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.
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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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