Supply Chain Management: October 2010

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.

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.
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.
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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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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.

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.

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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.
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Monday, October 25, 2010

Lean as a Supply Chain Strategy

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.

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.

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.

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.

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