Supply Chain: Design for Adaptability

Supply chains operate in a dynamic environment and hence their network capabilities should be flexible to accommodate changes in customer, supply, and business environments.  In principle, a network design should incorporate appropriate supply chain strategy (i.e., Build-to-Order, Build-to-Stock, etc.,) based on nature of business. Configuration of the network facilities should meet current and future supply/demand needs efficiently while maintaining desired service levels. Geographic constraints and infrastructure availability within the scope of operations limit the choice of facility location and transportation modes. However, an optimal network solution should be the objective. The design should provide room for effectively containing variations in demand, market growth and product portfolio. While minimizing inventory and shortage risks across product portfolio, the supply chain network should make provision to accommodate new business plans. 

Factors like changes in demographics, markets, competitive structures, business  & marketing plans and growth strategies will have wide implications on the network requirements demanding a major overhaul or capacity realignment. For instance, a change in the age profile within a segment may raise or shrink market potential and hence question the capacity mismatch. Similarly a series of fuel price hikes affect distribution efficiency requiring change in transportation policy. Market penetrations necessitate up-scaling production and distribution resources, but with additional capital and operating cost. Product line prunes lead to underutilized network resources affecting return on assets. Diversification into unrelated business necessitates establishing additional production and warehouse facilities in other locations making the supply chain network complex and inefficient.  Structural shifts such as changing customer preferences, product proliferation, emergence of new channels and modern retail formats, increase in rural spend-propensity, etc., besides logistics challenges and complex tax structure make the supply chain design challenging.  But network optimization should be sustained even in changed scenarios. While flexibility is utmost important to accommodate future requirements, efficiency and responsiveness of the supply chain cannot be ignored. Therefore, an effective network design should take a holistic view of all related dimensions to match supply to demand efficiently absorbing potential changes that can occur in market, competitive and product landscapes.

SCC Joint Goal Planning: Align with Business Strategy

Customer Service and Corporate Strategy are key functional drivers of supply chain strategy. Collaboration efforts often do not succeed because vital long-term details are ignored. Therefore, short- and long-term business strategies should also be factored while evolving supply chain goals to achieve business objectives.  After deciding on the right  supply chain  capability for the business the supply chain performance vis-a-vis capabilities required for achieving the business goals  should also be determined and  incorporated into the  collaborative SCM goals. Business strategy in terms of the defined strategic focus areas should be mapped in strategic focus matrix to incorporate business objectivity in supply chain collaboration. For instance, if the business goal is to achieve cost leadership through improving cost structures, then strategic focus areas include: inventory cost (IC), production cost (PC) and logistics cost (LC). Applying this to the strategic focus matrix extended SCM Goals would be as shown below.

 

Strategic Focus Matrix: Aligning Business Strategy with SCM

Evolved objectives should be mapped to existing supply chain capabilities across the chain to determine the exact capability gap.  Level 1 Metrics of supply chain operation reference (SCOR) model offers a scientific approach to assess the current supply chain performance and hence the required capabilities for achieving SCM goals. 

Supply Chain Collaboration: From Coordination to Partnership

When two or more firms across value chain are aligned and if they are willing as well as find it feasible to collaborate, then different levels of collaboration is possible depending upon business drivers and perceived collaborative value (i.e., potential overall incentive structure that can be realized from collaboration) of each member. Basic level of collaboration can be simple information exchange & coordination. The next level of collaboration focuses on synchronization and improvement of intra- and inter-organizational processes. The third level is intensive collaboration, in which strategically aligned partners enter into a higher-level partnership to improve strategic performance and innovation of their supply chain. The fourth level is partnerships involving extended financial relationships such as sharing investments, risks and profits.

While the lower level collaboration types are widely practiced across industries, higher levels are gaining prominence and are expected to diffuse slowly in select sectors. The practical need and feasibility of implementing for such collaborations are subjective and varies from product to product, company to company and industry to industry. Implementation problems span from: mutual trust to cultural compatibility, behavioral issues to leadership issues, process alignment to strategic alignment, etc. Power relationships and extent of inter-dependencies shared by partners are some major determining factors, for the type/level of collaboration that can arise in a given relationship and business context.

Supply Chain Collaboration: Joint Goal Planning

One of the top-level reasons for poor strategic supply chain collaborations is --  joint strategic planning process is still not as robust as it should be.  Without appropriate planning and analysis from the outset there is a potential for failure. The 
supply
 chain
 strategy 
process 
in many
 businesses 
is
 still
 immature
 and
 fragmented. In fact, this is one of the areas where the leaders appeared to be just as deficient as followers and laggards. Partners pay limited attention in evolving true  collaboration goals in the strategic planning and hence supply chain collaborations often fail. The study by Cranfield University in 2010 states that “the most important of supply chain performance drivers are cost focus, customer lead-time and customer quality but these vary by sector.” Customer behaviours also differ from segment to segment. Hence the shared goals (whether cost-focused and/or lead-time focused and/or quality-focused) chosen for the supply chain collaboration should be relevant to the business/industry/market in which the firm operates.  It  involves  deciding right supply chain for the product. The study also found that Customer Service and Corporate Strategy are key functional drivers of supply chain strategy. Therefore, short- and long-term business strategies should also be incorporated  in  the supply chain goals to align with corporate objectives. Care should be taken so that rebuilding or reinvention of supply chain capabilities is prevented. The state of supply chain capabilities should be assessed for future performance to know the capability gap.

