Change, Futures, and Supply Chain Strategy

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. For example, my Masters program had several courses involving contracting and the Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore Operations and Supply Chain  Strategy adding some additional support as well.

Change, Futures, and Supply Chain Strategy

Operations generally avoid following sales too closely which tends to throw the organization into volatile production swings. Classically, operations hangs just under the sales volatility and makes upward and downward adjustments based on long term trending.  With that said there are events that cause changes to strategy:

• Change in market conditions.
• Change in business direction.
• Anticipated changes in the market.

Market Condition Changes can emerge with stunning rapidity. Supply chains must adapt to a bursting bubble or long term trending with precision and accuracy. Failure to adequately identify and adjust can leave the supply chain with either massive overstock or austere shortages. Adapting may mean creating redundancy in manufacturing versus economies of scale or stronger command and control of the supply chain by external management to remove self-interest concerns in the chain. This was accomplished at the Heathrow Airport project as discussed in Project Complexity Perplexes Procurements. The project manager establish external control of the supply chain marginalizing the dominant supplier control. This increased collaboration and problem solving in the supply chain while reducing self interest and legal claims.  Supply Chain managers must avoid becoming too lean and balance customer service, flexibility, and cost.

Business Direction Changes result when companies approach the uncharted territory of new markets and products with little data or information available. Once in the new market or the product is out there the new information results in an overhaul of the supply chain or organization. A well designed supply chain can redirect goods and services to where the demand is emerging. Overstock and services in one area may be moved to areas where demand is higher preventing stock outs in one area and price reductions in another.  Whether the supply chain has centralized or decentralized management is a decision that must be considered. Nonetheless, flexibility and adaptability is at the heart of the supply chain design.

Anticipated Market Changes result when the market is volatile and advance forecasting efforts are undertaken. This is risky since all forecasts are wrong. The forecast error must be very narrow and the supply chain proactive. Innovation is the key to strategic flexibility and must occur in product, supply chain, and organizational designs.  Supply Chain qualities such as trust among partners and efficiencies can become liabilities. A lean and efficient supply chain can run until it starves itself for lack of a market.  Partners in the chain may place unwarranted trust in the nucleus firm and produce product until  the inventories are burgeoning or may follow the demand so tightly that the chain runs into the ground. 

If supply chains are to adjust to market changes in advance then they will need a different set of rules:

• Pursue efficiencies and improve chain velocities but not at the expense of flexibility.
• Develop multiple supply chains that are right for each product line.
• Monitor the consumer demand at the end of each chain in which the firm is participating.
• Monitor global trending
• Design for maximum supply chain flexibility

Competitive Priorities and Future Direction

Winning customers is a challenge and companies have different approaches.  The post on the Art of Profitability details the ways companies attempt to make money in markets. some of the profit models map to the APICS thought.  Some of the commonly used approaches according to APICS follow:

• Differentiate the product or service
• Niche design of product or service
• Low pricing of the product or service
• Responsiveness to demand

Differentiation begins with competitive analysis which is defined by APICs as an analysis of the competitors that includes strategies, capabilities, pricing, and costs. Once the analysis is completed differentiation may occur on quality, diversity, reliability, and features.  Typical supply chain strategy involves modular design and customization capabilities, marginal inventory to avoid obsolescence, design collaboration within the supply chain.

Niche marketing is the ability to service a closely held specialized segment of the market. The market is often a luxury, age or gender specific, or geographic segment of the market. The same product may be marketed differently to the different markets and the supply chains may vary or be identical.

Low price products or services are not compatible with niche or differentiated markets. This approach is used mostly with mass marketing and commoditized products and services. Supply chains under this approach seek to reduce cost throughout the entire chain. Under this model, suppliers may have to relocate, redesign the organization, change employment practices, and adopt lean practices. APICS asserts that low price strategy should not be confused with target cost which is designing a product to meet a specific cost objective. Target cost = the planned selling price - profit margins - (market + distribution costs) = the cost to manufacture.

Responsiveness is meeting delivery expectations of the consumer. Responsiveness applies to service and goods both. Fast food patrons will become impatient in line after a few minutes while fine dining patrons expect to waiting 30 minutes or longer. Supply chains handle responsiveness several ways. Safety stock is one method to avoid outages or wait times. Multiple warehouses that serve smaller regions reduce logistical times. Third party transportation services that stratified speed of delivery services.

Overall, supply chains serve many purposes in the business by balancing all the various elements in the chain, business, and operations.  More over the supply chain operates with a temporal quality of the moment with an eye on the future. Forecasting is a primary tool used in supply chains and the entire chain needs to focus on the downstream customer demand in order to avoid the bull whip effect.  Additionally, the products and services establish the approaches that affect the supply chain design supporting the product or service. Supply chain managers need to monitor everything all the time and act whenever necessary to keep the supply chain effective and moving. 

Reference:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.