Elements of Building a Supply Chain Strategy & 6 Ideas
Increased globalization, emerging technologies, and greater integration of once separate tasks have driven massive changes in supply chain management practices over the last decade.
According to one study, 57% of companies believe that supply chain management plays a crucial role in giving them a competitive edge, allowing them to further improve their business. Meanwhile, 70% of supply chain industry professionals believe that supply chains will be a key engine of customer satisfaction before the end of 2020.
To keep up with continually growing consumer demands and high expectations for goods and services to be constantly available, more organizations are becoming aware of the need to invest time and money into developing a supply chain strategy.
What Is Supply Chain Management?
Supply chain management (SCM) is the process of managing supply chain activities to increase customer value and gain a competitive advantage. It's a proactive approach to running and developing supply chains, ensuring that supplies, products, and services are moved and executed in the most efficient and cost-effective way possible.
In a nutshell, the term supply chain covers a wide range of activities, from product research and development, raw materials sourcing, and manufacturing to packing, logistics, and last-mile delivery. It also includes all information systems required to execute and coordinate these activities. Each link in the chain represents a different stage in the overall process of developing, producing, and delivering products to customers.
But as modern supply chains become more complex and spread out across different time zones, they've also become more prone to disruption and inefficiencies. According to the Business Continuity Institute, 62% of companies affected by supply chain disruptions suffer financially while 54% incur losses to both their logistics capabilities and reputation.
This is precisely what makes supply chain management strategies so important. A strategy helps protect a company's supply chain by outlining plans for contingencies, while also deciding the structure and activities during each stage of the supply chain.
5 Kinds of Supply Chain Strategy Decisions
Decisions involving supply chain management can be classified into two primary categories- strategic decisions and operational decisions.
As the name suggests, strategic decisions look at the big picture and are made with long-term implications in mind. They are closely aligned with the overall business strategy and guide the supply chain's design. On the other hand, operational decisions usually concern short-term goals and the day-to-day goings-on of the supply chain.
Many supply chain strategy decisions can be boiled down to five types of decisions, each with their own strategic and operational elements.
Decision-makers need to identify a strategic direction when brainstorming what products to manufacture and sell to customers. At the strategic level, much of the work will revolve around identifying and perfecting product-market fit for both new and existing customers.
For instance, if the organization wishes to scale its product line, supply chain managers will have to plan how to introduce new products or new versions of existing products into the market. From an operational standpoint, managers will have to assess whether existing operational resources are sufficient to cover the production and manufacturing needs of new products.
Part of identifying product-market fit is understanding who a product or service is designed for.
When an organization's decision-makers develop a new product or tweak an existing one, they need to break down their existing customer base into segments, each one with specified demographic data, pain points, challenges, needs, and desires. At the operational level, managers will have to allocate resources to conduct customer research.
Manufacturing decisions identify the manufacturing equipment and technology required to build products and provide services.
Examples of strategic manufacturing decisions include high-level demand forecasting and sales estimates, ensuring that inventory levels match customer demand throughout a specified timeframe. This helps prevent stock-outs as well as unnecessary inventory holding costs due to excess stock.
Operational decisions concerning manufacturing focus on production scheduling. These decisions typically involve scheduling man-hours and equipment maintenance to limit downtime as much as possible.
Despite being considered the last stage of the supply chain, the logistics function plays a critical role in the entire supply chain's success. This is because it is the stage that directly involves the customer, making it important to leave a positive lasting impression.
Strategic decisions involving logistics focus on designing a network that facilitates the movement of-
- Raw materials from suppliers to the manufacturing facility
- Finished goods from the manufacturing facility to distributors and retailers
- Finished goods from distributors and retailers to customers
Supply chain managers also have to develop policies for suppliers and third-party providers. The idea is to create a system for screening new suppliers, tracking supplier performance, and maintaining positive relationships with suppliers and contractors.
With a policy in place, supply chain managers are better equipped to manage relationships with suppliers and control their purchasing spend. This, in turn, can unlock opportunities to build strategic partnerships with suppliers that can offer the best discounts.
From an operational perspective, decisions involving suppliers focus on facilitating communications between procurement officers and these third-party companies.
4 Key Elements of a Supply Chain Strategy
An effective supply chain strategy will establish connections between different supply chain activities and define the optimal sequence and combination of functions throughout the value chain. The right strategy allows a business to deliver the best value to customers at the lowest possible cost.
Formulating an effective supply chain strategy requires a careful interplay between these four key elements.
An industry framework outlines the relationships between suppliers, customers, technologies, and economic developments that affect the marketplace in any industry. Within the industry framework are four interrelated drivers that affect supply chain design.
