The supply chain is one of the key lifelines of an organization. Superior supply chain performance demands efficient alignment of the supply chain with the organization’s business strategy. This necessitates its seamless integration with business objectives, goals, and policies. Therefore, supply chain governance has to transition from being simply an auxiliary activity, as witnessed in many companies, to becoming an integral part of business governance.Download an Insight
Loopholes and flaws in supply chain performance are most often blamed upon external factors such as the economy, markets, natural disasters, service providers, and IT challenges. However, a closer analysis points out that internal factors are the real cause. The most substantial one is a weak link at the top of the organizational pyramid -- between the supply chain and business strategies, policies, planning, and processes.
Bridging this gap should be on top of the business agenda, so that the supply chain gains a more strategic focus in the organization. Strengthening supply chain governance also requires a forward-looking approach to managing supply chain risks.
Supply Chain in the Business Context
A supply chain does not exist in isolation. It is part of a business at the strategic, planning, and operational levels, and should be linked with decision-making at all three levels.
An organization must be well informed about the key aspects of its business strategy while studying and managing its supply chain. It should be aware of: how the business strategy was formulated; what criteria influenced product and market focus; and how the organization plans and manages its product portfolio.
The supply chain has to be accurately linked to the other domains of an organization, ranging from R&D, to product design, technology, marketing, sales, operations, and finance. The organization needs to balance demand and supply, and define one common business plan that is communicated to different stakeholders.
The Business Model Canvas
The Business Model Canvas,1 as formulated by Alex Osterwalder and Yves Pigneur in their best- selling book, “Business Model Generation,” presents a powerful business model with tangible business areas to focus on.
On the right side of the above diagram is the customer segment which is the relationships an organization has to manage with its customers, and the channels used to reach customers. In the middle is the heart is the value proposition for the customer.
On the left of the model are the key resources which help an organization deliver value, as well as the key partners and the core activities an organization undertakes to further its business. The bottom section contains the cost structure and revenue streams which are an integral part of the business model.
This model can be used to figure out where the supply chain fits in an organization’s business strategy and structure, and also determine the activities and resources required to fulfil the value propositions for customers.
Key Operating Models Applicable to a Supply Chain
There are primarily four operating models and policies which can be applied to a supply chain:
Organizations with different product-market-combinations operate on multiple or mixed models. In each model, the key component is the Customer Order Decoupling Point (CODP), which is the point from which an organization penetrates into its customer base and fulfils customer orders. Based on their business strategy, organizations have to determine the value and impact of having decoupling points at different positions: towards the supplier or towards the customer. The made-toorder model usually proves to be more flexible and customer driven, as products are made according to the real needs and requirements of customers rather than forecasts and plans.
Performance Benchmarking and Targeting
Every product market has a price-service relation. This is the link between business strategy and the supply chain. As illustrated above, the horizontal axis indicates service and quality, while the vertical axis indicates price and margin. The center line represents the price and service relation, which is product specific, or product and market specific. Market elasticity and sensitivity influence the actual and desired positioning of organizations on this graph.
Companies on the upper left sector of the graph are noncompetitive in the market due to relative high pricing. Whereas organizations on the bottom left are low on service and cannot charge the desired price, thereby failing in the competitive market. Good service companies with inappropriate pricing (bottom right sector) also result in succumbing to the competition as they do not avail of the opportunity to earn more money. The ideal and recommended top right sector reflects that an organization offers high service levels, and is also capitalizing on that to make a good margin. Where an organization stands, and where it aspires to reach, shapes the supply chain and its operations.
Sales and Operations Planning (S&OP)
One of the first steps when drafting the Sales & Operations Plan is to develop a viable blueprint by aligning demand with supply and integrating this with inventory, financial plans and a business strategy. Focus on the balance sheet and introduce technology into this scenario for a rudimentary S&OP. An overwhelming number of organizations believe that S&OPs can make their supply chains more agile. However, while S&OPs are supposed to impart strength, balance, and agility, organizations have so far gained strength but often lack agility.
As companies today battle rising costs, myriad supply chains, multiple procedures and different governance models, it becomes critical to:
Below is a quick look at how technology can enable and support various aspects of FSMA compliance and food safety:
- Tie planning with execution -- examining the gaps in performance levels at present and what the organization would like to achieve;
- Build more horizontal processes – enabling companies to be market driven, align functions, maximize business opportunities and mitigate supply risks;
- Enable executive alignment and develop understanding of supply chains – build competencies to design effective S&OPs that can provide balance and agility to supply chain processes, invest in Enterprise Resource Planning (ERP), Lean/Six Sigma, integrate trading partners, and Advanced Planning Systems (APS);
- Bring about a balance -- through strong leadership, making trade-offs, and defining supply chain strategies;
- Be quick and reliable.
