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How to design a competitive Supply Chain?

Article written by: PhD. George Ogrinja, Supply Chain Director, Associate Professor Faculty of Economic Cybernetics, Statistics and Informatics, ASE Bucharest


Continuation of the article How does the company strategy influence the Supply Chain model?


Alignment of Supply Chain to the company’s competitiveness strategy

The competitive strategy of the company has a major influence on the development of the strategy, in terms of its physical and operational configuration.

There are many managers that first think of the elaboration and monitoring of a set of key performance indicator, when they want to improve the performance of a Supply Chain. We believe that, without knowing and correctly understanding a company’s existing and new markets, distribution channels, customer requirements, product portfolio and their characteristics strategy, the development of a competitive strategy of the Supply Chain is not possible.

It is the case of many Supply Chain executives that by only following cost criteria in their tactical decisions have been removed from the company’s competitiveness strategy objectives. Indeed, if the company’s strategy is focused on a range of products or services that differentiate it on flexibility in relation to market requirements, it cannot be supported by a strategy that is focused only on reducing COMPANY’s costs. And this is because, according to previous conclusions, there was no “One Size Fits AllSupply Chain model able to provide an optimal cost reduction solution in order to efficiently and flexible meet customers requirements.

Note: The Supply Chain should not be measured or designed in isolation from the company’s competitiveness strategy.

Here are 6 steps required to align the SC to the competitiveness strategy of the company:

1. The development and communication of the company’s strategy

For a Supply Chain Executive is very important to define the company’s strategy, what it is offered (e.g., products and services), when it is offered (time, production cycles, etc) and where it is offered (markets, segments, etc.) as well as its specific, measurable objectives.

After the elaboration of the final form, the strategy will be communicated to the decision-making structures of the organization. We mention that, in the case of strategic partnership alliances between the members of the SC, to achieve an uniform overall “end-to-end” strategy (the alignment of the strategies of the companies from the SC), the establishment of a “Supply Chain Council” may represent a successful solution. This Council which governs the entire SC is comprised of leaders, executives, managers of “business units” or other leaders with influence of the partner companies.

Note: SUNTETI LIDER DE Supply Chain, cunoasteti strategia de competitivitate a companiei? Pentru ca, ignorarea strategia de competitivitate a acesteia reprezinta sursa elaborarii unei strategii SC nesustenabila obiectivelor strategice ale companiei.

2. Identification of your own responsibilities in theSC field to support the company’s competitiveness strategy

First of all, a SC manager needs to understand how the company chooses to compete on the market in order to define a SC strategy oriented to the competitive fulfillment of the company’s strategic goals. In other words, the objectives set in the SC will be prioritized according to the objectives of the company’s competitiveness strategy.

3. Understanding customers’ requirements, distribution channels and product characteristics to define key processes of the SC in an accurate and integrated manner

In this way, the SC strategy does not represent a goal in itself, but it supports the competitiveness strategy.

4. Align SC KPIs with the company’s competitiveness strategy

A SC exists to sustain the market that it serves. Practically, the alignment of the SC strategy to the company’s strategy in terms of performance indicators means that SC’s KPIs have to represent a subset of the company’s competitiveness plan.
In the article “How to apply best practices in SCM” we presented a process oriented organizational model of a company (figure 1).

Supply Chain: Structura organizationala orientata pe proceseFigure 1. Process oriented organizational structure

According to the image above (Figure 1) in a rocess oriented organizational structure
The teams work both hierarchical (vertical integration) but also horizontally (interdepartmental) having specific and common objectives oriented towards customer satisfaction.

Note: Performance assessment indicators change employee behavior

How the functional departments’ efforts can be oriented towards the achievement of the company’s competitiveness strategy objectives?

One of the most effective solutions is developing KPIs to measure processes performance and not their individual functions.

We mention that the process performance indicators measure the performance of all departments involved in the process and by default the performance of the company in relation to its strategic objectives.

SC practice shows that, a well-established inter-departmental indicator removes the functional barriers between departments, develops positive relationships between internal workers and their efforts are oriented towards the outside of the company (clients and market) rather than inwards, i.e. towards solving individual tasks.

For example: the indicator “Fill Rate” measures the percentage of orders that have been shipped from stock. The indicator can be a measure of performance evaluation of the department of sales, marketing, inventory control or supply. This indicator evaluates an individual company function concerned of a Department and is oriented towards the efficiency of the activities within the company.

The “Perfect Order” measures the ability of the COMPANY to deliver on time, the ordered quantity to the customer’s destination without incidents and without errors in the delivery documents.

The Perfect Order indicator is a strategic indicator which relates to the fulfillment of customer orders and measures the degree of customer service that is the way the SC meets customers’ expectations. The indicator assesses the efficiency of the following functional departments: purchasing, order management (sales, logistics) and distribution (storage, transport).

In case of granting premiums (bonus system) on the basis of the “Perfect Order” performance indicator, the behavior of the functional departments will change, staff efforts will be shifted from inside to outside towards solving the strategic objectives of the company.

Note: Correlate the SC’s KPI with the bonus system, both indicators being oriented to the performance of the processes, in order to change the attitudes of the employees and to move their efforts towards achieving the strategic goals of the company.

5. . Develop a SC Strategy based on the efficiency and flexibility rules to support the company’s strategic objectives (SC structure, partners, processes, systems, organizational structure, role and competence in serving your customers).

Components of the SC Strategy:

a) Partners – the selection of partners, outsourcing models, partners relationship configuration for sharing earnings and costs associated to the tranzaction between partners.
b) Networks – the supply network, the manufacturing network, the integration types (horizontal or vertical) or distribution network.
c) Processes – designing supply, manufacturing, distribution, and support processes in relation to the cost, reliability, response time and flexibility, internal and external integration criteria.
d) Systems – software modules, information categories, reporting, control systems and bonus systems
e) Organizational Structure needed to support the Supply Chain strategy objectives

After compilation, the Supply Chain Manager will present its strategy to the executive, functional, administrative and operational structures in its subordination. It is very important that staff who belongs to the SC to understand that the role of their department is not only operational, but it serves the strategic objectives of the company or the entire SC.
This is the reason for which Best-in-Class companies hire SC executives who have very good communication and networking (internal and external) skills, strategic thinking and the ability to create value (value chain).

6. Redesign, improve and align SC strategy to company strategy

“Best practice” techniques recommend redesigning the SC strategy every 3-5 years to be in line with the company’s competitiveness strategy.

In Figure 2 we have presented the importance of the correlation between functional strategies (Supply Chain, Marketing and Sales, etc.) and the company’s competitiveness strategy. The reciprocal influences outlines the importance of the correlation approach in the planning cycles of the Supply Chain strategy and the company’s general strategy.

Because the Supply Chain strategy development requires time and money, the Supply Chain managers delay the SC evaluation and redesign. In general, it starts with a first stage of assessment of the alternatives of redesign (20-30 days), followed by the second stage of estimation of the development costs and potential cost reductions obtained after SC redesign (50-100 days).

In the SC practice the situations when SC have to be redesigned to solve with priority some processes that generate high operational costs are very often. But what are these signs that require a rethinking of the SC or its alternatives?

In our next articles we will continue the discussions about the elaboration of a Supply Chain strategy to be a competitive company.

PhD. George Ogrinja, Supply Chain Director, Associate Professor Faculty of Economic Cybernetics, Statistics and Informatics, ASE Bucharest

 

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