Sunday, November 16, 2014

Strategic Need around Supply Chain Network Design: Cost Reduction

Supply chain network design is a powerful model proven to deliver substantial reductions in supply chain costs and improvements in service levels by better aligning supply chain strategies. This approach incorporates end-to-end supply chain cost including: purchase, production, warehousing, inventory, and transportation; organizations can gain competitive advantages by running supply chain network scenarios, evaluating and actively implementing changes in response to dynamic business scenarios (i.e. new product introduction, changes in demand patters, new supply sources, and changes in tax laws).

As supply chain networks have become increasingly global and dispersed, a variety of factors have driven companies to redesign and reconfigure their supply chains continually. Notwithstanding, dedicated centralized supply chain teams have sprung up to help manage the complexities of global supply chain effectively. Thus, there are strategic needs around supply chain network design and the need to periodically make key strategic, tactical and operational decisions.

Companies have invested in process, tools and resources to achieve efficiency and effectiveness though their supply chains; many of which have migrated to an integrated planning approach, with the objectives of increased service level, responsiveness while balancing working capital needs. However, integrated planning often begins with assuming supply chain networks are static and tend towards driving optimization around similar assumptions. Because supply chains are dynamic, the network design exercises attempt to make supply chain agile enough to address current changes and future uncertainties.

“Why” and “When” of Supply Chain Network Design
Companies are aware of the importance of supply chain network design exercises but are unable to make the best use of it. Typically, the challenge lies in selecting the correct approach. Internal factors driving supply chain network design are focused on driving service delivery and working capital optimization across existing networks; external factors also drive strong structural changes.

Internal Factors:
Function-specific, or individual objectives and company objectives are not well defined or aligned often. Different functions work on their individual objectives, achieving local optimization while adversely impacting the overall supply chain performance. As a result, the costs associated with particular service levels may become concerning; conflicting optimization objectives by functions lead to sub-optimal supply chain performance (see figure, below).

External Factors:
Historically, businesses have established supply chains and different facilities across the network to gain things like: tax benefits, trade concessions, capital subsidies, etc. Many of these factors can be impacted through political and economic policy changes, questioning the relevance of the current supply network. Often, the impact of these changes is large enough to drive strategic structural supply chain changes; preparing for such changes are important though use of strategic modeling and network design exercises.

Design Hierarchy
Typically, supply chain decisions are taken at three levels: strategic, tactical and operational. At the strategic level, decisions link to business strategy and involve high investments, high-change over lead times and longer horizons. Tactical companies focus on adopting measures that focus on competitive needs, and operational levels focus on operation efficiency (see figure, below).

                                                   Hierarchy of supply chain needs addressed through exercises

Supply chain network design and optimization exercises can be long and cumbersome. However, it is important to have a pragmatic approach that delivers reliable results quickly and encourages strategy drive into action. Supply chain network design with a powerful modeling approach may deliver substantial reduction in supply chain cost and improvements in service levels. It incorporates end-to-end supply chain cost: purchasing, production, warehousing, inventory, and transportation. This being said, what is the frequency at which an organization should run an optimization exercise? Demand environment and supply side capabilities are not static; would an annual review on key operating needs (like inventory needs, cost to serve, etc.) be a good idea? In my opinion, keeping in mind the eventuality of external triggers, organizations should carry out exercises well in advance to accommodate long-term decisions and lead times to implement.


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