Strategic Supply Chain Management - Assignment Example

Supply chains are forms of industrial organization or al arrangements that link producers, processors, marketers and distributors (Roekel,Kopicki, Broekmans & Boselie, n.d.). Such organizations allow buyers and sellers who are separated by time and space to progressively add and accumulate value as the products pass from one member of the chain to another. Globalization, increased price war, changes in technology and the ever increasing-demands of the customer have forced the industries to reappraise the entire system to survive in the competitive market. The entire system needs to be realigned but Gattorna observed that too many companies are wasting time trying to collaborate with customers that just do not want to collaborate (Gilmore, 2006). Gattorna (2006) further contends that “supply chains and golf have many similarities; for best results everything must be in dynamic alignment”. The concept of what exactly constitutes dynamic alignment has been studied by many researchers and authors and it is possible to achieve this through the right integration. Gattorna reinforces that companies under-serve many customers while over-serving others and this results in forcing collaboration with customers that do not want it. This is not what is required in a supply chain and the supply chain should be dynamically aligned. In ‘dynamic alignment’ a company’s supply chain organization, capabilities and services are specifically but flexibly linked to customer buying behaviors (Gilmore, 2006). This implies that supply chain collaboration is a waste if an organization exerts efforts to lure a customer to collaborate who just does not value the exercise. In the process the company is only depleted of its valuable resources. Hence according to Gattorna, customers should be segmented based on what they value in the relationship. Needs keep changing in the volatile market place and hence based on this segmentation, an organization would be able to tailor their relationships, supply chain services and the prices. These could be aligned with the needs of the customers and hence ‘dynamic alignment’. Dynamic alignment was earlier referred to as strategic alignment by Christopher and Gattorna (2005) who contend that firm resources have to be allocated efficiently. Inefficient allocation can lead to inappropriate pricing regimes. It has been found that organizations either over-serve or under-serve the customers that leads to low cost-effectiveness and lost revenue oppurtunities. Most firms have overlooked the alignment but in today’s situation such alignment can add value to the supply chain. This implies that apart from customer based segmentation, the supply chain must also align their strategies, cultural capabilities and leadership styles with the customers. An organization has to go beyond the economic concepts and into the worlds of human behaviors, contend the authors. In this article the authors demonstrate four types of buying behavior which can vary across products and services and also across nations. The table below highlights the different categories which depict the drivers in each category: Source: Christopher & Gattorna (2005). Demand in the market can be predictable or unpredictable and the customer segmentation should be done based on this, according to Gattorna (Gilmore, 2006). Demand can be predictable (from known customers and hence continuous replenishment), mostly consistent demand (lean), unpredictable demand (hence agility essential for quick responses) and very unpredictable demand that requires a fully flexible supply chain. Based on the above buying behaviors, the supply chain can again be divided into four types: Source: Christopher & Gattorna (2005). They contend that such alignment can be the basis for service based pricing strategy. This helps to achieve service at low cost. Even with reduced prices the supplier margins can be maintained. Dynamic alignment does not merely refer to aligning the ‘interest’ of all the firms in their supply chain (Gattorna, 2008). Before this, the internal resources of the firm have to be aligned to have any chance of delivering high performance on a consistent basis. Customers are downstream in the chain and since the buying behaviors differ, an organization needs to have different value propositions to address this in the target market. Hence dynamic alignment is the ability to engage different supply chain configurations as customers change their buying behavior. Gattorna, in this article emphasizes that the internal culture of the firm plays a pivotal role. According to him the firms that did not exist a decade ago are the best performing enterprise supply