To balance the customers' demands with the need for profitable growth, many companies have moved aggressively to improve supply chain management. Their efforts reflect what I feel are the seven most important steps in supply chain management. These steps can enhance revenue, control costs and asset utilization as well as customer satisfaction. In this paper I will discuss what I think are the most important factors to create and run an excellent supply chain management system.
The first step is to segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably. Segmenting customers by their particular needs equips a company to develop a portfolio of services tailored to various segments. Surveys, interviews, and industry research have been the traditional tools for defining key segmentation criteria.
Today, progressive manufacturers are turning to such advanced analytical techniques as cluster and conjoint analysis (Fredendall) to measure customer tradeoffs and predict the marginal profitability of each segment. Home Depot bases segmentation on sales, merchandising needs and order fulfillment requirements. Others are finding that criteria such as technical support and account planning activities drive segmentation. Research also can establish the services valued by all customers versus those valued only by certain segments.
Most companies have a significant untapped opportunity to better align their investment in a particular customer relationship with the return that customer generates. To do so, companies must analyze the profitability of segments, plus the costs and benefits of alternate service packages, to ensure a reasonable return on their investment and the most profitable allocation of resources. To strike and sustain the appropriate balance between service and profitability, most companies will need to set priorities, sequencing the rollout of tailored programs to capitalize on existing capabilities and maximize customer impact
For the second step you must customize the logistics network to properly serve your customer and remain profitable across your customer segments. In many industries, especially such commodity industries as fine paper, tailoring distribution assets to meet individual logistics requirements is a greater source of differentiation for a manufacturer than the actual products, which are largely undifferentiated.
International Paper Co. found radically different customer service demands in two key segments; large publishers with long lead times and small regional printers needing delivery within 24 hours. To serve both segments well and achieve profitable growth, the manufacturer designed a multi-level logistics network with three full-stocking distribution centers and 46 quick-response cross-docks, stocking only fast-moving items, located near the regional printers. (Kuglin) Return on assets and revenues improved substantially thanks to the new inventory deployment strategy, supported by outsourcing of management of the quick response centers and the transportation activities.
The third step is to understand market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation. Forecasting has historically proceeded very redundantly with multiple departments independently creating forecasts for the same products. Everyone using their own assumptions, measures, and level of detail. Many consult the marketplace only informally, and few involve their major suppliers in the process. The functional orientation of many companies has just made things worse, allowing sales forecasts to envision growing demand while manufacturing second-guesses how much product the market actually wants.
Excellent supply chain management calls for sales and operations planning that transcends company boundaries to involve every link of the supply chain from the supplier's supplier to the customer's customer in developing forecasts collaboratively and then maintaining the required capacity across the operations. (Riggs)
Channel-wide S&OP can detect early warning signals of demand lurking in customer promotions, ordering patterns, and restocking algorithms and takes into account vendor and carrier capabilities, capacity, and constraints.
The fourth step is to differentiate your product closer to the customer and speed conversion across the supply chain. Manufacturers have traditionally based production goals on projections of the demand for finished goods and have stockpiled inventory to offset forecasting errors. These manufacturers tend to view lead times in the system as fixed, with only a finite window of time in which to convert materials into products that meet customer requirements.
While even such traditionalists can make progress in cutting costs through set-up reduction, cellular manufacturing, and just-in-time inventory methods, great potential remains in less traditional strategies such as mass customization. For example, manufacturers striving to meet individual customer needs efficiently through strategies such as mass customization are discovering the value of postponement. By delaying product differentiation to the last possible moment and thus overcoming the problem
With the proliferation of packaging requirements from major retailers, our number of SKUs (stock keeping units) has exploded. We have situations daily where we backorder one retailer, like Wal-Mart, on an item that is identical to an in-stock item, except for its packaging. Sometimes we even tear boxes apart and repackage by hand! (Ross)
The key to just-in-time product differentiation is to locate the leverage point in the manufacturing process where the product is unalterably configured to meet a single requirement and to assess options, such a postponement, modularized design, or modification of manufacturing processes, that can increase flexibility.
