Friday, December 10, 2010

New Supply Chain Design Imperative

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.
Looking for an alternate way to design effective supply chains? The answer does not lie in adopting theories in the hope of finding the right answer, but to build your own supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain and the new design imperative to build supply chain capabilities that directly support your business strategies.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.

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.

Tuesday, November 30, 2010

What Drives Your Supply Chain?

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.
Looking for an alternate way to design effective supply chains? The answer does not lie in adopting theories in the hope of finding the right answer, but to build your own supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain and the new design imperative to build supply chain capabilities that directly support your business strategies.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.
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.

Tuesday, November 16, 2010

Supply Chain Sphere of Influence

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.
Looking for an alternate way to design effective supply chains? The answer does not lie in adopting theories in the hope of finding the right answer, but to build your own supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain and the new design imperative to build supply chain capabilities that directly support your business strategies.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.

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.

Wednesday, November 3, 2010

Conventional Supply Chain Strategies: Simply Inadequate

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…
Looking for an alternate way to design effective supply chains? The answer does not lie in adopting theories in the hope of finding the right answer, but to build your own supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain and the new design imperative to build supply chain capabilities that directly support your business strategies.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.
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.

Monday, November 1, 2010

Speculation as Supply Chain Strategy

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.
Looking for an alternate way to design effective supply chains? The answer does not lie in adopting theories in the hope of finding the right answer, but to build your own supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain and the new design imperative to build supply chain capabilities that directly support your business strategies.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.
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.

Friday, October 29, 2010

Postponement as Supply Chain Strategy

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 forecasting. image
  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!
If you are looking for an alternate way to design effective supply chains, the answer does not lie in adopting theories in the hope of finding the right answer, but to build supply chain capabilities driven by your business staretgy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain, and learn about the new design imperative to build supply chain capabilities to support your strategy.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more on the subject in the book.
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.

Thursday, October 28, 2010

Supply Chain Strategy: Lean and Agile at the Same Time?

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.
If you are looking for an alternate way to design effective supply chains, the answer does not lie in adopting theories in the hope of finding the right answer, but to build supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chains sphere of influence, find out what drives your supply chain, and learn about the new design imperative to build supply chain capabilities to support your strategy.
This article is based on my book Supply Chain as Satretgic Asset: The Key to Reaching Business Goals. You can continue reading more on the subject in the book.

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.

Wednesday, October 27, 2010

Agile as Supply Chain Strategy

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.
If you are looking for an alternate way to design effective supply chains, the answer doe not lie in adopting theories in the hope of finding the right answer, but to build supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain, and learn about the new design imperative to build supply chain capabilities to support your strategy.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.
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.

Monday, October 25, 2010

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.

If you are looking for an alternate way to design effective supply chains, the answer does not lie in adopting theories in the hope of finding the right answer, but to build supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain, and learn about the new design imperative to build supply chain capabilities to support your strategy.

This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more on the subject in the book.

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.

Monday, October 11, 2010

Supply Chain Strategies: Time to Refresh?

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.
Looking for an alternate way to design effective supply chains? The answer does not lie in adopting theories in the hope of finding the right answer, but to build your own supply chain capabilities driven by your business strategy. To find this new approach to build effective supply chains, understand the supply chain sphere of influence, find out what drives your supply chain and the new design imperative to build supply chain capabilities that directly support your business strategies.
This article is adopted from my book, Supply Chain as Strategic Asset: The Key to Reaching Business Goals. You can continue reading more about the subject in the book.

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.

Monday, September 13, 2010

The 700-billion Dollar Supply Chain Opportunity

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 http://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 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!

Wednesday, August 25, 2010

Best Practices: Not Good Enough

Are best practices enough to create competitive advantage? What about adding business capabilities when you need it – the organically growing business function capabilities that most firm subscribe to? My contention is that both of these practices, though wide-spread, do nothing toward creating competitive advantages, because both of them are reactive in nature. To create real advantage, firms must be pro-active and must design their capabilities to forge ahead, to pioneer, to create advantages that are not yet “best practices”. This is one of the takeaways from my upcoming book on supply chain strategy.
Listen to my audio blog below supported with real examples from the industry or read below to see why. Part of my ongoing interviews with Logipi: Supply Chain Intelligence.

