Businesses can be managed effectively and efficiently if supply chain strategies are chosen wisely and by applying reason.
Supply chain comprise of end-to-end flow of money, products and information. Therefore, an organisation’s effectiveness and their competitiveness are decided by how well they can manage their supply chain strategies. It affects areas such as working capital requirements, product costs, service perception and speed to market. The business performance can be enhanced when there is a proper alignment between business strategy and supply chain.
Marshall Fisher was the first one to introduce the concept of supply chain segmentation in the article, “What is the right supply chain for your product?” in 1997. There were others including Gattorna and Christopher and A.T Kearney who developed several models regarding formulation of supply chain strategy.
Though there have been advances in supply chain theory, the traditional methods have not been consistently successful because they have failed to align with the industry’s competitive framework, with each organisation’s value proposition or unique value proposal or have not paid enough attention to the combinations and connections among key drivers throughout the value chain.
Among the most widely recognised case studies and theories about supply chain strategies, there are a set of common patterns that reveal key drivers of such supply chain strategies and explain how they can be aligned in a coherent strategy in a strategy formulation model called Supply Chain Roadmap. It provides an understanding of the inter-relation of key drivers with industry’s competitive framework and the business positioning, a compilation of the most relevant key drivers of a supply chain strategy and the characteristic profile of the types of supply chain. For applying a supply chain strategy that fits the business, it is necessary to understand what all it comprises of in the first place.
The inter-relation between four elements of the supply chain namely the marketplace or the industry framework, the competitive positioning of the organisation or its value proposal, the supply chain processes or internal processes of the organisation and the managerial focus or the linkage among business strategy and supply chain processes shapes the organisation’s supply chain strategy.
Industry framework or the marketplace
It refers to the interaction of customers, suppliers, economic factors and technological developments that affect competition in any field. There are drivers affecting supply chain design which are inter-related.
Market mediation costs: these are costs associated with the imbalance of demand and supply for example, lost sales when demand exceeds supply and compensation of excess supply in cases of product price markdowns. As a consequence of demand predictability, these costs reflect the fragile balance between product obsolescence and lost sales.
Lifecycle of the product: As product lifecycles are getting shorter due to rapid changes in technology, consumer product trends and fashion, they are impacting the market mediation costs and demand predictability as well as increasing the speed of product development and leading to renewal of product portfolios.
Cost of assets to total cost: Considering that asset utilisation is directly proportional to profits, businesses must ensure high utilisation of assets even to the extent of service levels and working capital. Businesses where cost of assets is low, the focus should be on enhancing responsiveness to unexpected demand that reduces market mediation costs and increases customer satisfaction.
Organisation’s value proposition
The company’s competitive positioning needs to be understood in terms of its supply chain. The concept of order winners and order qualifiers as described by Alex and Terry Hill in 1995 define the minimum requirements that businesses need to adhere to in order to differentiate the company from the competitors in terms of performance and to be considered as a relevant option by customers for winning orders.
In order to fulfil the value promises to customers, a company’s value proposal helps them to shape the combination and connection of key drivers in the supply chain processes.
It is important to understand the linkage between supply chain processes of a company and its competitive positioning. Driven by the supply chain’s managerial focus, the connection between these two areas are governed by the decision making process. Managerial focus helps in ensuring coherence between the business’ value proposal and supply chain execution. However, it is also an area where organisations can easily fail due to a standard managerial approach emphasising on efficiency-oriented performance indicators regardless of the competitive positioning of the organisation. This leads companies to seek local efficiencies that may directly conflict with their value proposal and create misalignment between business strategy and supply chain.
This ensures proper combination and connection within the supply chain activities under source, make and deliver categories. Asset utilisation and the location of the decoupling point are two of the most important elements. The decoupling point is a point in the value chain where a product takes on unique characteristics for a specific group of customers. There is interdependence between these two factors and this also impacts the other factors.
High utilisation of assets is mandated when the value proposal is of low cost or the business framework is characterised by a high degree of relevance of the cost of assets to the total costs. As a consequence, the end of the transformation process should be the location of the decoupling point. While prior to the decoupling point, processes are ‘push’ with high asset utilisation, long production cycles in order to increase production efficiency, after the decoupling point, processes are ‘pull’ which means medium asset utilisation with workload driven by demand and shorter production cycles in order to reduce order cycle time and enhance customer’s perception of positive service.
A large portion of ready to configure and partially manufactured inventory in keeping with the customer’s requirements is concentrated just before the decoupling point. Collaborative relationships with customers can help reduce uncertain demand.
Supply Chain Roadmap
Oriented towards efficiency and Oriented towards responsiveness
End-to-end efficiency is a must in industries where value proposal is low cost or has high relevance of asset utilisation such as in paper, steel, cement and fashion. These are further divided into fast, efficient and continuous flow supply chains.
While fast is for companies that produce trendy products with shorter lifecycle, efficient supply chain is suited for companies with intense market competition and continuous flow is a mature supply chain with a customer demand profile with little variation.
Companies employing supply chain models oriented towards responsiveness namely, agile, custom-configured or flexible are focussed on countering the demand uncertainty or where the market mediation is highly relevant. While the agile method is best suited for companies that manufacture products with unique specifications, in custom-configured model, the product is configurable within a limited combination of product specification and the flexible model is characterised by adaptability even in unforeseen circumstances.
This roadmap helps in demystifying the process of formulation of supply chain strategies which helps in selecting the best one that fits the business.
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Author – Aval Sethi, Founder