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.

Stages of Supply Chain Management Evolution

Stage 1: Multiple Dysfunction

The nucleus firm lacks clear internal definition and goals and has no external links other than transactional ones.

In the dysfunctional organization, this is what tends to happen:

  • Internal activities tend to be undertaken impulsively rather than according to plan.
  • Management provides only the most general sense of mission, communicated perhaps by pep talks at the best or threats at worst.
  • Forecasting tends to be mostly guess work, often inflated by unwarranted marketing optimism.
  • Products are designated without advice from other areas that could provide guidance, such as manufacturing or marketing.
  • Warehouses are cited near each market, stocked with an overabundance of inventory in anticipation of big sale, and staffed with manual laborers who have little training.
  • Trucks and trains are unloaded when they arrive and loaded when an order comes in, without much advance warning in either case.
  • There may be flaws of payments (but collection may be poorly executed) as well as materials but the exchange of information tends to be tied mostly to giving orders internally, accepting bids and sending invoices.
  • Material requirements planning (MRP) takes place at basic level, involving a Bill of Material (BOM), a master schedule, and current on-hand/on-order data.

Stage 2: Semi Functional Enterprise

The nucleus firm undertakes initiatives to improve effectiveness, efficiency, and quality within functional areas.

There is little or no overlap in decision making from one department to another.

An individual firm undertakes initiatives to improve specific functional areas. For example:

  • The largely manual operations in warehouses may be augmented by the addition of basic materials – handling equipment.
  • Inventory management may find ways to reduce levels of inventory within the firm’s own facilities.
  • Procurement might take advantage of new purchasing strategic to obtain supplies and services at the lowest possible prices.
  • The traffic department may reduce transportation costs by strategic selection of carriers and routes.
  • Some departments may institute more effective hard skills training and adopt strategies for making jobs more challenging.
  • Marketing may develop more reliable research and forecasting techniques.
  • Manufacturing resource planning (MRP II) software may be in peace and the company may have cross-functional integration of planning processes.
  • When the nucleus firm concentrates only on improvements within its separate departments, it may find its efforts wasted through lack of communication.

Stage 3: Integrated Enterprise

This firm breaks down silo walls and brings functional areas together in process such as sales and operations planning (S&OP) with a focus on companywide processes rather than individual functions.

Historically, this shift in supply chain strategy is associated with the late 1980s and early 1990s, the same time when personal computers were becoming more powerful, reliable and affordable.

There are a few key milestones that mark this phase:

  • Introduction of manufacturing and enterprise-wide software.
  • Increased cross-functional communication and training.
  • Centrally located and easily accessible database and files.
  • Periodic sales and operations planning meetings attended by representatives for all departments involved.

This stage is marked differently from the previous one because of the following:

  • The focus on business processes is facilitated with the increased availability of e-mail, file transfers, powerful databases, and enterprise wide software applications. Cross functional cooperation becomes must faster and easier and takes place almost instantaneously across functions, time zones, and international boundaries.
  • A variety of initiatives reduce the time it takes to get an order from a supplier, create the product, and deliver it to the customer, including MRP II and ERP:
    • MRP has been upgraded to MRP II, a breakthrough development that allows cross-functional communication between manufacturing a finance.
    • Enterprise Resource Planning (ERP) extends that process by adding modules for each functional area until the most advanced version tie together entire companies. Further advances have reached through the corporate wall to tie supply chain partners together.
  • Product design in some firms is now a team effort in which production engineers and other stake holders, such as marketing and purchasing, collaborate with design engineers to “design for marketing”, “design for logistics” or “design for the environment”. This approach results in products that are on target for customer desires and are ready to be manufactured without making costly modifications in processes, equipment or staffing.
  • There are improvements in customer service due to absolute segmentation of markets and more efficient replenishment policies suited to each segment.
  • Inventory is treated more strategically as just-in-time procedures, more accurate demand planning and improved logistics work together to make fulfillment more efficient and reliable.
  • Warehousing and transportation decisions are carried out in tandem to achieve the optimal balance of cost-effectiveness and customer service.
  • Warehouse management benefits from more advanced equipment and automation.
  • At this point the nucleus firm may begin to take a step toward integration with the external members of the chain by contracting with a logistics supplier, such as UPS, to “insource” by using its expertise to help optimize logistics decision.

Stage 4: Extended Enterprise

The firm integrates its internal network with the internal networks of selected supply chain partners to improve efficiency, product/service quality or both.

The starting point is generally one inside/outside partnership that points the way toward the completely networked enterprise.

