Don't let your supply chain strategy develop in isolation from the rest of the business.
Some managers believe that there are universal definitions of good or bad supply chains. We often see companies attempt to build the most efficient supply chain, regardless of whether their market strategy is to compete on price. Optimizing cost and inventory may come at the expense of lead-times, flexibility and risk. Your supply chain needs to compete the same way your company does. Supply chains cannot be measured in absolutes or designed in isolation of the corporate strategy. Here are six steps to align your supply chain with your corporate strategy:
1. Define and communicate a clear corporate strategy.
One of the biggest failure points in aligning strategy is when the supply chain organization doesnt know what to align with. Strategies cannot be too limited and fail to consider and prioritize all the market requirements and factors on which participants compete (features, price, delivery, etc). And strategies cannot be platitudes promising all things to all people. Corporate strategy needs to define how you are going to be different and better than your competitors, and it needs to set specific, measurable goals. Then the strategy needs to be communicated to the organization thoroughly and repeatedly.
2. Identify the areas of your corporate strategy that are enabled by the supply chain.
You need to connect the dots between your strategic goals and how those get delivered by the company. This process defines what your supply chain needs to be good at, and it allows you to prioritize supply chain objectives. Ask the question, "What part of my core competence and competitive differentiation falls within or derives from my supply chain activity?" This step is especially critical in making in-house/outsource decisions.
3. Align supply chain performance metrics with the corporate strategy.
One of the most common issues we see is the belief that there are standard supply chain performance measures, and the company should strive to maximize them all. This belief fails to account for the fact that there are tradeoffs in optimizing different goals. There are also no absolutes in competitive strategy. Goals should be set based on your performance relative to your competitors.
We have a client who had operated their supply chain with the goal of shipping product within one day after an order. But their mature market no longer needed that level of performance. Relaxing that delivery requirement opened up a significant opportunity for inventory improvement. It is important to note that they didn't stop delivering in a timely manner or stop measuring delivery performance; they just re-prioritized their goals to optimize a different objective.
4. Structure your supply chain to optimize the strategic goals.
This step is where you address the elements of supply chain design: Supply chain network, locations, supplier selection and business terms, inventory and planning policy, organizational structure. Supply chains that are optimized for cost efficiency will look different than supply chains that are optimized for flexibility and responsiveness. Your organization and the skill sets of your people will be different, too.
5. Align incentives end to end.
Internal performance evaluations and bonus structures need to match the aligned metrics that have been set. Supplier performance management and business models should align the suppliers' incentives with yours. Don't forget that channel and demand management are part of the supply chain, too. Build a robust S&OP process and drive your sales and marketing teams with objectives that aren't at odds with your supply chain objectives. One common failure is when sales and marketing have no incentive to control inventory. They will overdrive the forecast to guarantee availability and then the supply chain organization is left with the excess inventory.
6. Keep refreshing the strategy and alignment process.
Most companies have strategic planning cycles of one to three years, but we have seen companies that literally go decades without re-aligning their supply chain strategy. Put your supply chain strategy on the same schedule as the rest of your planning.
Good luck aligning your supply chain with your corporate strategy! I welcome your feedback.
Jeff Wallingford is vice president, Supply Chain Strategy for Riverwood Solutions.