by David Jacoby
between three and four times the return on capital employed;
between two and three times the return on assets (ROA);
two-thirds less time to increase output by 20%;
one-third less variation in sourcing and production order cycles.
The difference between supply chain management and supply chain strategy
SCM has become a widely used cliché for anything touching the movement of goods from one place to another. Few people question the word “management”, but they should. Whether the supply chain is used strategically, tactically, or both at once determines the value that it provides. So, SCM is dealing with today’s actual situation to generate improvement through process excellence. Supply chain strategy is forming the unique positioning that is intended to result in a future competitive advantage.
Strong SCM can deliver a competitive advantage in the long run, but if it is not guided by a supply chain strategy it usually delivers only incremental improvement. Strong supply chain strategy can define a unique end-state that has the potential to change the competitive landscape, but if not followed by reliable execution, it usually delivers no value.
Thus both supply chain strategy and supply chain execution are needed to deliver competitive advantage.
Manufacturing strategy
Historically, the closest analogy to supply chain strategy was manufacturing strategy. The business strategy should directly determine the manufacturing strategy, but the business strategy is not always clearly articulated, documented and available to those needing to set the supply chain strategy. A business strategy built on low cost requires a more standardised process than one built on premium quality or differentiation. Similarly, a business in which the average order size is very large requires a different production process from one where there are many small orders.
Robert Hayes and Steven Wheelwright developed a diagonally sloped volume-variety mix chart that compared process standardisation and the volume of production (see an adaptation of this concept in Figure 5.1 on the previous page).
Figure 5.1 Generic manufacturing strategies
Source: Author’s adaptation of a concept pioneered by Hayes, Robert and Wheelwright, Steven, Restoring Our Competitive Edge: Competing Through Manufacturing, John Wiley & Sons, 1984, p. 209
At one end, job-shop production (like auto body work where every job is different and usually small) and engineer-to-order production (like shipbuilding, where most jobs are different and require unique processes) are the lowest-volume production models, and no two jobs are ever exactly the same. Make-to-order (MTO) work uses a consistent type of product that does not need to be engineered each time and is made in either a discrete (one at a time, as in expensive furniture) or a batch (many at a time, as in printing) process. Make-to-stock (MTS) production results in deliberate inventory. For example, shoes that are sold in retail stores are manufactured on production lines and inventory is held in multiple locations. Assemble-to-order (ATO) production starts with prefabricated components and joins them together when the order is received, which results in a short production cycle but requires inventory at intermediary stages. Continuous production is especially used in making liquid and bulk products such as float glass or chemicals, where the plant is too costly to stop and restart, so it produces constantly.
The different types of operations can be simplified into three basic types: V, T and A, each representing the shape of the flow of materials that results in the final product. Job-shop and MTO (including batch) operations are “V” operations, since production orders start with few or no standard items and end with many or even infinite products (visualise starting at the bottom of the V and fanning out to the top). MTS items, ATO and configure-to-order (CTO) operations are “T” operations since production orders start with a finite number of inputs and result in a large number of possible outputs (visualise starting at the bottom of the T and reaching a point at which the options proliferate sideways in both directions). MTS and continuous flow are usually “A” operations since production orders start with a wide number of inputs and result in one or just a few outputs (visualise starting at the bottom of the A and converging on the point at the top).
Industries often apply multiple manufacturing strategies, depending on the type of product. Historically, consumer packaged goods (CPG) have been MTS, and chemicals and pharmaceuticals have been predominantly so. Shipbuilding and aircraft manufacture have typically been MTO, while computers have become CTO.
Supply chain strategy
For years, many companies’ supply chain strategies focused on reliability, basically eliminating blatant mistakes, and simple aphorisms such as “the right product at the right place at the right time” or more recently “the perfect order” were sufficient to capture the essence of the initiatives. Today, the basics of SCM are in place at most companies, so reliability is necessary but not sufficient to gain or even maintain competitive advantage.
Some of the supply chain strategy is given, based on the physical assets and industry in which companies operate. For example, retailers would find it easier to execute a customisation strategy than mining companies since they are closer to the end-customer. The part of the supply chain strategy that is given is dictated by the business’s place in the value chain. Upstream companies (those that are closer to the ultimate supplier) tend to focus more on asset and cost strategies. Mid-stream companies tend to focus more on synchronisation and innovation. Downstream companies (those that are closer to the ultimate customer) focus more on customisation.
The rest of the supply chain strategy should flow from the business strategy. A mining company typically focuses on asset utilisation and economies of scale, which are rationalisation strategies, due to the continuous nature of its production. However, if it pursued a customisation strategy, it could crush and blend unique grades for each customer, and arrange delivery in dump trucks rather than in barges, as each customer wishes.
