Five Core Tenets of Achieving Supply Chain Excellence

If you were associated with manufacturing and distribution operations a few decades ago, you may have heard of Dr. Eli Goldratt, the theory of constraints and his book titled "The Goal." 

The novel related the story of a fictitious plant manager, Alex Rogo, who battled to turn things around at a struggling production plant using innovative, yet basic, techniques around bottleneck management. Alex discovered, as did the reader, that optimizing locally everywhere in the plant did not result in the global optimum; instead, manufacturing throughput was best enhanced by managing critical production constraints effectively. The book succeeded in communicating that the ultimate goal of a business enterprise was to be profitable, ahead of any other seemingly important numerical metric.

Since then, the scope of constraint-based optimization has extended beyond the factory to include:

• Procurement,
• Production and
• Distribution.

Supply chain management has evolved into a science, with chief supply chain officers in command of global supply chains at many corporations. Although profitability continues to be paramount, the business environment for manufacturers has become much more challenging. For many manufacturing companies, achieving end-to-end supply chain excellence is now a top priority. 

THE STATE OF MANUFACTURING SUPPLY CHAINS

Slowly, but steadily, the manufacturing network has become more complex and geographically disparate. To start with, manufacturers have more channels available to reach their end customers:

◙ Direct enterprises,

◙ Retailers,

◙ Distributors and

◙ Online.

Demand across these channels has become increasingly volatile as customers have become more demanding and unpredictable. Across a diverse range of automotive, consumer electronics, consumer packaged goods, chemicals and pharmaceutical companies, manufacturers have been forced to introduce more new products to retain and grow market share. This unprecedented pace of new product introductions has strained alignment between the sales, engineering, manufacturing, marketing and finance departments internally, as well as with key suppliers externally. 

With outsourced manufacturing becoming an integral part of supply chains, most notably in the consumer electronics and high technology industries, supply chain related risk is also an increasing concern. 

CORE TENETS OF MANUFACTURING SUPPLY CHAIN EXCELLENCE

Despite these challenges, many companies have learned how to achieve supply chain excellence. These market leaders adhere to the following five core tenets:

1. Embrace Customer Centricity

With customer demand across channels becoming increasingly volatile, leading manufacturers are focused on understanding their end customers better. This is necessary not only at business-to-consumer companies, where the manufacturer has direct visibility into the end consumer, but also at business-to-business companies where the end customer may be just a few layers removed. 

Customer centricity goes beyond customer satisfaction surveys; it is about understanding what different customers buy, what influences that buying decision and how they buy. Leading manufacturers have learned from retailers in this regard, in that they are now able to define different customer personas and associated buying behaviors.

By constructing different value versus cost-to-serve propositions, these leaders are able to service diverse customer needs more effectively, and in turn, tend to be more competitive and profitable.

2. Differentiate Service Through Segmented Supply Chains

Customer-centric business strategies often result in manufacturers taking different value propositions to market to meet the needs of different customers while supporting corporate objectives. For instance, when pursuing market share growth for certain product-geography-channel combinations, manufacturers may need to adopt one supply chain posture: aggressive and dynamic pricing, high-product availability and superior lead times. When looking to retain market share for other product-geography-channel combinations, the supply chain posture may be different: fixed pricing and competitive lead times.

The supply chains serving these distinct segments need to be configured differently from a demand planning, inventory planning, production and distribution planning perspective. The benefits can be significant. 

Case in point: Dell, a leading manufacturer of mobility and desktop products, well known for inventing the direct-to-consumer model in the computer industry, successfully reinvented its supply chain to serve different customer segments through retail stores. Contrary to some prevailing perceptions, customer-centric, segmented supply chains result in reduced complexity and costs for the manufacturer. 

3. Design for Business Agility

Adapting effectively — and rapidly — to internal and external change is the essence of business agility. How long does it take for a demand change in a particular channel to be captured and reflected to all relevant stakeholders across the supply chain? How quickly is this change comprehended on the supply side and reflected in adjusted inventory plans, master production plans, factory plans and distribution plans? How soon do suppliers know what they need to do differently to accommodate this change? If there is a delay or disruption at a supplier, how quickly can a manufacturer determine the potential business impact and determine mitigation options?

