How to develop a Supply Chain Strategy

This article provides operations and supply chain professionals with a framework for developing an integrated supply chain strategy for their organization.

For more details about different methods and tools an organization can utilize during the strategy development and deployment process, please check out our “Strategy Planning and Deployment” training material.

1. Customer Requirements

An effective and efficient supply chain is demand-driven and customer-focused. Therefore, the development of an integrated supply chain strategy needs to start with an assessment of the present and future supply chain requirements from the Customer perspective. In some cases, an organization may be required to segment its Customers and develop different logistics approaches for each Customer Segment. Questions should include Customer requirements regarding delivery frequency, delivery windows, inventory levels, order fulfillment lead times, return & replacement policies, packaging requirements & damage in transportation, product labeling, warehouse network changes, and special delivery services.

Supply Chain Strategy Development - A Step-by-Step Approach.

2. Internal Capabilities

A thorough assessment of the internal supply chain capabilities is required to determine the gaps between an organization’s actual performance and the present and future Customer requirements. Challenges we have identified as common in most organizations across different industries include: Product Complexity (too many products, too many SKUs), Inventory Management (slow-moving and obsolete), Product Development (supply chain consideration not part of the product design), Demand & Supply Balancing (ineffective matching of supply and demand), Physical Network Design (demand-supply network not optimized), and Globalization Challenges (global issues and outsourcing problems),

It is often beneficial to ask an outside, unbiased organization to perform such an assessment to assure that a comprehensive, honest and detailed assessment leads to objective results. An outside organization should also be able to present best practices to close some of the identified supply chain performance and/or capability gaps.

3. Supply Chain Trends

It is vital that an organization considers the major supply chain trends and determines how it will address each of them as part of their integrated supply chain strategy.

Some of the current trends we would suggest an organization needs to research and evaluate include: E2E Collaboration, Lean Six Sigma, Management of Complexity, Physical Network Optimization Methods, Risks & Opportunities of Globalization, Focus on Cost & Working Capital and maybe the Impact of Sustainability if this is an internal or external requirement.

4. Competitive Analysis

To make the right strategic choices about what to do and what not to do, it is important for an organization to understand what the competition is and most likely intends to do. Don’t let your competition manage your profits for you!

While many organizations prefer to focus on comparing basic performance data, we suggest that it is far more useful to focus on understanding the competitor’s processes, technology, and network underlying capabilities. Any analysis of available performance data is much more reliable when understanding the competitor’s capabilities. However, only because your competition also uses the metrics “inventory turns” does not mean that it is defined in the same way than your metrics.

Supply Chain Technology Assessment Areas

Sources of information for the competitive analysis include: internet search, 10-K annual report, interviews with executives, conference presentations, interviews with employees that have worked for one of your competitors, mutual suppliers, mutual customers, online databases, and external consultants firms specialize on competitive benchmarking & analysis.

5. Supply Chain Technology

Technology helps an organization with enabling and sustaining new processes and capabilities necessary to execute the supply chain strategy.

Reviewing existing supply chain technologies and technology trends may trigger ideas about how to connect new technology capabilities with identified Customer requirements. J. Paul Dittmann (1) provides an excellent sample list of supply chain technologies (Figure 2) an organization should research and evaluate as part of their supply chain strategy development process. Just keep in mind that the Customer requirements, not the technology, should drive the development of new supply chain capabilities.

How effectively some of these technologies improve or even transform an organization’s supply chain greatly depends on how successful the organization is in hiring and retaining people who can understand and use them. Training and talent planning need to be therefore part of any technology strategy.

6. Supply Chain Risks

The lack of a robust process for identifying, prioritizing, managing and mitigating risks is a clear threat to an organization’s supply chain and its strategy. A systematic risk assessment becomes even more important as an organization decides to compete globally and/or to expand its supply chain to other countries and regions. Unfortunately, without a crisis to motivate actions, risk planning often falls to the bottom of the priority list.

The long list of factors that drive risk in an organization’s supply chain can be grouped into three categories as visualized in Figure 3.

I. Manuj and J.T. Mentzer (2) present six risk management strategies organizations are deploying to address specific supply chain risks – Postponement, Speculation, Hedging, Avoidance, Security, Control – Share – Transfer.

7. New Supply Chain Capabilities

In general, a supply chain strategy should look at least three years into the organization’s future. However, that does not mean that the organization then will follow that plan for the next three years without changes or modifications. The global environment is far too dynamic to not make corrections to address major significant changes in an organization’s competitive landscape.

