New Supply Chain Design Imperative

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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.

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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.

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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.

 

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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.

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Strategic Plans Lose Favor, Really?

Here is an article from Wall Street Journal proclaiming the death of strategic plans. Really? You can believe it only at your own peril. Unless of course, you never really knew what strategic planning was all about, which seems to be the case about WSJ.

Strategic plans are not about annual budget planning and it seems to me that is exactly what WSJ is talking about. Strategy is primarily about creating competitive benefits – if that is not what it is doing for you, sorry to say, but you don’t have a strategy. Strategy is also about assessing risks and having contingency plans. The competitive advantages don’t last forever, they erode over time. They can erode because they become commonplace (and everyone develops those capabilities), they can erode because the environment changes (what was a competitive advantage once is not any more), and they can erode because an expected situations arises (a risk for which the company has no contingency plans). It is the job of strategic planning to ensure that your business always has competitive advantages – creating new ones when the old ones erode.

Strategic plans are about positioning the business for growth and profitability; not about annual, quarterly, or monthly financial reviews to pore over the cost/revenues picture.

That said, the strategic plans are deployed through their attendant plans. Financial planning and budgeting is a prime example of one of those types of attendant plans. No less important, but they do not substitute the strategic planning. Almost all companies do have financial plans, but not all of them have strategic plans. Having a five year or three year financial plan does not equate to having a strategy. It only equates to having a broad understanding of revenues and expenses. It is an important tool towards realizing the business strategy, but it is not business strategy.

The WSJ article quotes, “a few even set up “situation rooms,” where staffers glued to computer screens monitored developments affecting sales and finances” – this is a clear symptom of the argument above. They are worried about revenues (sales) and expenses (finances), not strategy. It also quotes Accenture saying, “Strategy, as we knew it, is dead. Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future”, and Boston Consulting Group as saying, “more business leaders will start to rely less on static five-year strategic plans and more on rough “adaptive” strategies that consider multiple scenarios”. The emphasis in italics is mine, but the point is simple: if your strategic plans did not have risk assessments and contingency plans for each identified risk, such as recession, decline in demand, low pricing power, supply failures, and so on, then all you were doing was financial planning as usual – there was nothing “strategic” about it other than, probably the long horizon.

As far as the frequency of reviewing plans is concerned, it has been shrinking for a long time now. For good reasons too – it is now possible to reduce the frequency of reviews and assess the plans more often. Where collecting and crunching the data from several thousand stores, divisions, regions, and factories used to take months, it is now a matter of minutes, sometimes a day or two, if you have the right infrastructure. Whether you have the right infrastructure or not is a matter of strategy – if your company believed that making decisions objectively and expediently was a competitive advantage, you would have invested in the right areas of infrastructure to make that type of objective decision-making possible, if not, you are probably going to have to set “situation rooms” and throw in a few bodies to monitor the “situation”. This is the typical fire-fighting mode for companies focused on next quarter’s analyst call more than developing any real business strategy!

These days, it is neither impossible, nor uncommon for corporations to establish real-time business intelligence systems that not only guide their financial plans but also provide valuable inputs to their business strategy. The financial reviews and controls also don’t have to be on a pre-defined frequency, in fact, it is entirely possible to simply set-up triggers for change in a set of pre-defined metrics that should initiate a review of financial plans whenever the triggers are tripped. Examples of such triggers can be demand, supplies, resource usage, inventories, payroll, overtime pay, or anything else that matters for the business and most of them can be computed much more frequently than a month.

But of course, setting up such infrastructure is completely a matter of strategic planning: mere long-term financial planning is not going to get you there, no matter how frequently it is reviewed.

 

© Vivek Sehgal, 2010, All Rights Reserved.

 

Want to know 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.