Leading manufacturers have been redesigning supply chain processes with business agility in mind and regularly make strategic investments in inventory and capacity to absorb the impact of demand and supply changes.

SanDisk Corporation, one of the leading flash memory product manufacturers in the world, has made extensive use of intelligent inventory staging and production postponement techniques to design an adaptive supply chain that balances superior customer service with speed, flexibility, scale and cost.

It is important to note that business agility is not about speed alone; it is the ability to make intelligent decisions faster. To the extent that supply chain professionals help design and drive business agility at their corporations, they also enable corporations to stay profitable as business conditions change.

4. Drive End-to-End Synchronization

Supply chain management has multiple specialized disciplines, ranging from forecasting customer demand to positioning corresponding supply and creating optimal procurement plans. These disciplines span functional roles across sales, marketing, business units, manufacturing operations, procurement, engineering and finance. 

Given the pace of change corporations face today, it has become increasingly important to keep internal and external stakeholders aligned with the most current business plan.

Over the last decade, and especially since the global financial crisis a few years ago, leading manufacturers have focused on driving rapid synchronization across different functional stakeholders internally and externally through the systematic deployment of sales and operations planning (S&OP), also referred to at some companies as integrated business planning.

Identifying and bridging gaps between the stated business plan and the most recent view of reality — across new products, demand, supply and finance — is the primary objective of this process. The sheer cross-functional nature of the S&OP process, however, makes it difficult to execute the process consistently month after month.

To drive end-to-end synchronization across different stakeholders, senior-level S&OP champions have emerged at many manufacturing companies over the past few years. What-if scenario analyses have become a standard method for evaluating different options to bridge demand, supply and financial gaps. 

Several leading consumer goods manufacturers are developing integrated business plans with their strategic retail partners, engaging in structured, weekly collaborative processes to keep the extended value chain synchronized. In fact, data suggests that companies with more mature S&OP processes have better operational and financial results relative to their competition.

5. Leverage Advanced Optimization

Advanced supply chain management is based on intelligent trade-offs within the factory and across the entire supply chain. 

Optimization techniques continue to be the backbone of the intelligent decision-support technology supply chain practitioners use today, whether they work in the realm of predicting demand or positioning supply. What has changed over the last few decades is the ease-of-use and universal availability of such optimization techniques to help end users in manufacturing corporations drive real results.

For instance, a leading semiconductor manufacturer, well established in the industry for the quality of its analog products and now for its supply chain prowess, deployed advanced optimization solutions to improve its customer request date delivery performance by approximately 20 percentage points, while reducing its overall network inventory by 25 percent at the same time. Recognizing that supply chains are indeed a competitive differentiator, leading manufacturers have invested in upgrading the skill sets of their supply chain personnel, from internal training to college recruitment programs. 

Evolution of Decision-Support Technology and Deployment Models

Decision-support systems that help deploy these core principles and enable supply chain excellence have improved substantially over the past few decades. While the rigor of mathematical optimization continues to be relevant, significant energy has been devoted in recent years to help make supply chain systems easier to deploy and use.

In addition to providing in-depth optimization recommendations across different supply chain processes, these systems now place special emphasis on facilitating continuous learning through a closed-loop process for end users. Additionally, the advent of cloud computing has also made the deployment of advanced planning and scheduling systems much faster and easier.

While the manufacturing imperative has clearly evolved from optimizing factories to building end-to-end, global supply chain excellence, enterprise profitability is still the driving factor.

The good news is that the principles behind creating profitable supply chains have been clearly identified. For manufacturing supply chain professionals, the direction is clear: success will come to those companies that can drive business agility through customer-centric, segmented supply chains, end-to-end synchronization and advanced optimization. 

(Source: “The Manufacturing Imperative: Five Core Tenets of Achieving Supply Chain Excellence” by Puneet Saxena, Vice President of Manufacturing Industry Strategy, JDA Software)