The fifth step is to manage sources of supply strategically to reduce the total cost of owning materials and services. Determined to pay as low a price as possible for materials, manufacturers have not traditionally cultivated warm relationships with suppliers. Excellent supply chain management requires a more enlightened mindset
While manufacturers should place high demands on suppliers, they should also realize that partners must share the goal of reducing costs across the supply chain in order to lower prices in the marketplace and enhance margins. This fact-based knowledge is the essential foundation for determining the best way of acquiring every kind of material and service the company buys.
With their marketplace position and industry structure in mind, manufacturers can then consider how to approach suppliers. Through soliciting short-term competitive bids, entering into long-term contracts and strategic supplier relationships, outsourcing, or integrating vertically. Excellent supply chain management calls for creativity and flexibility.
The sixth step is to develop a supply chain-wide technology strategy that supports multiple levels of decision-making and gives a clear view of the flow of products, services, and information. To sustain reengineered business processes many progressive companies have been replacing inflexible, poorly integrated systems with enterprise-wide systems. Too many of these companies will find themselves victims of the powerful new transactional systems they put in place. Unfortunately, many leading-edge information systems can capture reams of data but cannot easily translate it into actionable intelligence that can enhance real-world operations
These managers need to build an information technology system that integrates capabilities of three essential terms. For the short term, the system must be able to handle day-to-day transactions and electronic commerce across the supply chain and thus help align supply and demand by sharing information on orders and daily scheduling. From a mid-term perspective, the system must facilitate planning and decision-making, supporting the demand and shipment planning and master production scheduling needed to allocate resources efficiently.
To add long-term value, the system must enable strategic analysis by providing tools, such as an integrated network model, that synthesize data for use in high-level "what-if" scenario planning to help managers evaluate plants, distribution centers, suppliers, and third-party service alternatives.
Despite making huge investments in technology, few companies are acquiring this full complement of capabilities. Today's enterprise wide systems remain enterprise-bound, unable to share across the supply chain the information that channel partners must have to achieve mutual success.
The seventh step is to adopt channel-spanning performance measures to gauge collective success in reaching the customer effectively and efficiently. To answer the question, How are we doing? most companies look inward and apply any number of functionally oriented measures. But excellent supply chain managers take a broader view, adopting measures that apply to every link in the supply chain and include both service and financial metrics.
First, they measure service in terms of the perfect order; the order that arrives when promised, complete, priced and billed correctly, and undamaged. The perfect order not only spans the supply chain, as a progressive performance measure should, but also views performance from the proper perspective, that of the customer.
Second, excellent supply chain managers determine their true profitability of service by identifying the actual costs and revenues of the activities required to serve an account, especially a key account. For many, this amounts to a revelation, since traditional cost measures rely on corporate accounting systems that allocate overhead evenly across accounts. Such measures do not differentiate, for example, an account that requires a multi-functional account team, small daily shipments, or special packaging. Traditional accounting tends to mask the real costs of the supply chain focusing on cost type rather than the cost of activities and ignoring the degree of control anyone has over the cost drivers.
The complexity of the supply chain can make it difficult to envision the whole, from end to end. But successful supply chain managers realize the need to invest time and effort up front in developing this total perspective and using it to inform a blueprint for change that maps linkages among initiatives and a well-thought-out implementation sequence. This blueprint also must coordinate the change initiatives with ongoing day-to-day operations and must cross company boundaries.
The blueprint requires rigorous assessment of the entire supply chain, from supplier relationships to internal operations to the marketplace, including customers, competitors, and the industry as a whole. Current practices must be ruthlessly weighed against best practices to determine the size of the gap to close. Thorough cost/benefit analysis lays the essential foundation for prioritizing and sequencing initiatives, establishing capital and people requirements, and getting a complete financial picture of the company's supply chain before, during, and after implementation.
By simultaneously enhancing customer satisfaction and profitability, these seven steps of supply chain management can turn these once warring objectives into a formula for sustainable competitive advantage and your company will be able to reap the full rewards of an excellent supply chain management system!
Basics of supply chain management. Lawrence D. Fredendall. St. Lucie Press, Alexandria, Va. Boca Raton, FL: 2001.
Customer-centered supply chain management: a link-by-link guide. Fred A. Kuglin.
New York, 1998.
The executive's guide to supply management strategies: building supply chain thinking into all business processes. David A. Riggs. New York: 1998.
Competing through supply chain management: creating market-winning strategies through supply chain partnerships. David Frederick Ross. New York NY Chapman & Hall 1998.