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.

Influencing Demand

  • Influencing demand describes the activities of product and brand management, marketing, and sales to convince customers to purchase the organizations products and services so that the organizations business objectives are met or exceeded.
  • Another aspect of influencing demand is the requirement for the demand side of the organization to influence the product development and supply sides of the organization to recognize a support actual customer expectation and requirements.
  • One iterative process that can be used to ensure that demand-influencing activities are being continually adapted to current situations is to use a structured process such as the plan, do, check, act model.

Plan, do, check, act model

  • This model is four-step cycle that incorporates performance measurement, feedback, and re-planning into the processes of planning and executing activities.
  • It is a model that can be applied to any process, including the other aspects of the demand management and S&OP integration processes.

Plan phase

  • During the plan phase of the demand-influencing cycle, product/brand management, marketing, and sales perform research and develop detailed strategies and tactics for influencing demand.
  • The plan should include a budget, a schedule, and a list of tasks assigned to specific individuals for accountability.
  • The plan should also set measurable targets indicating the increase in demand that the activities should generate.
  • The plans are reviewed and approved prior to the S&OP meetings and are adjusted as needed during those meetings, resulting in commitments to execute a consensus plan.

Do phase

  • During the do phase, product and brand management, marketing, and sales execute the plans.
  • Product and brand management professionals launch, manage, and retire products.
  • Marketing professionals work to create demand and reinforce the brand value.
  • Salesperson work to acquire new customers and retain and develop existing customers.
  • Sales and marketing professionals may be required to provide the demand manager with periodic data on their results during execution.
  • The marketing and sales managers and the demand manager exercise management and control during this phase by serving as problem solvers and by verifying that the correct activities are occurring.

Check phase

  • During the check phase, the demand manager and/or other demand-side managers review metrics against the plan and document other feedback, such as customer opinions on product pricing, features and customer service levels.
  • A key aspect of this phase is to determine the root cause of any differences between plan and actual results, that is, whether they arise from identifiable internal or external factors.
  • These activities are performed periodically rather than waiting until the processes are complete.
  • Dashboards are common way to track and monitor metrics for demand-influencing activities.

Act phase

  • During the act phase, the demand manager leads the re-planning efforts to respond to variances from the plan and address root cause of the variances.
  • Re-planning may call for increased or decreased investments in various activities depending on what is and is not proving effective.
  • The re-planning process could be part of the lead up to the monthly S&OP process, or it could be performed more frequently if required. However, many marketing efforts take a long time to show measurable results, so a long term focus is typically necessary.

Using this model allows organizations to control their demand-influencing activities to the fullest extent possible.

Planning Demand

  • Planning demand is one element of demand management and is not to be confused with demand planning, which is the larger process of forecasting and demand management that is the subject of this entire section.
  • A key output of the demand planning process should be regular updates to the demand plan.

The Demand Plan

  • The demand plan is a consensus document requesting products and services from the supply side of the organization to meet the expected future demand for the organizations products and services in each period.
  • It is an estimate of how many products customers will purchase, at what price, and on what time table so that the organization and its suppliers can determine how much to produce, when to produce it, and when to ship it.
  • The demand plan is based partly on forecasting and partly on commitments by the demand side of the organization to generate the necessary demand to meet the plan and the goals set in the organizations business plan.

Demand Plan Inputs

  • The demand plan influences and is influenced by forecasting, by commitments, by product and brand management, marketing, and sales to create, influence, manage and prioritize demand and by business plan and strategy.

  • Other key inputs to the demand plan are the assumptions used and uncertainties encountered by the persons responsible for preparing the forecasts, the product and brand management plans.
  • These assumptions and uncertainties should be documented, reviewed, and challenged in the monthly S&OP review process to validate that the demand plan is realistic.
  • Knowledge of assumptions and uncertainties will also help the organization determine the best way to arrive at a consensus regarding demand plan numbers.

Uses of Demand Plan

  • The demand plan is used by multiple areas of the organization because it indicates demand both in units and in monetary amounts.
  • In this way, each audience for the demand plan can view the information in the most meaningful terms.
    • Operations, logistics, customer service, and product development can view the plan in units
    • Finance can view the plan in monetary amounts
    • Marketing and sales can view both units and monetary amounts
  • A key control to keep demand plans realistic is to treat the demand plan as a request for product from supply side of the organization.
  • In making this request, the demand side of the organization is stating that it is committed to creating this amount of demand and selling the products in the requested amounts.
  • Holding the demand side of the organization accountable for the consequences of producing too much inventory can be an effective control over unrealistic demand plans.
  • Close scrutiny of the demand plan can also reveal when inputs may be biased or assumptions unrealistic.

Planning Horizon and Revision Period

  • A best practice is to produce a demand plan that has at least an 18-month planning horizon and to revise it by re-planning on regular basis.
  • An 18 month minimum horizon has other advantages:
    • It provides a sufficient horizon so that each periods demand has been planned and reviewed multiple times, with increasing accuracy each time.
    • Planned product and brand management and marketing activities typically span at least an 18 month horizon, and sales activities typically span at least 12 month horizon, so the most current and reliable information on internal plans and likely actions of customers and competitors falls within 18 month range.
    • If the demand plan does not seem to be capable of achieving the goals in the business plan and strategy, a longer horizon allows organizations time to plan and execute additional activities to meet the revenue goals.
    • If the demand plan shows a need to increase capacity, it gives the organization sufficient time to approve and execute capital expenditures.
    • When it comes time to generate the annual business plan, by midyear the demand plan will show the next years projected demand and can be used as a key input to the business plan.