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Table 5.1 Correlation between the value chain role and supply chain strategy
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Source: Boston Strategies International survey, 2008
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Michael Porter defined three generic business strategies in his hallmark book Competitive Strategy.1 According to surveys conducted by Boston Strategies International, over 50% of companies pursue a low-cost business strategy, 28% opt to focus on a specific market, and 18% try to differentiate their product or service and still pursue a broad market.
Empirical evidence shows that business strategies are correlated with supply chain strategies (see Table 5.2):
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Table 5.2 Correlation between business strategies and supply chain strategies
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Source: Boston Strategies International survey, 2008
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A low-cost strategy implies a supply chain strategy that cuts costs, and indeed, companies that follow this strategy typically favour rationalisation and synchronisation strategies over innovation and customisation, according to a survey of 500 companies worldwide.2
A focus strategy implies a supply chain strategy that helps to make the product or service more special in the eyes of the customer. Survey respondents who said their companies followed a focus strategy favour customer-oriented strategies such as customisation or innovation over low-cost strategies.
A differentiation business strategy means a supply chain strategy that achieves the ability to serve a mass market yet be different from other companies on one or more dimensions. Indeed, companies that try to differentiate tend to follow an innovation strategy more than companies that do not try to differentiate.
A fourth supply chain strategy that does not correspond to any of Porter’s original three generic business strategies is innovation, since this is an extension of more recent management movements such as time-based management and disruptive technologies. It more closely resembles Micha
el Treacy and Fred Wiersema’s concept of product leadership, which they also dubbed “innovation”.3
Defining the four generic supply chain strategies
There are four strategies for gaining competitive advantage through SCM: rationalisation, synchronisation, customisation and innovation (RASCI) (see Figure 5.2):
Figure 5.2 The four supply chain strategies
Source: Boston Strategies International
Rationalisation is excellence in managing the operating costs through SCM so as to achieve cost leadership and greater profitability than competitors. It focuses on operating expense management rather than asset management (which is part of a synchronisation strategy), because many companies are driven by earnings targets rather than balance-sheet optimisation.
Synchronisation is achieving reliable and flawless supply chain execution (the right product at the right place at the right time) so as to be able to produce the same volume of output with less fixed assets (production capacity) and working capital (inventory) than competitors. Asset productivity is part of the synchronisation strategy rather than the rationalisation strategy because some companies’ business and financial strategies, and hence executive compensation and performance, are driven by balance-sheet performance.
Customisation is excellence in building a unique capability in using the supply chain to enhance customer relationships, which leads to higher gross margins. Customisation embeds both responsiveness (“the velocity at which a supply chain provides products to the customer”) and flexibility (“the agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage”).4
Innovation is using supply chain activities to enable rapid, frequent and effective new product introductions that enhance the presence of the brand in the mind of the customer (mindshare), thus leading to an acceleration of revenue that otherwise would occur over a longer timeframe.
Across all industries, about a third of companies choose to follow an integrated strategy. Among companies that choose to focus on a specific supply chain strategy, about equal proportions follow rationalisation and synchronisation strategies (a third each) than any other strategy. Customisation and innovation are practised by 15–21% of companies.
The choice of which strategies to pursue and how much effort to put into each is a multi-faceted one. With limited management bandwidth, most companies have to select which strategies to emphasise, and from that, select which tools can help them be most successful at those strategies. Chapters 7–10 outline the tools that are most effective in achieving each of the generic supply chain strategies. Figure 5.3 shows a “spider diagram” that can be used to plan the emphasis on each strategy.
Figure 5.3 Hybrid strategy relative emphasis map
Source: Boston Strategies International
The integrated supply chain strategy
The benefits from SCM are so compelling that nearly 40% of companies try to execute an integrated strategy to get the benefits from all the four strategies combined.
Doing it all at once can yield few results if resources are too thin to execute multiple strategies concurrently.
However, the benefit of an integrated strategy is that there is strong synergy between the strategies if they are sequenced properly (see Figure 5.4). By channelling cost savings into price reductions, pricing more aggressively, personalising the product at customer touch-points, and launching new products rapidly and systematically, companies such as Wal-Mart, Dell and Amazon are increasing demand and loyalty, and reaching customers farther away. In short, they are competing on a basis of world-class performance in SCM.
Figure 5.4 The integrated supply chain strategy
Source: Author
From cost-cutting to rationalisation
Cost-cutting can be done in such a way that it yields higher quality and increased sales, and this approach to cost-cutting is the first step of an integrated supply chain strategy.
