventory. The results of this process directly affect the leanness of a supply chain by affecting inventory costs and affect agility by maintaining demand fulfillment targets under varying conditions of demand and supply.
  4. Management of resources. This is the last component of the corporate operations directly affected by supply chain processes. It is also the most complex and wide in scope since resources encompass so much in a corporation—they are the people, machinery, warehouses, trucks, forklifts, conveyors, and so on. A lot of these resources enable supply chain processes in the corporate offices, warehouses, factories, ports, in-transit, and stores. Supply chain processes create resource plans and affect the efficiency and utilization of these resources. Throughput in a warehouse or factory is a direct result of efficient planning and scheduling capabilities. In a wider definition, one could consider inventory and cash as resources as well. We chose to consider inventory separately since there are very specific supply chain processes addressing inventory planning. Cash is a legitimate resource for a corporation and even though supply chains impact it through working capital (inventory and operations), receivables, and payables (cash-to-cash cycles), we do not consider this in the primary sphere of influence of the physical supply chain. The reason to do so is that while supply chain capabilities impact the financial results, they do not manipulate cash as they manage the other components of inventory, demand, supply, and resources.

Next, we will continue with defining how can the supply chain sphere of influence help build a supply chain strategy and help define a roadmap of evolution for the supply chain competency for a firm.

 

Related Articles:

 

© 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.

Conventional Supply Chain Strategies: Simply Inadequate

Bookmark and Share

So far, we have discussed the most common of the supply chain strategies: lean, agile, speculation, and postponement. In doing so, we also highlighted the underlying concepts behind each of these so-called strategies and why they fail to deliver as supply chain strategies. 

image A comparison with Michael Porter’s generic business strategies will further clarify why the above concepts don’t qualify as supply chain strategies. Porter introduced the generic business strategies as cost, differentiation, and focus. These generic business strategies are based on these three factors because these three factors are common to all businesses, across all industry segments, all products and services, all demographics, all geographies and so on. Since all commercial business activity involves selling (cost) of products and services (differentiation) to its customers (focus), therefore, cost, differentiation, and focus are common attributes to all business activity. A business’s ability to control and leverage any one of these common attributes is what allows Porter to define these generic business strategies, applicable equally across the whole business landscape. Therefore, focusing on any one of these three can serve as an effective business strategy or business model that is generically applicable. 

Now think of the conventional supply chain strategies in a similar context: What do supply chains control? What is truly common across all supply chains irrespective of whether they belong to a manufacturer, retailer, distributor, or service provider? Only such basic characteristics that are specific to supply chain functions will be truly acquiescent to qualify as generic supply chain strategy drivers. Notice that lean and agile do not fit in this category being too generic and therefore applicable across everything a business does. Nor do speculation and postponement qualify because they are situational business models that their attendant supply chains must support and not generic supply chain drivers. 

To answer the above questions, we must first understand the supply chain sphere of influence. Without understanding this sphere of influence clearly, we run the risk of creating supply chain strategies like lean and agile or speculation and postponement, which are higher-level business directives and are equally applicable to all business functions. While they set the tone for supply chain functional capabilities, they do so to no more extent than they set the tone for merchandising or financing or any other corporate functions. In this context, they serve no better purpose than reinforcing the business strategy’s guidance for all business functions without offering any specific insights for creating supply chain capabilities. The supply chain sphere of influence helps one to understand what supply chains can and cannot affect. Only then, can one proceed to define how supply chain strategies can be formulated and how best to leverage them to create competitive advantages and support business goals.

So what is this supply chain sphere of influence? That is the subject of my next post, till then…

 

Related Articles:

 

© 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.

Speculation as Supply Chain Strategy

Bookmark and Share

Next in my series on supply chain strategy is the speculation as a strategy. As a refresher, in this series, we have so far covered the three other conventional strategies generally thought of as supply chain strategies and seen why they lack the credentials of being a true supply chain strategy: These were lean, agile, and postponement.

The speculation strategy is really based on savings created through economies of scale, by creating and delivering the finished goods in bulk. The speculation strategy reduces the cost of logistics by maximizing the usage of resources like warehouses and trucks, and reduces the cost of manufacturing by running large production batches that improve throughput by reducing the cost of set-up changes and by reducing the raw material costs by buying in bulk. This strategy leverages the large lot-sizes to produce the economies of scale in manufacturing and distribution, but it is prone to having higher inventory costs due to higher inventory levels and obsolescence. As speculation strategy is based on creating economies of scale through mass production and distribution, the supply chain processes based on this strategy generally create stable plans without much volatility. The low volatility in plans does not require highly responsive supply chain design, especially when compared to the supply chains that cater to a postponement strategy.

However, just as postponement was more of a business model and less of a supply chain choice, the same is true for speculation. The ability to leverage economies of scale or speculation is not a choice: It is an imperative imposed by the type of industry, assortment, and demand patterns. Consider, for example, an assemble-to-order manufacturer such as custom-built gaming machines must adopt postponement, because the speculation strategy will simply produce too many unwanted machines, making the business model unfeasible. In real-life businesses, the business model, dependent on industry, products, and demand patterns, forces a business model that is either speculative in nature or allows for postponement. The business model pursued then casts the requirements for a supply chain that must simply support the business. Therefore postponement or speculation remains a strategy for business and not something open for the supply chain to ponder upon and pursue

The situations in which speculation or postponement is an explicit choice to be made for a supply chain are limited, but may become real options for specific categories of products or sales channels of a company. For example, consider Dell with their new business model to sell through the retail stores. In the changed scenario, Dell must master a speculation model of supply chain to fill the retail channels with prebuilt machines, but they can continue to use their postponement model of supply chain design to effectively build machines for their online sales of computers.