chains. This was because they were able to start with a clean sheet and start their supply chain with a zero base. They did not have to adhere to any legacy cultures. Uncertainty in supply chain need not be limited to customer demand alone. Ambrose, Marshall and Lynch (2006) describe three sources of uncertainty within the supply chain – demand uncertainty, supplier performance and process reliability and delivery. Koh and Tan (2006) refer to the uncertainties that arise during the manufacturing process and since these are manufacturing activities it cannot be planned during the production process. For instance during the manufacturing process machine breakdown or scrap could lead to manufacturing uncertainty. Apart from the four areas for customer segmentation, demand uncertainty can also arise due to lack of information concerning the demand levels or specifications for goods and services. Lack of data or if data is not being available soon enough to allow for effective planning for operations could also cause demand uncertainty (Ambrose, Marshall & Lynch, 2006). Hence demand uncertainties are the unpredictable events that occur in the downstream supply chain which directly impacts the production cycle and the order release to the shop floor. Gupta and Maranas (2003) also concentrate on demand uncertainty and how this can be overcome through proper planning. Proper planning again suggests coordination or collaboration or alignment. If the demand fluctuations are not taken into account it could lead to unsatisfied customer demand which could result in loss of market share. Proper planning according to Gattorna can be done when the demand is predictable from known customers. If the demand does not occur it could mean a loss as there would be a rise in inventory holding cost as excessive inventory has to be held. While Koh and Tan (2006) contend that changes in customer needs lead to demand uncertainty, Gupta and Maranas explain that if the production process is delayed, demand uncertainty could result in unsatisfied customers. This could have a long-term impact on the market share. Gattorna suggests customer segmentation based on demand fluctuations but this demand uncertainty is measured at different levels. There are several decision makers including the manufacturers, distributors and retailers, according to Dong, Zhang, Yan and Nagurney (2003). When the demand associated with the product is random, the retailers must know how to order from the distributors in advance. An error could occur at any of the tiers especially when there is lack of cooperation at different levels in the chain. Apart from demand uncertainty, supplier uncertainty could also arise when the supplier cannot guarantee a reliable supply of quality goods/services due to uncertainty within their processes (Ambrose, Marshall & Lynch, 2006). This too can render the supply chain undynamic. Hence upstream supply chain could also delay the entire process and impact the supply chain. Yet another form of uncertainty that can affect the supply chain is the yield uncertainty. This is a form of supply uncertainty in which the quantity produced or received differs (Synder & Shen, 2006). The authors also take into account the lead time uncertainty in which the lead time for the order is a random variable. If a firm follows a base stock policy they will produce stochastic lead time for its customers as they are likely to experience stockouts which results in delays. Gattorna has disputed Lee’s views that dynamic alignment pertains to the alignment of the interest of all the firms in the supply chain but the truth is that merely aligning internal resources cannot reap the benefits. Everything must be in dynamic alignment. Barratt (2004) in his article discusses the importance of collaboration in the supply chain and says that it has been found to be difficult to collaborate as members in the chain do not understand when and with whom to collaborate. Collaboration is another word for alignment as emphasized by Gattorna. Barratt too proposes a segmentation approach based on customer buying behavior and service needs. The author discusses vertical collaboration with customers and with suppliers. He too insists on internal collaboration across functions which can overcome functional myopia and has the potential to enable internal integration. Internal collaboration and internal integration are not enough. Along with this external collaboration is necessary which helps build closer relationships, integrating processes and sharing information with customers and suppliers. Barratt accepts the idea of Gattarno and Tang that collaboration is essential only with a small group of important customers and suppliers