Researchers often claim that “collaboration ends up in failure when the start is all wrong and when compromises cover irreconcilable differences.” Because collaboration requires objective sharing between partners and lack of agreed objectives will lead the alliance to fail. So, adequate care should be taken to ensure that mutually agreed objectives are set for collaboration while addressing all possible differences among partners. Therefore, the joint strategic planning process should evolve mutually agreed objectives contemplating the strategic objectives and expectations of all partners with an outlook for inclusive growth and supply chain performance.  Shared objectives should comprise only those which are aligned with every partner’s business strategy.  This involves verifying and  ensuring strategic alignment with partners. If common agreed objectives cover existing supply chain capabilities, then shared goals of supply chain collaboration should be restricted to build required competencies from there. 

Collaboration efforts often do not succeed because vital long-term details are ignored. Besides, failure to identify and mitigate key risks (internal or external) proactively has been found to be one of the major reasons for supply chain collaboration failures. One of the findings of ‘Supply Chain Strategy in the Boardroom 2010” of Cranfield University is the supply chain strategy development process is generally undertaken internally, with little visibility outside the company. But, if external risks are not factored in, then collaboration may not be able to pursue the stated shared goals. For instance, if partner(s) are operating in an unstable economic conditions the high cost of credit and currency fluctuations limits the ability to improve cost structures. Similarly, if stringent labor laws prevail in their countries then partner(s) cannot contribute to efficient HR assets utilization. ‘Innovation’ cannot be the objective if partners have limited access to skilled labor and/or technology resources. ‘Delivery’ cannot be the game plan if logistics infrastructure is poor.  To preempt such external risks, it requires analyzing how friendly and/or hostile is the partners'  business environment. Hence, both micro and macro business environments of all the partners should be contemplated to evolve feasible supply chain collaboration goals.

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SCC Joint Goal Planning: Decide the Right Supply Chain

Partners in the strategic collaboration should focus on building right supply chain relevant to the business/industry. A study by Cranfield University in 2010 states that “the most important of supply chain performance drivers are cost focus, customer lead-time and customer quality but these vary by sector.” Hence the shared goals or objectives (whether cost-focused or lead-time focused or quality-focused) chosen for the supply chain collaboration should be relevant to the business/industry in which the firm operates. Which means dominant partner should focus only on those relevant strategic focus elements in Product/Material/Production/Logistics which reflect customer behaviour pattern in the business. Therefore to ensure relevancy, joint goal planning process should be driven by the most desirable supply chain capabilities in a given business/industry context. John Gattorna, thought leader in SCM, and author of the books “Living Supply Chains” and “Dynamic Supply Chain Alignment” has proposed four generic supply-chain types viz., Continuous Replenishment Supply Chain, Lean Supply Chain, Agile Supply Chain, Fully Flexible Supply Chain based on customer behavior patterns observed across industries. 

 Strategic Focus Matrix

Business Objective                   (in terms of SFAs)   for stage i  (i= 1 to n)

Product

Inventory

Production

Logistics

RFI

Q

RPI

B

C

R

U

S

C

R

U

S

C

R

U

S

Tier i        Supplier(s)

SUPPLY ALIGN

Tier i +1 Supplier(s) [10]

My Organization                                     (Business Strategy)

Supplier Collaboration Opportunities

Channel Collaboration Opportunities

N/A

N/A

Level n-1[        ]

CHANNEL ALIGN

Level n[      ]

Supply Chain Type

Key Focus

RFI

Q

RPI

B

C

R

U

S

C

R

U

S

C

R

U

S

Continuous Replenishment(C)

R, S

x

x

x

x

x

x

Lean (L)

Q, C, U

x

x

x

x

x

x

x

Agile(A)

RFI, R, S

x

x

x

x

x

x

x

Fully Flexible (F)

RFI, RPI, R, S

x

x

x

x

x

x

x

x

x

SCM Goals (Focus Areas)

IR

IS

PR

PS

LR

LS

Strategic focus in case of continuous replenishment type should be on service reliability; customer account profitability and retention of the relationship over the long-term. Here improving supply chain RELIABILITY in terms of maximizing availability and minimizing risks  besides improving SPEED of inventory, production and logistics resources become important focus (see strategic focus matrix). Building lean supply chain means focus should be clearly on delivering a low-cost predictable service to customers (Measures: accuracy, delivery-in-full-on-time (DIFOT); cost per unit, quality ;). Both EFFICIENCY and QUALITY are the focus areas. Hence, cost structures (C), utilization (U) of inventory, production and logistics resources along with product quality (Q) are the focus areas. In agile supply chains, the emphasis moves from reliability to time sensitivity (ability to respond quickly to customers) in an unpredictable world. Time to respond to unpredictable demand/needs depend on SPEED of supply chain resources at various points in the pathway to customer. So it is more of optimizing resources than utilization of resources, because redundant capacities mean extra cost.  Fully flexible supply chains, means ability to offer acceptable and new solutions quickly to the customers for unplanned events. INNOVATION and SPEED are key capabilities in this type of supply chain. So capabilities to ensure availability of whatever resources and systems required for producing and delivering acceptable products quickly have to be built along supply chain points. 

The dominant partner should set focus on those strategic focus elements under product, inventory, production and logistics based the supply chain type relevant to his business/industry. The generic supply chain framework integrated with strategic focus matrix (see figure) should broadly guide collaboration partners in deciding/deriving relevant collaboration objectives.  For example, if the type of supply chain required is continuous-replenishment, then the strategic focus areas desirable for the strategic alliance are supply chain RELIABILITY in terms of maximizing availability and minimizing risks  besides improving SPEED of inventory, production and logistics resources.