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.

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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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