May 2, 2019

The 5 Building Blocks of an Effective Supply Chain Strategy

Written by Garret Weigel | Supply Chain

Today's supply chain looks very different than yesterday. In the past, the supply chain was comprised of traffic, purchasing (sometimes called the materials planning department), and other departments associated with moving goods and materials related to business operations. It has evolved and is now an essential ingredient in the global success of competitive companies. Smart enterprises continuously put time, resources, and other investments into improving their supply chain to bring quality goods to market faster at a competitive cost. It has become a crucial component to success.

Every manager needs a framework to help them improve their supply chain. Take a look at five building blocks to consider in shaping your supply chain strategy to increase your competitive advantage.


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1. Demand-Driven Planning

This principle focuses not on the practice of creating or managing demand, but on responding to it. Demand planning must be proactive for it to be effective and requires goal setting and strategy development. Tasks must be clearly outlined with established deadlines, ready to meet goals and objectives.


Demand planning begins with codifying your processes while assessing historical performance data. Then apply measurement to those processes, followed by subsequent actions such as inventory classification and advanced planning for long lead time materials. Understand your past performance, then calculate expected demand and plan accordingly, using all available information.


When this topic was studied by the researcher Tecsys, they found that demand during planning could potentially reduce inventory requirements by 15%. It could also help fill orders 20% faster. What's more, they found it resulted in a 2% (and sometimes greater) increase in revenue. Here's the clincher: it resulted in a 3 to 5% increase in gross margins.


2. Agility

Building agility into the supply chain is crucial. Supply chains must be fluid, nimble, and able to respond quickly to changing demands and influences in the marketplace. When consultant McKinsey studied the issue, they declared that supply operations are challenged to keep pace with competitors. These organizations approach a market with good intentions, but they lack the agility to capitalize on available opportunities. Also, their agility disallows them from mitigating risks that enter at unforeseen (and unwelcome) times.


McKinsey looked at the supply chain performance of companies and several industries; they examined their practices to discover the essential elements of agility. They found that companies that employed agile practices in order to be more responsive to both the good and the bad yielded better results for the organization. More specifically, they found that companies that had robust supply chain monitoring and  agile practices had a service level (by their measure) that was 7% higher than their competitors. They also found that the inventory levels of those that had very agile supply chain practices kept those levels 23 days less than their peers that were weaker in supply chain agility.


3. Profit, People, and Planet

The British consultant John Elkington coined this expression in a 1994 article in The Economist, calling it the "triple bottom line." Elkington argued that companies should not just have one bottom line, but three. And those three bottom lines are not necessarily related.


triple bottom line


The triple bottom line: profit, people, and planet. Source:


The first is a traditional measure: corporate profit, the proverbial bottom line of profit and loss. The second, as Elkington describes it, is their "people account." This is a measure of how socially responsible they are in their operations (the supply chain). It gives credence to the organization's respect to people, their many interactions, and their own organization. The third Elkington calls "planet." This measures how environmentally responsible the organization has been.


The triple bottom line can be applied to the supply chain and measured over time. Elkington likens it to the phrase "balance scorecard,” where performance is measured holistically as they operate within a global market. Thus, a company, through their supply chain, must account for not only their corporate and profitable pursuits, but also their socially responsible ones. They'll be perceived better in the marketplace and viewed as a preeminent and reliable company.


4. Team Integration and Communication

This principle seems self-explanatory, but it’s often missing. Behind every good supply chain – one that works well and meets the objectives of the company – there's a team that works well together, has good synergy and a certain chemistry that achieves results. When researcher Braziotis Christos studied this principle, he found several useful ways to better build a team and increase communication:


"Competing more effectively on a global scale is closely linked with offering a distinctive and innovative value proposition to the final customer that further demonstrates the need for upstream and downstream members of the supply chain to work collaboratively in terms of aligning their production process as well as their strategies.”


Christos further explained that cross-functional and cross-organizational teams positively contribute to supply chain integration. They subsequently develop a collaborative environment that breeds positive results. This is critical in today’s highly competitive global environment. Companies need to work collaboratively to recognize mistakes that can then be prevented from repeat by imposing safeguards that are shared in collaboration. This ultimately contributes to a stronger competitive position. He concludes that a collaborative and synergistic cross-functional team is an essential part of a successful supply chain and provides a base to share risks as well as rewards.


5. Visibility and Control

Today's supply chain has the luxury of leveraging a diverse set of metrics, often via the Internet of Things (IoT) and aggregated big data. This provides useful information about operations, as they occur, in real time. It also helps forecast what's next, according to the historic data. These characteristics enable quick and accurate decisions to mitigate trouble and promote positive outcomes before the issues are able to occur.


This is what visibility is all about; it allows supply chain managers to look inside an organization and learn about new orders, the demand for specific products, and what those products require in terms of material and timing. It also watches external forces such as market trends, weather, and seasonal events.


Once information is processed, managers know their options and can use the information to make decisions, which can be improved over time as they gain experience. They’ll establish a new normal and new warning signs. Most importantly, they will learn how to mitigate trouble and solve problems before they occur so they may exercise control.


Consequently, visibility and control work well together. Visibility provides information and the know-how of what's going on at any given time. Control involves the actions that can be taken based upon that information to improve performance and subsequently the overall operation of the supply chain.


Many tools now exist to aid visibility and control, including telematics, sensorization to aggregate data, and cloud computing platforms to process all this information. These tools enable supply chain managers to remotely ingest such information via dashboards and scorecards to know their operational performance in real time to devise actions to correct course if necessary.


Even though the supply chain of yesterday was not always viewed as a critical component of profitability and success, today's supply chain is. These five building blocks stimulate better developed policies that will give the supply chain a more competitive posture needed to survive in today’s competitive global economy.


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