Value-Chain Report -- Proactively Manage Your Supply-Chain Strategy

An efficient, responsive supply chain can be one of management's most effective competitive weapons and a primary differentiator. In spite of the current problems in the high-tech sector, it would be difficult to dispute the value of Cisco Systems Inc.'s or Dell Computer Corp.'s supply-chain strategies. It also would be difficult to overestimate the negative impact of an ineffective supply chain in the aftermath of the Christmas 2000 debacle affecting many of the largest e-tailers, some of which are non-existent today. The value of an effective supply-chain strategy is well recognized. According to research by Gartner Group, enterprises that implement supply-chain planning applications with a continuous improvement program are likely to increase ROI by 40% during a five-year lifecycle. On-going evaluation of your supply chain is critical to identifying those improvements necessary to keep your company ahead of the competition. Within the context of the ever-changing business environment, we should constantly be asking:

How should our supply chain be organized, designed, and operated to enable achievement of our business objectives and sustainability of results?

How should our supply-chain network (sourcing, production, distribution, inventory deployment, and other stocking points, etc.) be configured?

What should the mission and value-added activities be at each facility and for each participant in our supply-chain network?

How should our overall supply chain be managed to ensure business and customer value at maximum efficiency? Supply Chains Typically Evolve In Response To Business Dynamics Unfortunately, supply chains for most mature companies are a product of reactive evolution rather than a proactive strategy for continuous optimization. Over time, supply-chain networks tend to be constructed in response to many different business dynamics, such as:

Shareholder value and returns

Competition and margin pressures

Mergers and acquisitions

Shifts in cost and service structures

New markets and new products

Customer requirements and demands

Capacity constraints

Sourcing and supplier requirements A Proactive Approach Will Help Optimize Performance Successful firms have a more proactive approach in developing their supply-chain strategies. These firms recognize that they need to stay ahead of the competition to achieve their growth and profitability objectives. In fact, a responsive supply chain is more and more a requirement just to retain existing business. Gartner Group estimates that by 2004 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers. What are the steps that companies can and should take to proactively manage their supply-chain strategy? Most importantly, management must develop a supply-chain strategy that will maximize value through support of strategic business objectives. This should not be viewed as a one-time event. Rather, the structure of the supply chain should result from a periodic and systematic assessment and analysis of the elements of network strategy. These are likely to include:

Review of strategic business goals and objectives

Assessment of mission critical logistics processes

Assessment of customer requirements

Analysis of facility missions and costs

Assessment of inventory deployment and costs

Assessment of supplier capabilities

Assessment of outsourcing opportunities

Analysis of operations costs

Analysis of transportation costs and alternatives

Evaluation of competitor strategies An Effective Strategy Optimizes Entire Supply Chain Strategies which optimize the supply chain result from analytical processes that help to determine the unique configuration for the supply chain that offers the lowest total logistics costs and the highest total profitability while achieving target customer service levels. The scope of analysis should extend from the customer's customer to the supplier's supplier, recognizing that the supply-chain network is comprised of the set of suppliers, storage and handling facilities, material flows, and rules by which products are sourced, stored, and handled and subsequently delivered to customers or end users. An effective supply-chain strategy is one that optimizes the entire supply-chain network. Supply-chain network optimization considers the strategic nature of the inherent trade-offs among acquisition costs; inbound, inter-facility and outbound transportation costs; distribution center costs; and inventory costs, as well as service response times and fill rates, in order to determine an optimal network strategy. Operational Tactics Support Strategy Execution Execution of an effective supply-chain strategy is built upon specific operational tactics and practices that enable the company to achieve the objectives of the stated strategy. For example, consider the value of capable-to-promise capabilities. Through 2002 Gartner Group estimates that enterprises that fail to model their supply chains accurately and to give the sales organization access to capable-to-promise information will lose 15% of potential profits from transactions because they will promise their customers too little or too much. For leading supply chains, a proactive approach is likely to result in implementation of several or many of these key tactics:

Available-to-promise/Capable-to-promise

Cross-docking

Global sourcing

Outsourcing

Consignment selling/Supplier managed inventories

Scan-based trading

Focused factories/Lean manufacturing

Hub & Spoke/Multi-tiered distribution

Merge-in-transit

Retail direct

Channel integration

Disintermediation Supply-Chain Management Challenge The challenge for management is not to become complacent about the supply chain, but to continually assess supply-chain effectiveness and the ability of the supply chain to contribute significantly to the overall strategic objectives of the company. This must become a proactive process with a focus on continuous improvement rather than an evolutionary, reactive process that leads to "supply-chain strategy by default". Management has a responsibility to all stakeholders to develop and implement strategies to optimize the supply chain and create competitive advantage. Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.