Supply chains encompass the end-to-end flow of information, products, and money. For that reason, the way they are managed strongly affects an organization's competitiveness in such areas as product cost, working capital requirements, speed to market, and service perception, among others. In this context, the proper alignment of the supply chain with business strategy is essential to ensure a high level of business performance.
In 1997 Marshall Fisher introduced the revolutionary concept of supply chain segmentation in his famous article "What is the right supply chain for your product?"1 Following Fisher's article, several academics and consultants, including Lee,2 Gattorna and Christopher,3 Ketchen and Hult,4 MartÃÂnez-Olvera and Shunk,5 and the consulting firm A.T. Kearney,6 among others, developed several models regarding the formulation of supply chain strategy.
Despite these advances in supply chain theory, traditional approaches to formulating and validating supply chain strategy have not been consistently successful. This is largely because they have not paid enough attention to the connections and combinations among key drivers throughout the value chain, nor to their alignment with an industry's competitive framework and with each organization's unique value proposal (also called the "value proposition").
In order to address this shortcoming, I have conducted an analysis of the most widely recognized theories and case studies about supply chain strategy. My analysis has identified a set of common patterns that reveal key drivers of supply chain strategy and explain how these can be aligned in a coherent strategy. Those findings are summarized in a strategy-formulation model called the "Supply Chain Roadmap," which provides:
This article will describe each supply chain type and will outline the criteria for adopting them, thereby helping to answer one of the most frequently recurring questions among supply chain executives: Which supply chain strategy best fits my business?
The four elements of supply chain strategy
To paraphrase Michael Porter,7 while operational efficacy deals with achieving excellence in individual activities or functions, supply chain strategy defines the connection and combination of activities and functions throughout the value chain, in order to fulfill the business value proposal to customers in a marketplace.
Accordingly, an organization's supply chain strategy is shaped by the interrelation among four main elements, as shown in Figure 1: the industry framework (the marketplace); the organization's unique value proposal (its competitive positioning); its internal processes (supply chain processes); and its managerial focus (the linkage among supply chain processes and business strategy). Although each of these elements includes multiple factors, only some of those factors are relevant drivers for the formulation of a supply chain strategy.
Industry framework. "Industry framework" refers to the interaction of suppliers, customers, technological developments, and economic factors that affect competition in any industrial sector. Within this framework are four main drivers affecting supply chain design, all of them interrelated:
Unique value proposal. The second element, the unique value proposal, requires a clear understanding of the organization's competitive positioning in terms of its supply chain. A good approach to this is the concept of "order qualifiers" and "order winners" described in 1995 by Alex and Terry Hill.8 These concepts define, respectively, the minimum requirements for being considered as a relevant option by customers, and the performance aspects that best differentiate the company from its competitors and therefore help to win customer orders.
Recognizing the main "order winners" (in terms of product features and service) in a company's value proposal allows the enterprise to shape the connection and combination of the key drivers that must be incorporated into supply chain processes in order to ensure the fulfillment of that value promise to customers.
Managerial focus. Before discussing the fourth element—internal processes—it is important to explain the linkage and alignment between an organization's competitive positioning and its supply chain processes. The connection between these two areas is governed by the decision-making process and is driven by the supply chain's managerial focus.
This focus is the most important factor in ensuring coherence between supply chain execution and a business's unique value proposal. Yet it also can be an area where organizations are more likely to fail. Such failures mainly result from a standard managerial approach that emphasizes efficiency-oriented performance indicators regardless of the competitive positioning defined by the organization. This approach encourages companies to focus on seeking local efficiencies that may conflict with their value proposal to customers, thus creating misalignment between the supply chain and business strategy.
Internal processes. The fourth element, internal processes, provides an orientation that ensures a proper connection and combination within the supply chain activities that fall under the categories of source, make, and deliver. (See Figure 2.) Among the many factors encompassed by this element, the most important are asset utilization and the location of the decoupling point. The decoupling point is the process in the value chain where a product takes on unique characteristics or specifications for a specific customer or group of customers. There is a high degree of interdependence between these two factors, and they in turn govern other factors:
Six generic supply chain models
Once a company understands the factors driving its business, then it can determine which of six common supply chain models identified by the Supply Chain Roadmap best matches those criteria. These six are grouped in two categories: supply chain models that are oriented to efficiency, and those that are oriented to responsiveness. Figure 3 provides a detailed summary of the characteristics of these models, which are discussed below.
Supply chains oriented to efficiency
In industries where the value proposal is oriented toward low cost and/or high relevance of asset utilization to total cost, end-to-end efficiency is a must. Examples of such industries include cement, steel, paper, commodities, and low-cost fashion, among others. They are best suited to one of three supply chain types—"efficient," "fast," and "continuous-flow"—that are best able to maximize asset utilization:
The "efficient" supply chain model
The efficient supply chain is best suited to industries that are characterized by intense market competition, with several competitors fighting for the same group of customers who may not perceive major differences in their value proposals. In effect, competition is virtually always based almost solely on price.
