Supply Chain Frontiers issue #49
Aligning supply chain strategy with a company’s business model is an effective way to improve competitiveness, but which strategy is the best fit? Hernán David Perez tackled this question in a Graduate Certificate in Logistics and Supply Chain Management (GCLOG) capstone project. He came up with six generic options, and has used this work to develop a roadmap for strategic alignment.
Based on analyses of supply chain theories, case studies, and input from various users, the Supply Chain RoadmapTM helps firms to align supply chain and business strategies.
“Hernán David Perez’s work is a great example of the down-to-earth applied research we expect from our GCLOG students during the program,” said Dr. Edgar Blanco, Research Director, MIT Center for Transportation & Logistics (MIT CTL), and Executive Director, MIT SCALE Latin America. “We are very excited to see the potential impact of his work in Latin America.”
The research identified the key drivers of supply chain strategy and a set of common patterns that link the different approaches. In addition, the work explained how alignment can be achieved. Perez has encapsulated these findings in his Roadmap.
To apply the method effectively, users first need to understand the factors that drive their businesses. Then they can embark on the three-step method. First, clarify the current situation using a one-page map of the supply chain. Second, evaluate the supply chain; and finally, redesign it according to its strengths and weaknesses.
Firms can choose which of the generic strategies best fit their particular model. Here are the six options.
The Efficient Supply Chain
This form of supply chain is appropriate for industries where intense competition is the norm. A typical scenario is where several players are competing for the same group of customers, and the customers do not perceive any marked differences between the value proposals of the competitors. In effect, price is the key differentiator.
In this commoditized business, there are recurrent demand peaks. Continuous-replenishment models are inappropriate, and a firm’s competitive positioning depends on its ability to offer the best price and to achieve perfect order fulfillment.
The focus should be on maximizing the end-to-end efficiency of supply chain. This requires features such as extra capacity in outbound logistics, minimum order sizes for full truckload shipments, and extra warehouse capacity to meet peak demand.
The Fast Supply Chain
Industries where trendy, short-life products are sold to customers who value a firm’s ability to offer the latest model are well suited to this type of supply chain. Given these characteristics, it is imperative that companies keep market mediation costs to a minimum.
Production should be geared to batch sizes that are tied closely to sales expectations and make-to-forecast models.
Here, the focus is on keeping product portfolios refreshed. This requires short time to market, accurate sales forecasts, and end-to-end efficiency. Success factors include outsourced production to minimize the amount of unused capacity, state-of-the-art forecasting methods, and standardized raw materials.
The Continuous-Flow Supply Chain
This option is associated with relatively mature businesses that serve markets where demand patterns are generally stable. Successful firms offer a continuous- replenishment system that assures high service levels and low inventory volumes.
Key features include prescheduled, regular order cycles; the buffering of highly variable SKUs with extra inventory; and fixed long-term production schedules.
The Agile Supply Chain
Useful for companies that make products tailored to individual customers, the agile supply chain excels at managing unpredictable demand. Companies typically manufacture items after receiving the customer’s purchase order to avoid making products that might not be sold.
As the name of this supply chain suggests, agility is critical to the model. This is supported by excess capacity, as well as products and processes that produce the smallest possible batch sizes.
Some examples of success factors in these businesses include a common material platform, collaborative relationships with key customers, and higher prices for those customers with variable demand.
The Custom-Configured Supply Chain
This supply chain delivers unique configurations of finished products to customers. Unlike the agile option, however, each configuration is constrained by a limited number of specifications. The designs are usually based on different combinations of components or assemblies.
It is almost impossible to generate accurate demand forecasts in these industries, because of the variation in finished product design. As a result, assembling products and downstream processes are scheduled after receiving the customer’s order.
To cater for these special demands, pre-configuration processes are managed under an efficient continuous-flow supply chain model, while the configuration and downstream processes operate under the agile supply chain model.
Detailed, accurate order-entry systems are a feature of this type of supply chain; other characteristics include the ability to maximize the number of configurations for a product platform, while minimizing the amount of parts involved, and the ready availability of materials.
The Flexible Supply Chain
Adaptability is at the core of this supply chain model. Firms with flexible supply chains manage unexpected demand and workloads that swing from high peaks to long lulls. These organizations must be able to reconfigure processes quickly in line with market shifts.
This flexibility rests on four main capabilities: to maintain extra capacity in critical resource areas, respond rapidly to market signals, acquire technical process and product engineering strengths, and develop processes that are easy to reconfigure.
Success factors include emergency response mechanisms, such as resource pooling, strong collaborative relationships with key suppliers, and robust order-entry processes.
Although each of these six supply chains fits a certain type of business, it is possible to develop several in parallel within a single operation, with each one concentrating on a particular market segment.
In addition to promoting strategic alignment, understanding these options and how they fit into a business also helps to demystify supply chain strategy and its competitive role.
An article written by Hernán David Perez, titled Supply chain strategies: Which one hits the mark? and published in the March 2013 issue of Supply Chain Quarterly, describes the Supply Chain Roadmap in more detail. For more information on the method go to: http://www.supplychainroadmap.com.
GCLOG is a rigorous academic program from the MIT Global SCALE Network for masters students in Latin America. The program attracts some of the best students from the region’s top universities and trains them in key concepts of logistics and supply chain management at MIT. For more information go to: http://ctl.mit.edu/gclog. Or contact Dr. Roberto Perez-Franco, Research Associate, MIT CTL.