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.

Business Strategy and Competitive Advantages

Following topics are discussed in this section:

Business Strategy

  • Least cost relates to a lower cost flow than competition for an otherwise equivalent product or service.
  • Differentiation relates to a product or service with more features, options or models than the competitive.
  • Focus relates to weather the product or service is designed for a broad audience or a well-defined market segment or segments.
  • Common business strategies that are generic to many industries and manufacturers include the following variations:
    • Best Cost
      Creates a hybrid, low cost approach for providing a differentiation product or service.
    • Low Cost
      Focuses on delivering low price and no frills basics with prices that are hard to match.
    • Broad Differentiation
      Creates product and service attributes that appeal to many buyers looking for variety of goods.
    • Focused Differentiation
      Develops unique strategies for target market niches to meet unique buyer needs.
    • Focused Low Cost
      Designed to meet well-defined buyer needs at a low cost.

Competitive Advantages

  • Competitive advantages mirror the strategies used to create them
  • A competitive advantage exist when an organization is able to provide the same benefits from a product or service at a lower cost than a competitor (low cost advantage), deliver benefits that exceed those of competitor’s product or service (differentiation advantage) or create a product or service that is better suited to a given customer segment than what the competition can offer (focus advantage). The result of this competitive advantage is superior value creation for the organization and its customers.

Low-Cost Advantage Strategies

  • A low-cost strategy should not be confused with target cost.

(Definition) Target Costing is the process of designing a product to meet a specific cost objective. Target costing involves setting the planned selling price, subtracting the desired profit as well as marketing and distribution costs, thus leaving the required manufacturing or target cost.

  • In many cities, this strategy had resulted in the opening of numerous “dollar stores” where majority of the products are only one dollar and the selection is huge.
  • Providing a product or service at the lowest price is generally not compatible with either differentiation or focus (niche marketing) strategies.
  • The lower profit margins provided by this approach are more consistent with mass marketing.

Product or Service Differentiation Advantage Strategies

  • Determining how to differentiate a product or service begins with a competitive analysis of other firms in the market to see what they have to offer.

(Definition) Competitive Analysis is an analysis of a competitor that includes its strategies, capabilities, prices and costs.

  • Once a firm has analyzed the offerings of competitors, it may differentiate its products and services in a number of ways. This is known as product differentiation.

(Definition) Product Differentiation is a strategy of making a product distinct from the competition on a non-price basis such as availability, durability, quality or reliability.

  • Supply chain strategies appropriate to product differentiation include:
    • Modular design combined with postponement to allow last-minute customization to meet specific consumer demands.
    • Minimal inventory of the base model to prevent obsolescence and expand the inventory of options.
    • Collaboration with suppliers to develop innovative designs, numerous options appealing to different customer tastes, artistic design and so on.

Focus Advantage Strategies

Niche Marketing (vs Mass Marketing)

  • Firms can choose to develop products and services for a mass market or for a relatively small slice of a layer market – a market niche.
  • Depending upon the niche, sourcing may focus more on finding special expertise or high-quality materials rather than on low-cost labor.

Responsiveness

  • Perhaps the most obvious example of responsiveness is the fast-food industry that grew up in the last half of the 20th century, led by McDonalds.
  • Supply chains designed for responsiveness may rely on substantial supplies of safety stock to avoid outages (overstocked seasonal items typically go on sale at the end of the season).
  • They may also have multiple warehouse to place products nearer to user.
  • Third-party providers of rapid transportation, such as package delivery services were developed to suit the needs of such supply chains.

Choosing Business Strategies

  • While some firms may focus primarily on one business strategy, others may pursue a mix strategies.
  • For example, providing high quality at the lowest price is a challenge. But not all the strategies are mutually exclusive.
  • Product differentiation and niche marketing fit well together. Either responsiveness or low cost may be a key competitive factor that differentiates a firm from its market rivals.
  • Once an organization has decided on a business strategy, it uses these choices to drive the organizational strategy and eventually the supply chain strategy.