- Demand Profile - This refers to the kind of demand placed on the company's manufacturing assets. By optimizing the demand profile, supply chain managers can increase production efficiency and lower product costs.
- Product Lifecycle - This is the length of time it takes for a product to enter the market until it's removed from shelves. Changes in technology and consumer preferences are causing product lifecycles to become shorter than ever, making it harder to predict demand. In turn, this puts pressure on companies to shorten product development times and continuously re-evaluate their product lines.
- Market Mediation Costs - These are the costs incurred when there's an imbalance between supply and demand. For instance, a company with excess stock may have to eat the loss in margins by marking down its products.
- Cost of Assets Relative to Total Cost - This driver is especially critical in industries where profits are dependent on high asset-utilization rates, or the efficient use of resources to generate profit.
A value proposition is a statement summarizing the value a business promises to its customers. While typically associated with marketing and branding, its concepts can also be applied to supply chain management.
For instance, a company can assess its competitive positioning to understand how to communicate its order fulfillment capabilities to customers. This allows the organization to show customers that it constantly has products in stock and can swiftly deliver orders.
Managerial control ensures alignment and consistency between the organization's value proposition and its supply chain capabilities. This, however, is easier said than done as many managers are likely to take the traditional managerial approach of focusing on efficiency-related key performance indicators (KPIs), completely ignoring the company's competitive positioning.
The key to getting managerial control right is to involve supply chain managers in any discussions about overall business strategy. This ensures a balance between meeting supply chain performance targets while living up to the value promises made to customers.
Internal processes are the best practices that ensure a seamless flow of supply chain activities under the primary supply chain management procedures of plan, source, make, and deliver.
While this element of a supply chain strategy encompasses multiple factors, two of the most important are asset utilization and the decoupling point - the point in the value chain where goods take on the specific attributes required by a specific customer or customer group.
Asset utilization and the decoupling point influence each other in the following ways-
- When a company's industry framework depends on the efficient use of resources to generate profits or its value proposition is oriented towards low product prices, it will need a high asset-utilization rate. In this case, the decoupling point will be at the end of the transformation process.
- Before the decoupling point, internal processes are push, which means that the product cycle focuses on increasing production efficiency. After the decoupling point, the production cycle becomes shorter as workloads are driven by customer demand.
- The largest portion of inventory, consisting of partially manufactured goods, is found before the decoupling point. When the supply chain requires goods to be customized, the decoupling point will be located farthest from the customer stage of the supply chain. This gives the supply chain time to conduct product customizations. Conversely, a decoupling point near the customer stage means that product customization is low.
6 Examples of Supply Chain Strategies
The growing complexity of supply chains and the seemingly constant introduction of variables, such as new technologies and regulations, have made it more challenging than ever to create a supply chain strategy. Still, there are tried and proven methods that should help businesses get off to a good start.
Demand-Driven Planning Based on Real-time Demand Insights
Artificial intelligence (AI) and the Internet of Things (IoT) now enables supply chain management teams to gather real-time supply chain data and improve the accuracy of their demand forecasts. With supply chain management software, teams can automatically adjust their supply chains based on fluctuating demand.
Integrating Rapid Planning and Manufacturing
Adaptiveness and agility are quickly becoming critical characteristics of modern supply chains. By using cloud-based supply chain management solutions, companies can now consolidate financial and materials-planning activities, from inventory management and procurement to manufacturing and last-mile delivery, into a single platform. This makes it possible to integrate manufacturing and planning across the company.
Optimize Product Development and Management
Gone are the days when product development and supply chain management teams operate in silos. As product lifecycles become shorter, more organizations are integrating product design and supply chain management to predict demand for new products and new product lines.
This is especially common in the consumer electronics industry, where yearly launches of new smartphone models are made possible by optimized supplier management, marketing, and manufacturing.
Aligning Supply Chain Management with Business Goals
Integrating sales and operations planning (S&OP) with demand forecasting allows businesses to plan for disruptions more effectively. The idea is to improve the organization's planning capabilities to spot macro business priorities and risks, transforming them into actionable supply chain activities.
Making Supply Chain Operations More Sustainable
Sustainability goes beyond social and environmental causes. Embedding sustainable best practices into a company's supply chain also ensures its survival, forcing management to focus on long-term growth instead of rapid but short-term gains.
Adopt Demand Forecasting Software
When integrated with automated inventory management software, demand forecasting systems can accurately predict demand by combining vast volumes of historical data with real-time inventory tracking.
According to one report, 84% of supply chain professionals believe that the digitalization of demand forecasting will have the greatest impact on supply chain management by 2021.
The goal of any supply chain strategy is to coordinate all supply chain activities, ensuring that each function is as efficient as possible and supports the organization's business goals. By lowering supply chain costs, businesses can focus on providing more value to customers.