and this is the segmentation approach. Supply chain segmentation is based on the assumption that customers have different expectations and buying behavior and are prepared to pay different prices based on their service requirements. Separate supply chains have to be devised to meet the differing needs of different customers. Clements (2007) supports the view that supply chains need to maximize value through internal integration. The author contends that delivering value depends upon cooperation between functions. He further cites Gattorna according to whom value creation ‘involves the interface between functions internally and organizational participants externally’. Clements suggests role-playing or embracing the role they are involved in, is the solution and not just assuming the role. Role-playing breaks down barriers and makes the learning process sophisticated. This process enhances inter-firm integration. Fawcett and Magnan (2001) conducted an empirical study involving surveys and case study interviews to gain insight into the SCM strategies adopted by companies. Based on their findings they devised their own six-stage framework to achieve supply chain integration or collaboration. The process of integration first requires the managers to recognize the major players in the supply chain. The vision must be created and accepted internally, which suggests internal alignment is first essential. This vision should be used to drive supply chain alignment. The internal and external barriers have to be identified to manage collaboration. Finally they contend that supply chains must be dynamic and flexible. The best supply chain companies are those that avoid complacency and are viewed as agile, lean and tough competitors. Min and Zhou (2002) refer to the supply chain as an integrated system which synchronizes a series of inter-related business processes. They too agree that supply chain management evolves around a customer-focused corporate vision which drives changes through out a firm’s internal and external linkages. This integration depends heavily on timely and accurate availability of information that can be shared by all members of the supply chain. Sahay (2002) conducted a study on the customer-supplier collaboration across 160 firms in India in industries ranging from FMCG to automotive to chemical engineering. They found that the driving force of effective SCM – collaboration was lacking. This calls for commitment and trust over an extended time period. The Indian industry now recognizes the value of an effective supply chain and they now spend 12 to 15 percent of the revenue on logistics (Sahay, Gupta & Mohan, 2006). All of the literature reviewed above suggests that alignment of all processes – internal and external is essential for the success of the supply chain. Different authors have used different terms like collaboration, cooperation, integration, alignment, strategic alignment or the latest dynamic alignment. The words ‘integration’ and alignment have been found in the recent studies while collaboration and cooperation were used by authors in earlier studies. All the studies indicate that demand uncertainties have to be complied with and internal integration is the first priority. A study from the industry demonstrates that it is possible to achieve dynamic integration despite demand uncertainties. The study of supply chain integration has been undertaken by authors even in the late nineties as is evident from the article by Saimee (2007). Saimee contends that alliances and partnerships allow sharing of risks and rewards while also offering opportunities for joint learning. Dynamic integration is achievable with the right leadership and vision and the firms must have the capability of value creation and value capture. This is evident in several industries. In the automotive industry Toyota benefited with the suppliers’ expertise when it formed strategic partnership with its supply chain to improve efficiency. Sony has unplanned demand and is an innovative company. It thus has a fully flexible supply chain. Sony has suppliers scattered all over the world apart from over 75 of its own manufacturing units all over the world. They devised an “optimization sharing plan” where the channel members could share gains from supply chain innovation. In the clothing and apparel industry, Zara, the Spanish firm is exemplary. Here the uncertainties are high and the product life cycle is small, which enhances the complexity and the entire process involves several partners in the manufacturing, distribution and logistics (Christopher & Lee, 2001). They have still been able to conquer the world of fashion using a low-cost approach (Heyden, 2007). Zara has