Business Plan, Supply Chain Strategy, Collaboration Relationships

The following topics are discussed in this section:

Business Plan

  • A business plan is a written document that describes the overall direction of the firm and what it wants to become in future.

(Definition) Business Plan is a statement if long-range strategy and revenue, cost and profit objectives usually accompanied by budgets, a projected balance sheet and a cash flow (source and application of funds) statement. A business plan is usually stated in terms of dollars and grouped by product family. The business plan is then translated into synchronized tactical functional plans through the production planning process (or the sales and operations planning process). Although, frequently stated in different terms (dollars vs units), these tactical plans should agree with each other and with the business plan.

  • Key function such a finance, engineering, marketing and operations typically have input into the plans.

  1. Finance
    The finance function manages and tracks the sources of funds, amounts available for use, cash flows, budgets, profits and return on investment.
  2. Engineering
    The Engineering function is responsible for research and development and the design and redesign of products that can be made most economically.
  3. Marketing
    The Marketing function focus is on analysis of the market place and how the form positions itself and its products.
  4. Operations
    The goal of the operations function is to meet the demands of the market place via the organization’s product. Operations also manage the manufacturing facilities, machinery, equipment, labor and materials as efficiently as possible.
  • The functional roles collectively support the success of the supply chain.

Supply Chain Strategy

  • Functional strategies underlying supply chain management must articulate with the business plan.
  • The purpose of supply chains is to be globally competitive.
  • Time, distance and collaboration are basic elements in modern supply chains that impact the chains ability to respond to competitive changes in the global market place.

Collaborative Relationships

  • In the virtual corporation and virtual networks, we can and therefore we must share ideas and data to be competitive.
  • What do these strategic partnerships look like in action? Suppliers, manufacturers and customers all come together on design teams to create products that will not only satisfy customer demand but will be efficient to produce, assemble, transport and store.

Partnership Criteria

  • Seven factors need to be carefully researched and considered when forming a supply chain strategy:
    • Add value.
    • Improve Market Access.
    • Strengthen Operations.
    • Add Technological Strength.
    • Enhance Strategic Growth.
    • Share Insights and Learning.
    • Increase Financial Strength.
  • Every potential partner organization has its strengths or core competencies.
  • It’s only a successful strategic alliance if the partnership results in a “win-win” for both parties.
  • Effective partnerships are a combination of shared risks, resources, rewards, vision and values.

Building Collaborative Relationships

  • In order to build the foundation of collaborative partnership, the partners must:
    • Initiate management tasks.
    • Overcome barriers to collaboration.
    • Build levels of communication.
    • Determine levels of collaborative intensity.
    • Examine strategic importance versus difficulty to determine product categories.
  • Initiate Management Tasks
    • Once the collaboration is official, it’s critical that top management demonstrate their enthusiastic commitment to the partnership.
    • This process begins with determining the specific contribution of each party and the criteria for measuring that contribution.
    • In early stages, relationships should emphasize equity in profits among all parties. Equity will help motivate all parties to work toward the good of the whole.
    • The next talk is to define roles for each party, taking care to avoid redundant efforts. Conflicts can occur if these roles make one party more dependent upon another than they wish to be. To alleviate this common problem, networks should avoid sequential interdependence, in which the second party cannot begin work until the first party is done. Instead, they should establish reciprocal interdependence, in which the exchange of tasks and services occur in both directions. Examples of this include CPFR (Collaborative Planning, Forecasting and Replenishment).
    • Since no contract can cover all contingencies, the next task is to create a policy for resolving conflicts.
  • Overcome Barriers to Collaboration

    Building successful collaboration requires overcoming predictable obstacles, including the following challenges:

  1. Sub Optimization

    Sub optimization refers to a solution to a problem that is best from a narrow point of view but not from a higher or overall company point of view.

  2. Individual Incentives that Conflict with Organizational Goals
  • Incentives, such as sales force bonuses, structured without thought for the supply chain strategy, can often be counterproductive.
  • These practices create a great deal of excess inventory as well as variability in demand that the manufacturer must then deal with. Instead sales goals must be aligned with actual demand.
  1. Working with Competitors

    One firm may try to win market share at the expense of the other. Such relationships should be kept at arm’s length to ensure fairness and extra caution must be devoted to sharing information. Companies may pretend to embrace collaboration when they really only want access to information for their own benefit.

  2. Bottlenecks Caused by Weak or Slow Partners

    If the firm is not willing to invest un a technical and social change process, the only alternative may be to find a more willing or able partner who can keep up with the networks collaboration curve.