What is unique to this stage is the following:

  • There is an initial exploratory collaboration between a channel master and one or several partners in chain often a manufacturer and are component supplier or a retailer and one supplier of finished goods.
  • With MRP II merged with other functional applications and transformed into ERP, enterprise wide planning software is able to link the entire internal supply chain together on one platform.
  • The networked enterprise is built on intranets, extranets, peer-to-peer networks, the internet, or a combination of those platforms. Partners begin to synchronize their ERP systems across corporate boundaries so they can share data as necessary for their efficient collaboration.
  • Cross-functional approaches are implemented with certain processes such as CPFR (Collaborative Planning, Forecasting and Replenishment). Stage 4 companies institute periodic sales and operations planning meetings in which representatives of sales and marketing, production (or operations), and other functions meet to coordinate demand planning and production scheduling.
  • In stage 4, there are advances in e-commerce such as interactive sites where customers can order products and services, track their shipment and communicate with customer service immediately upon their arrival.

Demand Management Functional Responsibilities and Interfaces

Demand management has functional responsibilities and interfaces that include:

  • Product Development and brand management
  • Marketing
  • Sales
  • Operations

Demand management serves as an intermediary between product development and brand management, marketing, sales, and operations so that all of these functions plans, communications, influences, and priorities are coordinated to maximize and satisfy demand.

Demand management interfaces with product development, marketing, sales and operations to help the organization and the extended supply chain integrate the right services into their product offerings. Rather than producing and then selling, demand management helps organizations generate product-service packages that can meet specific customer segment needs in terms of what is delivered and when it is delivered.

Product development and brand management

  • Product development or design and brand management are typically long-term strategic tasks that can benefit from integration with demand management because it promotes the balanced needs of the supply chain.
  • Elements that are not perceived as a value to the customer should be eliminated from the design of the product-service package. This is one of the principles of lean thinking: If the customer does not understand or value the results of a supply chain activity, it is not value-added and can be eliminated.
  • Demand management can influence product and brand management to consider the processes throughout the whole supply chain, such as the ease and expense of sourcing raw materials for product, manufacturing it, warehousing it, transporting it, displaying it, servicing it, repairing it, returning it, and reusing or recycling it at the end of its life.
  • Demand management can provide a collaborative venue for multiple departments or supply chain stakeholders to provide input, consider the feasibility of options or strategies, and, after some amount of iteration, arrive at the product-service package and brand design with the highest potential for mutual profit.

Marketing

  • Demand management relies on marketing because marketing must provide input to the demand plan. The input is necessary because marketing and sales are the people who are closest to prospects and customers.
  • Marketing staff are responsible for finding potential customers and identifying needs the company can solve, creating and maintaining customer demand with communications and promotions, helping to refine product design and packaging to meet customer needs, forecasting demand throughout a product’s life cycle, and pricing products and services to be affordable and profitable at the same time.
  • Demand management interfaces with marketing in the medium and short term to tailor demand to meet available capacity. Tailoring demand from a marketing perspective includes setting existing and potential customers’ expectations regarding the types of demand that the organization will accept or consider. That is, if customer know the rules of the game they will be more likely to happily work within those rules. This helps avoid situations such as frustrating a potential customer by having to reject and unprofitable customization request that likely took some time to prepare.
  • Another way demand can be tailored is by raising or lowering prices either semi-permanently or through promotions. Price reductions can simulate demand in times of excess capacity, and returns to regular pricing can help when there is insufficient capacity.

Sales

  • Sales departments work with customers on a daily basis and make delivery promises. The primary interface demand management has with sales is to implement the demand plan commitments regarding influencing or prioritizing demand. Another interface is ensure that the demand plan supports the organizational strategy.
  • Salespersons desire to eliminate order backlogs, which means sales staff is not typically interested in minimizing inventories. Their priority is to increase sales by providing the right quality of supplies at the right place. For similar reasons, a high priority for sales is time to market, especially if the product or service must be ready for a particular selling season, be presented at a trade show or convention, or beat the competition to the market. Demand management can champion these requirements with product development, marketing, and operations.
  • Demand management can work with sales to manage demand in such ways as convincing product and brand management to raise or lower prices for ordering in bulk or for accepting delayed shipments. Another role for demand management is to educate sales staff on the limitations of product development, marketing and operations.

Operations

  • Interfacing between the demand side of the organization and manufacturing planning and control is a vital task for demand management because most operations professionals are highly specialized.
  • Demand management can also facilitate the understanding between operations and the other parties at S&OP meetings, such as by accommodating the requirements of profitable customer segments in production plans.