It is in trying to do all of these that S&OPs are gaining importance. S&OPs help plan for the unexpected, understand how supply and demand impacts costs, customer service, quality and inventory, focus on the trade-offs and expected market impacts thereby acting as enablers of business strategy and functioning brilliantly provided the process is balanced and action is taken to maximize agility.
Improved Supply Chain Processes for Superior Performance
Process orientation should be at the heart of an organization and its supply chain for successful target achievement. Processes can be strengthened by reducing the cycle time or the actual time taken for completing a specific task before moving to the next step in the value chain. This step is a six sigma criterion in the supply chain which reduces the need for frequent process variations. State-of-the-art processes, reference models and best practices should guide the exercise of designing or re-designing supply chain processes.
Regular assessments of process maturity or capability are indispensable and results in focused improvement plans, progress monitoring, and continuous review. With disciplined PDCA (Plan-Do-Check-Act) review cycles, organizations can ensure consistency and continuous improvement in supply chain.
End-to-end Supply Chains2 and Supply Chain Reference Models3
The illustration above depicts the position of the supply chain in an organization alongside the customers. At the center is the organization, and on either side are the suppliers and the customers. There are also sources and processes in the supply chain and the customer side, which have to be integrated and optimized in a common effort.
A more sophisticated reference model is the Supply Chain Operations Reference Model (SCOR) , developed by the Supply Chain Council (SCC), an independent, nonprofit, global corporation (merged with the American Production and Inventory Control Society APICS in 2014). It is a unique framework that links business processes, metrics, best practices and technology features into a unified structure, to support communication among supply chain partners and to improve the effectiveness of supply chain management. SCOR also outlines the pre-defined relationships between operational processes, metrics, practices and skills. Thus, SCOR facilitates better supply chain redesign, enables proficient benchmarking, and supports the process of adopting best practices.
Supply Chain Process Maturity and Capability
The best supply chains progress through four distinct stages of maturity: Informal, functional, fully integrated, and extended enterprise which is the world- class level. These progressive levels of supply chain performance have to be defined, described, and measured on a consistent basis.
Many organizations feel their supply chains are balanced, strong, resilient and agile enough to combat all disruptions. But any sudden occurrence – natural or man-made – can prove them wrong. Information is critical especially if it is real-time and drawn from well-networked sources. These supply chains having undergone the various levels of maturity, enjoy both, visibility and agility. Here’s how a research study by the MIT Forum for Supply Chain Innovation and PricewaterhouseCoopers titled “Supply Chain and Risk Management” identifies these levels:5
“Level 1: Reactive supply chain management
- Low degree of integration and little coordination between suppliers and partners
- Minimal coordination between product design and supplier operations
- Little visibility into source of supply chain risk
- Unbalanced inventory leading to poor customer service
Level 2: Internal supply chain integration with planned buffers
- Align performance objectives and information across internal departments
- Some visibility into emerging changes and patterns outside of the company
- Changing demand patterns influence product design
- Integration of internal risk management processes
Level 3: Collaboration across extended supply chain network
- Extensive data and information sharing produces high visibility
- Integration of product design and inventory management across all supply chain partners
- Visibility outside of the organization is exploited to predict change and variability
- Monitor supply chain resilience levels and business continuity plan preparation
Level 4: Dynamic supply chain adaptation and flexibility
- Align KPIs across the entire ecosystem
- Full flexibility to identify and respond to emerging value chain patterns
- Real-time monitoring and data analytics
- Quick responses shortens product, network, and process lead times
- Segmented risk strategies based on supplier profiles and market-product combination characteristics.
Identifying these levels enables organizations to evaluate their current supply chain capabilities and devise a scheme for enhancing performance. Transitioning from one stage to the other not only necessitates desired processes and plans but also provides an idea of how to apply them, design practices, and implement these as may be suited to their business and their capabilities.
Any success therein is not just because of the process, but also due to the people and technology which enable the participants to know what needs to be done and when. This imparts some agility to handle changes, helps develop performance metrics, and build focus on improving crucial processes that can lead to considerable supply chain maturity across the board.6
Supply Chain Globalization
Given how the pace of globalization has picked up today, organizations need to devise supply chains that are nimble and resilient to the complexities and unpredictable risks that these changes carry. It is in such a scenario that organizations are realizing opportunities to implement supply chain globalization strategies to meet the diverse demands of global customers and thereby add to their business growth.
In India, for instance, given the population size and increasing standards of living, a majority would fall under the middle to low income bracket. Multinational organizations dealing in consumer durables in the Indian market would then need to employ strategies to make goods available to this segment either by lowering prices and reducing pack size, or by redesigning business processes which impact the entire value chain and necessitate changing processes for Marketing, Sales, R&D, etc.