retained direct control over the entire process. Zara has not followed the practice of sourcing their manufacturing from low-wage countries, which would make them distant from the consumer market (Diaz, 2005). Instead, Zara maintains 80% of its production processes in Europe, 50% in Spain, which is very close to its headquarters (Slashdoc, 2005). It does not push its factories in maximizing output but intentionally leaves extra capacity. It does not choose economies of scale but produces in small batches. It is thus able to manage the designing, warehousing, distribution and logistics function itself. Zara has a cutting edge approach and has applied the sense and respond business model due to which they are able to respond to the rapidly changing markets. They control everything what happens to products till the customer buys them (Ferdows, Lewis & Machuca, 2004). To respond is to take action whether it is changing product mix or capacity allocation which is essential in the fast changing fashion industry (Clifford, 2005). The designers work in close connection with market planners. In addition, the designers and the production areas are combined where the designers sit amidst the production process. This demonstrates internal alignment along with external collaboration. They are able to involve everyone in the designing and manufacturing process which is not possible if the manufacturing is outsourced. They use technology to keep track of the total order fulfillment process – plan procurement and production requirements, monitor warehouse inventories, allocate production to various factories and other suppliers, keep track of shortages and oversupplies (Ferdows, Lewis & Machuca, 2004). This enables them to react fast to the changing consumer tastes. Flexibility is again demonstrated by Zara as they do not follow the rigid line flow in production but batch flow which allows it to customize its products with high quality and low prices (Heyden, 2007). Their downstream supply chain is equally dynamically aligned. They do follow the conventional method of selling through the retailers. Their delivery and restocking methods are like those found in the grocery stores. They have no warehouses as their goods are either in transit or on the shelves at their stores (Diaz, 2005). They do not rely on outsourced transportation and they do not hold orders until an economic order quantity has been achieved, which means they even send half-empty trucks to maintain their delivery schedules. Thus Zara has been able to operate dynamic alignment with an agile supply chain amidst challenges in the highly competitive apparel industry. Dynamic alignment can also be achieved by applying the risk-hedging strategy as was done by Saturn Corporation, a major US automobile manufacturer. They too applied the sense and respond supply. This is essential when demand uncertainties prevail. Saturn as has a two-fold source of strength. It has a service supply chain strategy which matches the urgency of the customers’ needs (Dawson, 2004). Secondly, it shares both authority and risk with channel partners. Like Zara, they do not hold inventory on the basis of forecast demand but replenishes suppliers’ demand on request. If a part sits for nine months with the retailer they buy it back and if a part is not available with the retailer, they pay for the cost of the search. To meet the changing customer demands, Dow Chemical started its private exchange with 200 customers in 1999 and by the end of 2001 they had 8000 customers spread across 35 countries (Hoffman et al., 2002). The customers are able to view their purchase histories, plan their future orders and check availability of products. The suppliers, on their part, get a clear picture of the buying habits of the customers and this helps them to forecast demand, control inventory, schedule manufacturing. The company can track all interactions with the customers through this platform and the company’s cost per transaction reportedly came down to $1 from about $50. Thus, it is evident that in today’s competitive environment, it is possible to have dynamic alignment in the supply chain. In fact dynamic alignment is the answer to a successful supply chain. First and foremost, as suggested by Gattorna, internal integration is essential before an organization seeks collaboration or cooperation from external members. Demand uncertainty is visible in practically every industry today as the slightest change in the economic condition upsets the market place. Except for the grocery and consumer durables, the demand in uncertain and if companies rely on past consumption, the cost of inventory holding would be unwanted. Companies need to have an agile and