Because customers in these commoditized businesses take an opportunistic approach to purchasing in order to ensure that they get the best price for each order, it results in a demand profile with recurrent peaks. Consequently, a continuous-replenishment model is inappropriate. Production should instead be scheduled based on sales expectations for the length of the production cycle, using a model based on a "make to forecast" decoupling point. Competitive positioning, therefore, depends on offering the best price and perfect order fulfillment.
Managers should focus on promoting maximum end-to-end efficiency. There are two main actions they can take to accomplish this. First, they should ensure high rates of asset utilization coupled with high overall equipment efficiency (OEE) in order to reduce cost. And second, they should ensure high levels of forecast accuracy to guarantee product availability and consequently, perfect order fulfillment.
For this supply chain model to be successful, the following factors should be in place:
This supply chain model is well suited for businesses with commoditized products, such as cement and steel.
The "fast" supply chain model
The fast supply chain is best for companies that produce trendy products with a short lifecycle. From the customer's perspective, the main difference among competitors' value proposals is how well they are able to update product portfolios in accordance with the latest trends. This focuses competition in the market on manufacturers' ability to continuously develop new products they can sell at an affordable price. As a result, the main driver of competitiveness is the reduction of market mediation costs. In an industry framework characterized by a short lifecycle, this might appear to be a conundrum, but with an understanding of market trends and consumers' habits, it is possible to maintain market mediation cost at an optimal level.
Production should be scheduled in a single batch per SKU, with its size defined by sales expectations for the sales season (or collection, in the fashion industry), using a model based on a "make to forecast" decoupling point. As the product line's sales season becomes shorter, it gets more difficult to produce a second batch of the bestselling products from the collection and replenish it to stores before the product goes out of fashion and consumers no longer want to buy it.
Management should focus on promoting continuous portfolio renewal, which is supported by three main capabilities: short time from idea to market, maximum levels of forecast accuracy in order to reduce market mediation cost, and end-to-end efficiency to ensure affordable costs for customers.
For this supply chain model to be successful, the following factors should be in place:
Examples of companies that benefit from this supply chain model include those that engage in catalogue sales. Companies in this industry segment typically launch new marketing campaigns every three or four weeks, and each catalogue may refresh more than 50 percent of the SKUs featured. It's also appropriate for retailers that sell trendy apparel and whose customers tend to visit stores monthly. These retailers need to update their stores' SKU portfolio every few weeks so loyal customers see a fresh image at each visit.
The "continuous-flow" supply chain model
The main features of the continuous-flow supply chain model are supply and demand stability, with processes scheduled in such a way as to ensure a steady cadence and continuous flow of information and products. This model typically is for a very mature supply chain with a customer demand profile that has little variation. Consequently, the production workload can match demand through a continuous-replenishment model based on a "make to stock" decoupling point, where production is scheduled to replenish predefined stock levels based on a specified reorder point for inventory in the production cycle. Accordingly, competitive positioning is based on offering a continuous-replenishment system to customers in order to assure high service levels and low inventory levels at customers' facilities, thus achieving optimization of costs associated with inventory.
Management should focus on promoting supply chain collaboration, which is supported by three main capabilities. In the early stages, they include electronic transactions that are used to reduce the number of transactional processes required during the order cycle, as well as the sharing of sales and inventory information to improve the ability to predict demand. In the most mature stage, collaborative planning with key customers helps to anticipate demand patterns.
For this supply chain model to be successful, the following factors should be in place:
This supply chain model typically works well for businesses with short-shelf-life products, such as dairy products and bread. It is also suitable for manufacturers of intermediate products, such as original equipment manufacturer (OEM) parts for assembly.
Supply chains oriented to responsiveness
Industries that face considerable demand uncertainty, where market mediation cost is highly relevant, should employ one of three different supply chain approaches that are oriented toward providing capacity in response to changes in demand. These include the "agile," "custom-configured," and "flexible" models.
The "agile" supply chain model
The agile type of supply chain is useful for companies that manufacture products under unique specifications for each customer. This is typically seen in industries that are characterized by unpredictable demand. They use a "make to order" decoupling point, producing the item after receiving the customer's purchase order to avoid manufacturing products that have no certainty of future sales.
As a result, the main driver of competitiveness is agility—the ability to meet unpredictable demand, in quantities exceeding the customer's forecast and/or within a shorter lead time than agreed. The ability to be agile is proportional to the ratio between excess capacity and the average rate of asset usage. In strict terms, there can be no agility without excess capacity.
Management should focus on ensuring agility, which is supported by two main capabilities: excess capacity, and products and processes designed to produce the smallest possible batches.
For this supply chain model to be successful, the following factors should be in place:
Generally, this type of supply chain is employed by manufacturers of intermediary goods that make products for industrial customers according to each customer's specific needs, and by companies whose industrial customers place a high value on short lead times. This strategy is useful for industries where the company's value proposal is oriented toward offering products "on demand" and with a high service level, such as packaging, chemical specialties, and metal machining services, among others.
