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. The Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore Supply Chain Strategy adding some additional support as well.

Supply Chain Strategy

Adding strategy to anything suddenly increases the importance and sound grander than mere management. Strategic planning sounds considerably more sophisticated and powerful than mere planning. In the military, strategy alludes to the marshaling of resources in order to achieve an end state. One approach is effects-based operations to implementing strategy. If a corporate strategy is smartly conceived then implemented wisely, then strategy results in successful local, domestic, and global markets. 

Expeditionary warfare refers to autonomous organic units that operate globally and make use of supply chains to support operations. If the corporate strategy is similar to military strategy then the corporate supply chain becomes essential as a potent resource to success. Designing and implementing the supply chain correctly could be the edge to become more adaptive, flexible, agile, and deliver value against the competition. 

Strategy as an adjective is more exciting than a strategy as a noun. The strategic thinker stands ready to grab whatever circumstance emerges and exploit it for profit. Underperforming strategies will be dropped in a heartbeat for a higher-performing strategy. Strategic thinkers look into the future exploiting temporal elements of the market either seizing future opportunities or creating the opportunity. 

Corporate Strategy 

APICS defines strategy as the ‘How To...’ Strategy tells an organization how to function in its environment. Regardless of the strategy adopted, the supply chain must adapt and operate to further the strategic goals. Most supply chains include multiple independent companies with their own strategies and goals. This discussion is about the nucleus firm or master firm in the supply chain. All the strategies have to do two things: 

• Serve the customer. 
• Be Profitable for all participants in the supply chain. 

Supply strategy centers on delivering the 4P’s; The Right Product to the Right Place at the Right Price and Right Promotion. A supply chain is not about fast and cheap despite being one of the models. Instead, supply chains are about timing and place for the customer. Many stakeholders are involved in the process to include market researchers, design engineers, logisticians, and many others. The challenges increase as there are multiple customers in the supply chains as well who are both internal and external to the chain. All the strategies of the supply chain require constant attention, leadership, and according to APICS a little magic. 

Sustainability in the supply chain requires widespread cooperation internal and external to the chain achieving the "triple bottom line" as no one is an island.

Forecast Driven Strategy 

A long-standing challenge in supply chains is identifying demand which is even difficult for even the most stable demand. Demand works its way back to the raw resources used in making the product. Traditionally, forecasting is the method of determining future demand and making to stock. This approach is a push strategy having three meanings: 

• Production: The production of goods based on a schedule planned in advance. 
• Material Control: The issuing of materials according to a schedule or job order. 
• Distribution: Centralized warehouse replenishment decision making at manufacturing or supply office site based on forecasts. 

Everything in the system is pushed downstream based on forecasts and the resulting schedules. As each participant in the chain makes their forecasts, errors in the forecast become amplified. This amplification of variability or demand uncertainty is called the bullwhip effect. Forecasts are deemed to be 100% incorrect being either too conservative or too liberal. The greatest risk in a push strategy is overstocking goods resulting in high inventory carrying costs or losses due to price reductions to move the excess inventory. 

Demand-Driven Strategy 

Demand-driven approaches are 'make to order' and considered a pull strategy having three meanings similar to the push strategy. 

• Production: The production of goods based on demand or to replenish stock levels following use. 
• Material Control: The issuing of materials according to or based on user demand or signaling. 
• Distribution: Centralized warehouse replenishment decision making local to the warehouse or supply point. 

In a strict demand-driven supply chain there is no production schedule. Goods are produced based on demand signals. Upstream forecasting remains necessary in a demand-driven chain. The primary challenge in switching from a push to a pull strategy is reducing inventory without impacting downstream performance. The greatest risk is a stock out which is often spun by marketing as overwhelming demand due to products appeals to the end customer. Demand-driven enterprises require some major considerations: 

• Access to demand data actuals in the entire chain. 
• Trust and collaboration among the supply chain partners 
• Agility

The Multiple Chain Strategy

An organization can have more than one supply chain. In fact, the supply chain can be a complex web or network of relationships. The more complex the Bill of Materials the more complex the network or supply chain.  Suppliers can range from small highly specialized service firms to giant material suppliers upstream or giant retailers downstream to individuals. Downstream goods may be sold through multiple channels; e-commerce, printed catalog, commercial wholesalers, and retailers. Regardless of the complexity and structure of the supply chain, there are two characters; Functional and Innovative products. 

Functional products have low contributions to the margin and change very little having very long life cycles with stable demand. Forecasts are generally simple and have less than 10 percent error.  These goods have long lead times and typically are made to order. These products are predictable and low cost having the performance indicators:

• High average utilization rate in manufacturing
• Minimal inventory with high inventory turns
• Short lead times
• Supplies selected for cost and quality
• Maximum performance at a minimal cost

Innovative products have unpredictable demand, short life cycles, and a high contribution to margins in excess of 20 percent. They also have high stockout rates in excess of 10 percent and out of season markdowns above 10 percent. Forecast errors exceed 40 percent. Lead times are often low to meet market responsiveness.  Innovative products have indicators that promote responsiveness over physical efficiencies:

• Excess or significant buffer capacities or safety stock of both stock and finished goods
• Aggressive reduction in leads times
• Suppliers selected for speed, flexibility, and quality
• Modular design that postpones differentiation as long as possible

A product can have both functional and innovative solutions but the variations would have different supply chains as one size does not fit all. Information technology makes it possible to have multiple or dynamic chains accommodating the different information flows and products.

Competition with Supply Chains

The point of having a strategy is to compete in the marketplace on the terms of the market share being sought.  Competing supply chains involve the following situations:

1. Groups of Companies allied as partners in supply networks competing against other networks that are also allied.

2. Competition that is carried out between or among individual companies on the basis of the supply chain. 

3. Competition that is dominated by a channel master whose policies dominate the entire channel. 

Supply Chain Strategy can be complex with multiple chains and competition factors that could change quickly. Therefore, the supply chain must be flexible and responsive in design.  Seeking win-win scenarios may be a challenge based on the tempo of the supply chain and change.  Therefore, it is possible that suppliers, wholesalers, distributors, and others in the supply chain may need to revolve.  A channel master may need to be outside the chain rather than a dominant member in the chain. This is to facilitate cooperation. If a member inside the supply chain controls the chain then flexibility and costs controls can be thwarted or non-perform for the chain.  For example, in complex projects typically performed by governments or major corporations, the project manager may need to become the channel master setting the expectations.  I discussed this in the post Project Complexity Perplexes Procurement.

Reference:

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