Cost-saving in the retail industry has enabled supermarkets to increase sales volume by lowering costs and prices. Wal-Mart, Dell and Costco have adeptly used high-volume purchasing and logistics operations to facilitate deep price discounting. Through its Chinese import-based low cost and its everyday low price (EDLP) approach, Wal-Mart climbed to 20% market share in the United States (and 10% of the world’s retailing dollars) in 1999, nearly four times more than any other retailer in the world.5
Lean distribution helps to earn more revenue by serving customers farther away. These companies generally compete within a geographic territory, and can serve a larger market area when they reduce costs. With lower supply chain costs (distribution, transport, ordering, and so on), they can transport farther for the same delivered price. For example, a global minerals company extended its market reach of heavy products such as calcium carbonate by consolidating its transportation arrangements among fewer carriers and negotiating lower transport rates based on the increased volume. It increased its geographic reach by switching modes from truck, which economically hauls bulk material up to about 1,000km (600 miles), to rail, which economically hauls heavy material 1,600km or more at least in the United States, and also by lowering the rate paid per tonne-km on each mode in order to be able to afford a long haul for the same amount of money.
From rationalisation to synchronisation
Rationalisation is an excellent platform for synchronisation since it exposes waste that results in misalignments and bottlenecks, both of which cause inconsistencies in performance levels. Rationalisation efforts reduce or eliminate waste, and a leaner organisation is easier to synchronise since there are fewer inventory buffers and each resource exists to serve a specific order stream.
Most of the lean tools that are concerned with waste reduction (the “seven types of waste”, the 5s approach to workplace organisation, total quality management or TQM, total productive maintenance or TPM, cellular manufacturing and diagnostic tools – see pages 82–7), as well as standardisation, SKU rationalisation, and so on, all support synchronisation, since it is much easier to synchronise a lean process than a wasteful process.
From synchronisation to customisation
Synchronisation, particularly through its ambitious one-piece flow system, enables the agility that is needed to deliver customised or personalised output. Non-synchronised supply chains are slow to adjust to change since they are characterised by misalignments of expectations and of physical flows between parties in the chain. When change occurs, non-synchronised supply chains cannot adjust quickly. In contrast, directly linked supply chains with a one-to-one relationship between the parties involved can react instantaneously.
While synchronisation conjures up images of efficiency and industrial engineering, synchronous engineered operations can become agile delivery systems that flex up and down on demand, even on a per-customer basis. The engineering approach that is typically used in a high-volume, low-mix operation can be applied to finely sub-segment customer types and deliver a unique supply chain to each one.
From customisation to innovation
Customisation enables innovation by providing an understanding of customers’ needs and wants. When these are clear, innovations have a far better chance of succeeding.
Effective SCM facilitates faster product introduction by using the extensive customer knowledge that it gathers, through its customisation efforts, to fuel an innovation engine. This brings three benefits: first, more profits accrue because the product is in the market longer before it reaches the decline stage of its product life-cycle; second, the product commands higher margins for being in the market earlier than its competitors; and third, the firm gets a reputation for being a market leader, which in turn may command even greater market share and higher margins. Operations decision-makers can enable faster product launches through concurrent design and rapid prototyping.
A company that exemplifies innovation is Apple, which used the customer knowledge that it gained through the launch of the iPod, the Mac and
other popular consumer devices to nearly double its product range between 2002 amd 2009. Research in Motion (RIM) achieved new heights of customisability, even personalisation, with the BlackBerry. Users can configure it for their own tastes, not only in the user interface but also in the content that they load on it.
From innovation to rationalisation again
Innovation inevitably leads to the need to clean up. Many new products have fast product life-cycles that expire, leaving obsolete or at least heavily discounted product on the shelves. End-of-life SKU management becomes important so as to prevent the erosion of profitability through excessive inventory costs.
The first end-of-life decision is when to remove the products from the shelves. The decreasing chances of incremental sales must be balanced by the (sometimes increasing) cost of maintaining inventory and production at lower volumes. Here, the cost of holding inventory extends far beyond the financial carrying cost, which is usually low (around 5%). The real cost is the cost of obsolescence (throwing the unsold product away) and the administrative overhead cost of managing more unimportant and ageing SKUs. In a world of rapid SKU turnover, not having a process for withdrawing end-of-life SKUs is asking for trouble.
The pruning and fitness that comes with a fully integrated supply chain strategy leaves every organisation more lean, agile and responsive.
Honda and Delphi: examples of integrated strategy