  3. Technology Barriers
  • When potential partners have incompatible systems, it increases the difficulty of sharing data.
  • Incompatible and / or antiquated hardware infrastructures can also prove a barrier to collaboration.
  1. Power-Based Relationship
  • Rather than building relationships based upon trust and mutual benefit, the nucleus firm may use its leverage to dedicate the terms of relationships to other members.
  • While the profits of the nucleus firm increase, other members of the network may suffer losses. When this occurs, the disadvantaged partner may rebel.
  • Resistance may result in redundancy, loss of overall profitability for the chain or an actual reversal of the power relationship. Once in power, the mistreated party may retaliate instead of using the opportunity to develop equitable relationships along the chain.
  1. Underestimated Benefits
  • When collaboration is viewed as another type of process reengineering, the partners generally measure the results in reduced cost and cycle time rather than return on investment (ROI), which is a better long-term indicator.
  • Simply measuring efficiency increases will fail to account for some of the true long-term benefits or collaboration.
  • This may lead managers to reject a collaborative venture based on a failure to see gains such as removal of reduplicated efforts, enhanced innovation and better use of total system assets and processes.
  1. Culture Conflicts
  • Cultures tend to be egocentric and thus tens to resist external collaboration. They feel that their ways are the best ways of doing things and will often reject a different way without even considering it.
  • Culture conflicts are increased when each company relies on its own sources of information and unable to see the impact of its choices on other areas of the network. When companies don’t see the negative results of their actions, they can’t learn from their mistakes.
  • Another potential culture conflict can arise when managers delay or prevent collaboration. Such managers generally have safeguarded their positions by not sharing information so that they may be sought for their expertise.
  • Others feel that collaboration is a fad or a bad idea altogether. Still others talk about collaboration, but they are only interested in receiving the benefits from a partner without reciprocating.
  • Build Levels of Communication

    Communication between partners can take place on different levels; not all collaborations dependent upon the same degree of intensity of communication.

    Four levels of communication:

  1. Transactional with Information Sharing

    At this level of communication, each partner has access to a single source of data about matters such as workflow, forecasts and transactions. Contracts are generally medium term.

  2. Shared Processes and Partnership

    At this level, partners collaborative in specific processes such as design. They share knowledge across the network, contracts are longer term.

  3. Linked Competitive Vision and Strategic Alliance

    At this level, supply chain partners function as virtual entity, working out even the highest level of strategy together. The partners develop considerable trust and achieve social and cultural understanding as well as information sharing. Strategic alliances may last for decades.

  4. Backward Integration (Mergers and Administrations)
  • Outsourcing current functions isn’t the only way to forge links in a chain. Mergers or acquisitions may involve two companies in the same till rather than horizontal supplier-customer partners.
  • Although mergers would seem to provide the deepest level of trust and communication, the sudden clash of business, regional and national cultures involved often requires years of work to align attitudes, technology and business practices.
  • Determine Levels of Collaborative Intensity
    • Determining the level of collaborative intensity that each relationship requires depends on cost, quality, delivery, reliability, precision and flexibility.
    • Cost speaks for itself, but cost and quality often are inversely proportional.
    • Quality and delivery reliability are usually measured by number of defects allowed or late orders and are often collectively rated by members of an exchange using supplier history.
    • Precision is measured as degree of variance from specifications.
    • Flexibility is the ability of the supplier or manufacturer to deliver in varying quantities when given a specific number of days’ notice.
    • These criteria are strongly influenced by four factors related to the product or service:
      • Strategic Importance
      • Complexity
      • Number of Suppliers
      • Uncertainty
  • Examine Strategic Importance vs Difficulty to Determine Product categories

    If a partnership requires more than one of the intense collaboration levels – for example, when there is a limited number of suppliers and uncertainty about an item’s availability – then the need for higher collaborative intensity can be turned as “high strategic importance”.

    This model can be used to determine which suppliers are most appropriate for each of the four types of goods:

  1. Commodity Materials
  • Low strategic importance
  • Low supply chain difficulty

They require suppliers whose priority is cost reduction. These item are best purchased at arm’s length. Which of your suppliers can provide the best cost reduction on the commodity items you need?

  1. Bottleneck Materials
  • Low strategic importance
  • High supply chain difficulty

Efforts must be made to ensure that the need for these items is fulfilled. Therefore, some level of ongoing relationship with a particular supplier may be called for.

  1. Leveragable Materials
  • High strategic importance
  • Low difficulty levels

They call for collaboration to maximize both cost savings and reliability through means such as bulk purchasing by multiple members of the supply chain.

  1. Direct or Core Competency Materials
  • High strategic importance
  • High difficulty

Require strategic partnerships for longer periods of time to ensure availability and quality.

Features and Benefits of Collaboration

Collaborative Relationship Features Benefits
Joint development of shared processes. Lower costs.
Open sharing of information and knowledge. Improved quality.
Jointly developed performance metrics. Better customer service.
Open two-way communications. Reduced inventories.
Network wide visibility. Rapid project results.
Clear roles and responsibility. Reduced cycle times and lead times.
Joint problem solving. More effective working relationships.
Commitment to the relationship. Enhanced commitment to one another.