In my next article on the ongoing discussion on supply chain strategy, I will conclude on the conventional strategies discussed so far: lean, agile, postponement and speculative and summarize why this conventional framework of supply chain strategies is not adequate for guiding any real supply chain design for a firm.

 

Related Articles:

 

© 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.

Postponement as Supply Chain Strategy

Bookmark and Share

Next in my series on supply chain strategy is the postponement as a strategy. Till now in this series, we have covered the lean and agile as supply chain strategies and this is the third conventional supply chain strategy I will be talking about.

The postponement strategy is based on the following two basic principles of demand forecastingimage

  1. The accuracy of the forecast demand decreases with an increase in the time horizon. The farther the time window for which the demand is being forecasted, the more inaccurate it will be. The figure graphically represents this effect as a funnel: as time extends farther into the future, the forecast error grows, showing that the forecast demand will have larger and larger variations as time periods progress into the future.
  2. Demand projections for a product group are generally more accurate than projections for individual products. For example, it is much easier to forecast the total demand for LCD TVs than it is for an individual TV of a specific brand, model, screen size, resolution, and color contrast ratio.

The postponement strategy leverages the above characteristics of demand forecasting. It dictates that the firms should postpone the creation or delivery of the final product as long as possible. For retailers, this takes the shape of postponing the delivery of the final product to its destination, while for assemble-to-order manufacturers this means postponing the final assembly of the product. For manufacturing scenarios like build-to-stock, the postponement strategy may drive pushing the packaging or final assembly of the products, allowing the manufacturer to personalize, configure finished products to customer orders, and change the final product mix to suit any changes in demand. The postponement strategy effectively reduces inventory obsolescence and takes out the risk and uncertainty costs associated with having undesirable products, but it requires an integrated and agile supply chain to ensure that the latest demand forecasts can be frequently created and propagated through the supply chain to produce or allocate the right products for their customers.

While postponement is conventionally thought of as a supply chain strategies, a little thinking will dispel this notion. Postponement is not an absolute choice, it is an imperative forced by the type of industry, assortment, and demand patterns. For example, a postponement strategy for delivering supplies to a trauma center or cereal to a grocery store are just not practical choices, even though it may allow for delivery of specific medical kits optimal for the type of trauma or the correct size of cereal packages in response to the actual demand. Therefore, medical supplies manufacturer cannot select postponement as their supply chain strategy any more than a grocer can postpone delivering their cereal. However, in few situations the production and demand patterns may allow postponement to become a business option, in which case, the supply chain must be designed to support that choice – an example is Avon as provided by Shoshanah Cohen and Joseph Roussel in their book on Strategic Supply Chain Management. Avon declined to label their bottles themselves for a long time, viewing this as additional cost and complexity. However, after developing an end-to-end supply chain visibility, Avon saw the opportunity in postponing the creation of its final product by placing the labels in the desired target language. It successfully deployed an idea that had been pushed out earlier, after understanding that this allowed them to postpone the production of final finished goods and better align their supplies to the end-demand without tremendously increasing their inventory.

The situations in which postponement may be an explicit choice to be made for a supply chain are limited, but may become real options for specific categories of products or sales channels of a company. For example, Dell has mastered the art of postponement for their custom-designed machines for individual consumers. When Dell started, this was not necessarily the case in the industry, however, Dell invented a new business model and leveraged postponement as a business model – not as a supply chain strategy – though, it then designed their supply chain to support this business model. That is the distinction I want to make clear – postponement as a business model which then drives the supply chain strategy and not the other way around. And that is also the reason for why I believe that postponement as a supply chain strategy puts the facts on their head – supply chain strategy must follow a business strategy and not the other way around!

In the next article, I will talk about the speculation as a supply chain strategy and why that too falls short of truly being a strategy for supply chains. Keep tuned!

 

Related Articles:

 

© 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 Strategy: Lean and Agile at the Same Time?

Bookmark and Share

In the last two posts, I argued why lean and agile fail as supply chain strategies and why they are inadequate to drive a supply chain design by themselves. The fact is that most of the supply chains  need to be lean and agile simultaneously. After all you cant have a lean supply chain that is cost-effective but is unable to react to any changes or  an agile chain that is good at responding to changes but simply unsustainable financially.

image

Wal-Mart is a prime example: Their explicitly stated business strategy of low prices has driven them to consistently reduce their cost of operations through supply chain innovations. Wal-Mart’s supply chain is definitely among the most cost-efficient in the industry. However, it is also quite agile. Wal-Mart was the only major retailer to reorient their assortment with national colors and substantially increase their American flag-based merchandise after the 9/11 attacks in a very short time. Absence of any major clearance at their stores also points to an agile supply chain that can adapt itself quickly to changes, thereby avoiding overstocked stores and the need to discount merchandise to clear the shelves.

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. The example of Wal-Mart illustrates the complementary use of lean and agile design principles in designing a supply chain that is highly effective – while Wal-Mart uses inventory optimization and transportation optimization processes to reduce the costs (lean), it also uses cross-docking to actively respond to the latest store demand (agile).

Therefore, the question of whether a supply chain should be lean or agile becomes rhetorical. Any large enterprise cannot have a rigidly designed supply chain that is either lean or agile. Both of these aspects of lean and agile are required in designing an effective supply chain to support the business.

Next, I will present the other two supply chain strategies that are routine mentioned: Postponement and Speculation. I will highlight once again, why they too, fall short of being supply chain strategies and why firms must refresh their thinking on supply chain strategies.

Related Articles:

 

© 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 .