Globalization of supply chain strategies can succeed only if organizations understand the landscape they are entering and can see the opportunities that lie there. The risks and costs entailed in entering global markets far outweigh the potential benefits initially. Therefore, a balanced supply chain strategy is one that considers such fluctuations and deals with it upfront. Given how supply chains keep evolving in response to changing business strategies, it is important that globalization strategies be agile and ready to adapt to shifts – regulatory or environmental. Having flexible IT solutions to power these strategies coupled with excellent talent to give it the requisite direction, going local while looking at the global picture goes a long way in facilitating effective, globalized supply chain mechanisms.7
Supply Chain Risk Management
Supply chains are increasingly posing risks to business continuity and customer service. Risks originate from globalization, outsourcing, off shoring, political, regional and global financial crises, as well as natural disasters and their aftermaths. Internal risks include changing product designs and engineering specs, relocation of production and distribution sites from one point to another, and replacement of information systems such as CRM and ERP. The impact of these risks is amplified by shorter product life cycles, increasing market expectations, and decreasing customer loyalty.
Companies must have an active supply chain risk management system in place to comply with external requirements and accounting standards such as SOX and CTPAT, to secure the future of the company.
The risk management processes and policies must focus on:
- Identifying and assessing the probability and impact of events
- Making mitigation plans
- Checking and reviewing the effectiveness of policies regularly
One of the ways to mitigate risks is to take to dual sourcing instead of single sourcing in the global supply chain. Organizations can also look at on-shoring part of the production process. Contingencies and risks in forecasting, planning, and inventories must also be considered to secure the complex supply chain.
Technology for Proficient Supply Chain Governance
Leveraging a supply chain management technology solution will enable organizations to efficiently manage supply chain risks, enhance supply chain quality, monitor supply chain performance, and implement an effective end-to-end supply chain program. Advanced web-based technology can help gain increased visibility into supply chain governance across processes and operations, thereby enabling consistent risk-preparedness and regulatory compliance.
Supply chain due-diligence exercises can be simplified using technology solutions that support risk-based evaluation of suppliers. Supplier on-boarding processes can also be streamlined with ease and supplier profile management can be automated. Efficient scorecards help in continuously moitoring the performance of suppliers, while a central data repository enables organizations to store volumes of diverse information on suppliers and link them to their contracts.
Flexible workflow-based audit tools with end-to-end functionalities help in planning, designing, executing, and monitoring the whole array of supply chain audit activities. Offline audit tools offer the advantage of conducing fieldwork in remote sites and gathering relevant data even in the absence of network connectivity. It is also possible to generate various types of audit reports and present them in compatible formats using advanced technology.
Supplier risk management systems equipped with risk heat maps, automatic notifications and alerts, risk assessment templates, and the ability to integrate with external applications and sources, enable organizations to gain complete control over supply chain risks.
Any supplier risk or compliance issues that arise can be tracked, investigated, and managed using issue remediation tools. Alongside, management dashboards provide enterprise-wide visibility into these processes, as well as supplier risks and compliance statuses across the supply chain.
Many supply chain management solutions can be integrated with external regulatory feeds to help organizations stay consistently updated on relevant changes in regulations and policies and provide valuable intelligence on the latest trends and global issues affecting supply chains.
Advanced Technology can thus serve as a strong enabler in overcoming challenges in supply chain management and achieving cutting-edge performance.
Business Aligned Supply Chains: A summary
Creating supply chain capabilities that organizations can benefit from is easier said than done. There is fair amount of juggling with costs, labor, goals, and inventory which is needed to attain the final goal. The supply chain should be integrated with the rest of the business functions so that they can sense changes, adapt, optimize, and work within the context of the larger business strategy without any conflicts and thus generate maximum opportunities for innovation and improvement.
While the ideal way for an organization to recognize the inherent value of supply chain operations is to have the supply chain team directly report to the CEO. The question that often arises is that how does one build an effective supply chain? This is unique in the sense that it depends on what works best for each organization.
Now, there may be gaps between what the organizations want and what the supply chain can provide which is why it is important to comprehend the relationship between businesses and supply chain strategies. Technology has become critical to formulating cost effective, streamlined, and standard skill-dependent processes but it adds to the problems when it becomes complex, unmanageable and costly.
Creating effective supply chains means understanding business strategy and using it to design supply chain capabilities while being tech-savvy enables such capabilities and helps in deploying them consistently across their operations. More importantly, business strategies need to constantly synchronize with the evolving supply chains thereby making them sustainable as they respond to fluctuations in the business environment. The key words for effective supply chain functioning in such a scenario of flux then seem to be, “dynamic alignment and sustainability”.