Organizational Strategy

The following topics are discussed under this section:

Goals of Organizational Strategy

  • Whatever strategy the corporation adopts to satisfy customers, grow, compete, organize itself and make money the supply chain has to operate in a manner that furthers those goals.
  • Four types of organizational strategy:
    • Customer focus and alignment
    • Forecast driven enterprise
    • Demand driven enterprise
    • Product type driven supply chain

Customer Focus and Alignment

  • When it comes to supply chains, its’s what’s good for the customers that counts and not what’s good for the nucleus company or even what seems to be good for the supply chain itself.
  • Supply chain management needs to be focused on giving the final customer the right product at the right time and place for the right price.
  • It’s about the balance of quality, price and availability (timing and place) that’s just right for the supply chain’s customer.
  • There are some basic premises that can help you get started in determining the appropriate balance:
    • Serving the end user customer is the primary driver of the supply chain decisions.
    • Organizations in the supply chain have to make a profit and stay in business to serve the customer.
  • Functional teams in the organization will provide their input and research on the optimal balance for the supply chain to meet customer needs.
  • Design engineers or better yet design teams from across the network design products that are right for the end customer and can be sold profitably.
  • Market research looks for the true, and not always obvious, needs in potential consumers that the supply chain can be engineered to satisfy profitably.
  • Logistics strategy begins with data about customer demands for availability of materials, components, service or finished products, depending upon the customer and then it looks for ways to move products in a cost effective way with acceptable risk.
  • Successfully managing for sustainability requires a strategic mindset, involving numerous personal and financial resources and a commitment from suppliers from first to lower tiers of the supply chain as well as consumers further up the supply chain.
  • Departments must cooperate with other departments in their organization and with their counterparts at suppliers.
  • This type of collaboration between supply chain partners necessitates breaking down cultural barriers and building a culture of trust to ensure that the focus is an end-to-end supply chain activities and not just discrete supply chain processes.
  • Creating and managing a sustainable supply chain requires an organization to be informed, exercise leadership and cooperate with all supply chain partners in achieving positive results on the triple bottom line.

Forecast Driven Enterprise

  • This strategy is one in which the nucleus firm, usually the manufacturer, utilizes a forecast an estimate of future demand as the basis of its organizational strategy.
  • It’s difficult to predict even the most stable demand – say, for a product like diapers.
  • The chain of demand begins at the far retail end of the supply chain and works its way back towards the source of raw materials used in marking the product. The traditional way of attempting to satisfy their demand is to forecast it.

(Definition) Safety Stock is a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply.

Demand Driven Enterprise

  • The bullwhip effect is driven by demand forecasts. The solution is to replace the forecasts with actual demand information.
  • In the demand driven chain, supply management is focused on customer demand.
  • Instead of manufacturers planning their operations based on factory capacity and asset utilization, the demand driven supply model operates on customer centric approach that allows demand to drive supply chain planning and execution moving the “push-pull frontier”, back up the chain at least to the factory.
  • Instead of producing to the forecast and sending finished products to inventory, the production process is based on sales information.
  • There is no fixed production schedule in a strictly demand driven supply chain.
  • Product is turned out only in response to actual orders “on demand”.
  • Note, however, that on the supplier side of the plant, forecasts still determine delivery of raw material. The art of forecasting remains crucial, even in a demand driven chain.

Pull system entails the following:

  • In production, the production of items only as demanded for use or to replace those taken for use.
  • In material control, the withdrawal of inventory as demanded by the using operations. Material is not issued until a signal comes from the user.
  • In distribution, a system for replenishing field warehouse inventories where replenishment decisions are made at the field warehouse itself, not at the central warehouse or plant.

When a supply chain works in response to forecasts it’s called a Push chain or push system and it entails the following:

  • In production, the production of items at required times based on a given schedule planned in advance.
  • In material control, the issuing of material according to given schedule or issuing material to a job order at its start time.
  • In distribution, a system for replenishing field warehouse inventories when replenishment decision making is centralized, usually at the manufacturing site or supply facility.
  • Everything in a push system is pushed downstream from one point to the next according to schedules based on the forecasts.
  • The challenge in changing from forecast driven (push) to demand driven (pull) system is in reducing inventory without also lowering customer satisfaction.
  • The decision to switch to a demand-pull process trades one type of risk for another:
    • In the forecast-push process, the risk is related to the buildup of inventory all along the chain. Not only does inventory cost money while it sits in a retail stock rooms, distribution center or production storage area, it runs the risk of becoming obsolete or irrelevant for a number of reasons. In a world of rapid innovation, inventory obsolescence is a very real threat.
    • In the demand-pull, make-to-order model, on the other hand, the risk is that orders will begin to come in above capacity and all along the chain there will be expensive activity to run the plant overtime, buy more and faster transportation or sweet-talk customers into waiting for their orders to be filled or substituting a different product.
  • Running short pf stock is also a risk in the forecast driven chain. Forecasts can be wrong in either direction. That’s why the safety-stock builds up at each point where orders come in.
  • One technique to prepare for uncertain demands is Kitting, which is preparing (making / purchasing) components in advanced, grouping them together in a Kit, and having them available to assemble or complete when and order is placed.
  • In reality, most organizations pursue a push-pull strategy and the point where push moves to pull is the key strategic decision.
  • Once that decision has been made, building a demand driven enterprise can require significant changes in sully chain processes. The following are some major steps:
    • Provide access to real demand data along the chain for greater visibility of the end customer.
      • The first requirement is to replace the forecasts with real data. The only supply chain partner with access to these data first hand is the retailer.
      • Visibility is a necessity for building a pull system and pioneers like Walmart have led the way in that regard.
      • With point of sale scanning and radio frequency identification (RFID) a retailer can alert its suppliers to customer activity instantaneously.
      • Instead of producing to monthly forecast, manufacturers with that kind of immediate signal from the front lines can plan one day’s production runs at the end of the preceding day. They produce just enough to replace the sold items.
    • Establish trust and promote collaboration among supply chain partners.
      • Collaboration is implied in the sharing of information.
      • In return of receiving real-time data that allow reduction of inventory, suppliers and distributors have to agree to change their processes in whatever ways may be necessary to make the new system function without disrupting customer service.
    • Increase agility of trade partners.
      • Because the inventory buffers with not exist or will be much reduced in this demand-driven supply chain, the trade partners need to develop agility-the ability to respond to the variability in the flow of orders based on sales.
      • When making to forecast, a plant can run a larger volume of each product to send to inventory. But when making to order, the plant may have to produce several different types of products in a day. There will be no room for long changeover times between runs of different products; therefore, equipment, processes, work center layouts, staffing, or siting or all these things may have to change to create the capacity required to handle the new system.

Product Type Driven

  • Company can have more than one supply chain, depending upon the types of products that are passing along the chain and other variables.

Functional Products

  • Functional products that change little from year to year have longer life cycles (perhaps more than two years), relatively low contribution margins, and little variety. Because demand for them is stable, they are fairly easy to forecast, with a margin of error of about 10%, very few stock out and no end-of-season mark downs.
  • The appropriate supply chain for these products should emphasize predictability and low cost with performance indicators such as the following points:
    • High average utilization rate in manufacturing.
    • Minimal inventory with high inventory turns.
    • Short lead time (consistent with low cost).
    • Suppliers chosen for cost and quality.
    • Product design that strives for maximum performance and minimal cost.
  • However, make-to-order functional products, such as replacement parts for customized equipment, usually have long lead time (six months to a year).

Innovative Products

  • Innovative products have unpredictable demand, relatively short life cycles (three months for seasonal clothing) and high contribution margins or 20 to 60 %.
  • They must have millions of variants in each category, an average stock out rate from 10 to 40 %, and end-of-season markdowns in the range of 10 to 25 % of regular price.
  • The margin of error on forecasts for innovative products is high -40 to 100 % but the lead time to make them to order may be as low as one day and generally is no more than two weeks.
  • The supply chain for innovative products should emphasize market responsiveness rather than physical efficiency, with performance indicators such as the following:
    • Excess buffer capacity and significant buffer (or safety) stock of parts or finished items.
    • Aggressive reduction or lead time.
    • Suppliers chosen for speed, flexibility, and quality (rather than cost).
    • Modular design that postpones differentiation as long as possible.
  • Innovative products, with their high margins and unpredictable demand, justify the extra expense for holding costs.
  • The idea that the same types of product can be either functional or innovative implies that one company might have more than one supply chain.
  • New information technology makes it possible to have multiple, dynamic chains that can accommodate different product and information flows.

  • Staples
    • These have steady, year-round demand and low margins, for example: white underwear.
    • It is advised to stock staples only in relative outlets in small quantities and transporting them in truckload quantities.
    • A full truck, is cost-effective for the shipper than a partially loaded vehicle.
  • Seasonal Products

These could include outdoor patio furniture, holiday décor, etc. for which the demand is more predictable since it is tied to the holiday or season.

  • Fashion Products

These are innovative items, with unpredictable demand. For example, Zara, the Spanish clothing manufacturer has two supply chains, one for staples and other for fashion clothing. To get the faster response time, Zara uses European suppliers for the fashion items. But for the more predictable demand items, it uses eastern European supplier that have poor response time (not a concern) and lower cost.

  • In addition to varying supply chain by product type there are several other variables to consider – store type and time in season or product cycle.