Vivek Sehgal Best practices & organic evolution of business functions
Last time, I spoke to Dustin about my upcoming book on supply chain titled, “Supply Chain as Strategic Asset: The Key to Reaching Business Goals”. We spoke about the main takeaways from the book. The first takeaway we talked about was how best practices can only lead to parity and not competitive advantage. And that is the subject for today -- I will explain it further and provide some examples to support the concept.
First and foremost -- the best practices are based on an industry’s general idea of handling an existing process that is considered optimal. This has two consequences -- first, this is not a forward-looking exercise, but reactive -- the best practices are based on what the industry does today and not focused on the future, it misses on innovation. Second, since these practices already exist, pursuing them can only bring parity with the generally acceptable business capabilities in an industry. To create competitive advantages, the firms must create capabilities that are better, superior, and go beyond the “generally acceptable business capabilities” within an industry.
Consider what would have happened to Dell in mid-80s, if it had decided to pursue the so called industry best practices. The best practice for the personal computer manufacturers, at the time, was to take large orders and make quarterly deliveries to the intermediaries. Dell’s “configure-to-order” model was definitely not a “best practice”, but a mere novelty. But for Dell’s business model based on providing differentiated products and experience, it made the most sense. There were other innovations as well, that Dell started which were definitely not the industry “best practices” at the time. Consider the fact that Dell set-up manufacturing factories close to the customers so that they can ship the machines faster, or the fact that the end-consumer could configure the exact specifications they wanted on a machine and track the status of their order as it was being built, or the fact that Dell started a substantial vendor-owned-inventory practice in the manufacturing industry -- and did it to their advantage. None of these were anywhere the “best practices” at the time -- had Dell fallen into the trap of following “best practices”, chances are they would have gone the Compaq way. Instead, Dell planned their own supply chain evolution, their own “best practices” by aligning their supply chain to their business strategy that was based on providing a differentiated product and a differentiated experience to its customers. This meant that Dell wanted to provide the customers the ability to configure their own machine, track their orders, build them fast so they can be shipped faster to their customers, and so on. And instead of looking to the “best practices” to help them, Dell analyzed the business requirements and pro-actively created what worked for them.
That brings me to the secondary point that business functions that grow organically -- simply don’t deliver any competitive advantages. Again, the underlying reasons are similar -- the model of organic evolution of business processes is reactive by design and therefore, it is like building fire-fighting infrastructure when the house is already on fire. To be successful, you must be pro-active, to build competitive advantages, you have to plan ahead and build capabilities that you will need to grow and be competitive -- instead of simply reacting to the business needs of the time to build capabilities.
Another great example is Wal-Mart. During Wal-Mart’s early years, the best practices in Retail were defined by companies like Kmart -- there were not many retailers with their own distribution network, not many retailers who had cut-out the wholesalers and bought directly from manufacturers, and not many retailers who had real-time data communication with their stores! Wal-Mart created these capabilities, not by looking at the industry “best practices” and not through organic growth, they created these capabilities pro-actively and by following their business strategy of becoming and staying the price-leader. And of course, Wal-Mart continues to innovate -- the latest innovations being the cross-docking operations, real-time demand sharing with vendors, RFID…. the list continues, and once again, Wal-Mart is defining these “best practices” that work for them, pro-actively creating business capabilities and building competitive advantages rather than simply reacting to the business needs of the moment.
So, that is what I mean when I say that pursuing the best practices is just not sufficient, nor is organic evolution -- if you wish to create competitive advantages, you must pro-actively design superior capabilities to create those advantages.
Next time -- I will talk about the next takeaway of why the existing supply chain strategies don’t deliver and why is it necessary for the firms to deliberately design their supply chain rather than pursuing concepts that are just not relevant.
© Vivek Sehgal, 2010, 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.