The "custom-configured" supply chain model
The custom-configured supply chain model is characterized by a high degree of relevance of the cost of assets to the total cost, and multiple (potentially unlimited) configurations of the finished product on a unique platform. Competitive positioning is founded on offering a unique configuration of the finished product according to the end consumer's needs. Unlike in an agile supply chain, where the product can be customized to meet virtually any customer requirement—limited only by technical constraints—in this supply chain, the product is configurable within a limited combination of product specifications, usually by combining parts into a set or assembly.
Usually, product configuration is accomplished during an assembly process, where some of the parts are mounted or assembled according to an individual customer's requirements. However, product configuration may be done in other types of processes, such as mixing, packaging, and printing, among others. As a general rule, the processes before product configuration are lengthier than the configuration itself and the downstream processes.
Because of the nearly unlimited number of possible finished products resulting from multiple combinations of parts or materials, it is practically impossible to make an accurate forecast. Other complicating factors include the finite number of materials or pieces, and the fact that processes that occur prior to configuration are scheduled according to a forecast or a continuous-replenishment model, depending on the variability of the demand profile. Consequently, product configuration and downstream processes are scheduled after receiving the customer's order, and to ensure a short order cycle those processes are designed with extra capacity available.
Because of those factors, this type of supply chain employs a "configurable to order" decoupling point, where the processes occurring before configuration are managed under an efficient or a continuous-flow supply chain model, and the configuration and downstream processes operate as in an agile supply chain.
For this supply chain model to be successful, the following factors should be in place:
One example of where this supply chain strategy makes sense is the assembly of personalized products, such as computers and vehicles. Another example is in the paper manufacturing industry, where the decoupling point occurs after the manufacture of the big paper rolls, and the products are customized in the cutting and packaging process. In the service sector, some fast food restaurants apply this supply chain model.
The "flexible" supply chain
The sixth supply chain type, the flexible model, is suited for companies that must meet unexpected demand and therefore are faced with high demand peaks and long periods of low workload. This supply chain model is characterized by adaptability, which is the capability to reconfigure internal processes in order to meet a customer's specific need or solve a customer's problem. This model typically is used by service companies that focus on handling unexpected situations, perhaps even including emergencies. Due to the nature of such events, customers appreciate not only the speed of a supplier's response, but also its ability to tailor solutions to their needs. Consequently, the price becomes largely irrelevant to the customer.
Management should focus on ensuring flexibility, which is supported by four main capabilities: extra capacity of critical resources, rapid-response capability, technical strengths in process and product engineering, and a process flow that is designed to be quickly reconfigurable.
For this supply chain model to be successful, the following factors should be in place:
A typical example of this type of supply chain can be found in companies that provide metalworking and machining services for the manufacture of spare parts for industrial customers. This type of company may encounter emergency situations such as the need to immediately replace broken parts. Accordingly, they must be able to provide a fast response and sufficient capacity to develop unique parts by combining successive processes, such as turning, reaming, and welding, in a configuration adapted to a specific situation.
Simultaneous capabilities, or multiple supply chains?
Organizations tend to want their supply chains to have simultaneous capabilities: efficient, fast, agile, custom-configured, and flexible, among others. Yet each of these capabilities requires different skills, and in the majority of cases, these skill sets are incompatible within the same supply chain. However, it is possible to develop several parallel supply chains within a single organization, each focused on a defined market segment with a responsiveness level and a cost structure that are appropriate to the segment it serves.
The most powerful benefits of the "Supply Chain Roadmap" arise from its ability to help demystify the process of formulating supply chain strategy. As suggested by the overview in Figure 4, it does so by identifying the key drivers of business strategy, and then helping managers understand how those drivers would align in a coherent way with each of the six generic supply chains. This makes it possible to select the supply chain type that best fits a particular business segment.
Notes:
1. Marshall Fisher, "What Is the Right Supply Chain for Your Product?" Harvard Business Review, March-April 1997, 105-116.
2. Hau Lee, "Aligning supply chain strategies with product uncertainties," California Management Review 44, no. 3 (Spring 2002): 105-119.
3. Martin Christopher and John Gattorna, "Supply chain cost management and value-based pricing," Industrial Marketing Management 34 (2005): 115-121.
4. David Ketchen and Tomas Hult, "Bridging organization theory and supply chain management: The case of best value supply chains," Journal of Operations Management 25 (2007): 573-580.
5. C. MartÃnez-Olvera and D. Shunk, "Comprehensive framework for the development of a supply chain strategy," International Journal of Production Research 44, no. 21 (2006): 4511-4528.
6. A.T. Kearney, "How Many Supply Chains Do You Need? Matching Supply Chain Strategies to Products and Customers," 2004.
7. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).
8. Alex Hill and Terry Hill. Manufacturing Operations Strategy, 3rd ed. (Basingstoke: Palgrave MacMillan, 2012).
Copyright ©2023. All Rights ReservedDesign, CMS, Hosting & Web Development :: ePublishing