To define and prioritize new supply chain capabilities we suggest that the organization forms a cross-functional strategy team, including resources from sales, IT and finance, and organizes a two- or three- day off-site meeting to initiate the process. The off-site meeting starts with a review of the inputs collected so far. This includes customer requirements, internal supply chain assessment, supply chain trends, competitive analysis, supply chain technologies, and supply chain risks. During the review process, a running list of all potential new supply chain capabilities that could be developed needs to be kept.

Supply Chain Strategy - Global Risk Assessment

To rank and prioritize the potential supply chain capabilities, the strategy team needs to determine the estimated impact of each new capability on the organization’s supply chain performance indicators (service levels, costs, inventory & working capital, ROI), as well as consider the human and financial resources necessary to implement each supply chain capability. Some organizations also add a “Probability of Delivery” factor to this evaluation matrix to include a factor describing the complexity and risk associated with each potential capability.

Once the strategy team has established that the selected new supply chain capabilities will indeed enable the organization to achieve its goals & objectives and are feasible to implement within the given resource constraints, the team needs to establish a detailed project plan for the new supply chain capabilities selected. The overall project plan also needs to identify how the individual projects are interrelated to visualize that some projects with a lower ROI are actually enablers of projects with a significantly higher ROI.

8. Supply Chain Organization, People & Indicators

The implementation of a new supply chain strategy could very well mean the need for a different organizational structure of a supply chain organization. This could include additional people, fewer people, separation of an existing team, or merging two teams that are currently in different parts of the organization. Therefore, a review of the organizational design needs to be part of the supply chain strategy implementation process.

Developing new supply chain capabilities and managing them over time will almost always require new skills and competencies. The strategy team needs to establish a complete list of skills and competencies needed for each position and then evaluate the existing people based on whether they have already these skills or if they are able to acquire them. Specific competence development plans need to be established for each individual to ensure that new capabilities can be effectively implemented and managed. Requirements for new hires and associated transition plans need to be developed.

A Supply Chain Capability Development Process

A new supply chain organization and capabilities also demand a new set of performance indicators. Key Performance Indicators (KPIs) need to be aligned with the supply chain strategy and help drive an organization towards the desired future state. They also need to enforce the new behavior needed to sustain the changes and help deal with trade-offs and conflicting priorities. Please read our article “Supply Chain Performance Indicators” introducing sixteen commonly used supply chain performance indicators.

Best-in-class organizations deploy Balanced Scorecards across the supply chain organization to accomplish this. For more details about developing and deploying Balanced Scorecards, please check out our “Balanced Scorecard Development & Deploymenttraining material.

9. Business Case & Buy-In

Implementing a supply chain strategy is a major cross-functional effort and therefore requires the buy-in and support of almost every function in an organization. A solid business case for the change is often not sufficient to gain buy-in, but it is absolutely a necessary condition.

The process of getting buy-in at all levels of the organization needs to begin on the first day of strategy development. As mentioned earlier, we strongly suggest that the supply team forms a cross-functional strategy team, including resources form sales, IT and finance, when starting to identify and prioritize new supply chain capabilities.

We also suggest providing periodic updates to the senior leadership team and key stakeholders during the strategy development process, emphasizing the significant impact and benefits the supply chain can have in terms of financial performance of an organization and shareholder value. This activity needs to be part of a more comprehensive communication and change management plan that supports the strategy development and deployment process from “cradle to grave”.

Research has identified the following barriers to an effective strategy deployment process.

  • Vision Barrier – e.g. no one in the organization understands the strategic objectives and goals, as well as the need for change.

  • Political & Functional Barrier – e.g. supply chain capabilities impact the organizational design or roles & responsibilities of other functions.

  • Management Barrier – e.g. management spends too little time on strategy and too much time on short-term tactical decision-making.

  • People Barrier – e.g. most people have objectives that are not linked to the strategy.

  • Resource Barrier – e.g. time, energy, and money are not allocated to those things that are critical to implementing the strategy or no plan exists to sustain the strategy

  • Communication Barrier – e.g. lack of or a flawed communication process

10. Supply Chain Strategy Execution

The execution of an organization’s supply chain strategy is best managed as part of the Sales & Operations Planning (S&OP) process and meetings. In case an organization should not have an S&OP process, this may be a good time to develop and implement one as part of their integrated supply chain strategy.

Please Contact Us to discuss how we can support your Operational Excellence initiative, and visit our OpEx Academy for downloadable Training Material, eLearning Modules, Training AidsOnline Courses, and Public Workshops offering.

References:

(1) Dittmann, J. Paul - Supply Chain Transformation: Building and Executing an Integrated Supply Chain Strategy (New York, New York: The McGraw-Hills Companies, 2013)

(2) I. Manuj and J. T. Mentzer - Global Risk Management Strategies (International Journal of Physical Distribution and Logistics Management 38(3), 2008)

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