flexible supply chain and collaborate with every member. Timely and accurate information availability is essential as has been seen in the case of Zara and Dow Chemicals. Basing the supply chain on customer segmentation would help avoiding under-serving or over-serving the customers. This in turn would mean that firm resources are allocated efficiently. Thus the benefits that companies derive are economies of scale, better information flow and efficient customer service. Apart from customer segmentation, the right leadership, the right strategy, visionary leadership and cultural capabilities are equally important. Challenges are many but dynamic alignment is achievable. References: Ambrose, E Marshall, D & Lynch, D 2006, Uncertainty and Ambiguity in supply chain relationships, retrieved online 14 January 2009, from http://www.ctvr.ie/docs/O&M_Pubs/IPSERA%202006%20EA.pdf Barratt, M 2004, Understanding the meaning of collaboration in the supply chain, Supply Chain Management: An International Journal, vol. 9, no. 1, pp. 30-42. Christopher, M & Lee, HL 2001, Supply Chain Confidence, retrieved online 14 January 2009, from http://www.stanford.edu/group/scforum/Welcome/Supply%20Chain%20Confidence%20021402.pdf Christopher, M & Gattorna, J 2005, Supply chain cost management and value-based pricing, Industrial Marketing Management, vol. 34, pp. 115– 121 Clements, MDJ 2007, Role-playing: a learning process to aid supply chain integration, DEVELOPMENT AND LEARNING IN ORGANIZATIONS, vol. 21, no. 3, pp. 14-16. Clifford, S 2005, Knowing What Customers Want, retrieved online 14 January 2009, from http://www.inc.com/magazine/20050801/supply-chain.html Diaz, FC 2005, An Integrative Framework for Architecting Supply Chains, retrieved online 14 January 2009, from http://sdm.mit.edu/docs/cela_diaz_thesis.pdf Dawson, A 2004, Supply Chain Technology, Work Study, vol. 51, no. 4, pp. 191-196 Dong, J Zhang, D Yan, H & Nagurney, A 2003, Multi-tiered Supply Chain Networks: Multicriteria Decision–Making under Uncertainty, Annals of Operations Research, vol. 135, pp. 155-178. Fawcett, SE & Magnan, GM 2001, Achieving World-Class Aupply Chain Alignment: Benefits, Barriers & Bridges, retrieved online 14 January 2009, from http://www.capsresearch.org/publications/pdfs-public/fawcett2001es.pdf Ferdows, K Lewis, MA & Machuca, JD 2005, Zaras Secret for Fast Fashion, retrieved online 14 January 2009, from http://hbswk.hbs.edu/archive/4652.html Gattorna, J 2008, The Triple-A Supply Chain revisited, retrieved online 14 January 2009, from http://www.supplychainasia.com/downloads/nov-dec-2008/supply-chain-strategy-the-triple-a-supply-chain-revisited/download.html Gilmore, D 2006, First Thoughts, Supply Chain Digest, retrieved online 14 January 2009, from http://www.scdigest.com/assets/FirstThoughts/06-11-16.cfm?cid=756&ctype=content Gupta, A & Maranas, CD 2003, Managing demand uncertainty in supply chain planning, Computers and Chemical Engineering, vol. 27, pp. 1219-1227 Heyden, L 2007, Business Model Innovation - M&S vs. Zara, INSEAD. retrieved online 14 January 2009, from www.solvay.edu/FR/Programmes/documents/ulb_gestd201_MSvsZARA.ppt Hoffman, W Keedy, J Roberts, K 2002, The unexpected return of B2B, The McKinsey Quarterly, retrieved online 14 January 2009, from http://www.mckinseyquarterly.com/article_page.aspx?ar=1210&L2=16&L3=44 Koh, SLC & Tan, KH 2006, Translating knowledge of supply chain uncertainty into business strategy and actions, Journal of Manufacturing Technology Management, vol. 17, no. 4, ABI/INFORM Global pg. 472 Min, H & Zhou, G (2002), Supply chain modelling- past, present and future, Computers & Industrial Engineering, vol. 43, pp. 231-249. Roekel, J Kopicki, R Broekmans, CJE & Boselie, DM n.d, Building Agri Supply Chains: Issues and Guidelines, retrieved online 14 January 2009, from http://siteresources.worldbank.org/INTARD/864438-1112682945622/20716483/AgriSupplyChains.pdf Sahay, BS 2002, Supply chain collaboration: the key to value creation, Work Study, vol. 52, no. 2, pp. 76-83. Sahay, BS Gupta, JND & Mohan, R 2006, Managing supply chains for competitiveness: the Indian scenario, Supply Chain Management: An International Journal, vol. 11, no. 1, pp. 15-24. Saimee, S 2007, Global marketing effectiveness via alliances and electronic commerce in business-to-business markets, Industrial Marketing Management, vol. 37, pp. 3–8. Slashdoc, 2005, Zara; should they change their IT infrastructure to remain sustainable? retrieved online 14 January 2009, from http://www.slashdoc.com/documents/49095 Snyder, LV & Shen, ZM 2006, Supply and Demand Uncertainty in Multi-Echelon Supply Chains, retrieved online 14 January 2009, from http://ieor.berkeley.edu/~shen/papers/paper38.pdf Read More