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Understanding the Supply Chain

English Name: Aimira

Chinese Name: 艾美

Wuhan College

Major: BUSINESS MAJOR 2018

Understanding the Supply Chain

To balance the customers’ demands with the need for profitable growth, many companies

have moved aggressively to improve supply chain management. Their efforts reflect what I

feel are the seven most important steps in supply chain management. These steps can enhance

revenue, control costs and asset utilization as well as customer satisfaction. In this paper I

will discuss what I think are the most important factors to create and run an excellent supply

chain management system.

The first step is to segment customers based on the service needs of distinct groups and

adapt the supply chain to serve these segments profitably. Segmenting customers by their

particular needs equips a company to develop a portfolio of services tailored to various

segments. Surveys, interviews, and industry research have been the traditional tools for

defining key segmentation criteria.

Today, progressive manufacturers are turning to such advanced analytical techniques as

cluster and conjoint analysis to measure customer tradeoffs and predict the marginal

profitability of each segment. Home Depot bases segmentation on sales, merchandising needs

and order fulfillment requirements. Others are finding that criteria such as technical support

and account planning activities drive segmentation. Research also can establish the services

valued by all customers versus those valued only by certain segments. Most companies have

a significant untapped opportunity to better align their investment in a particular customer

relationship with the return that customer generates. To do so, companies must analyze the

profitability of segments, plus the costs and benefits of alternate service packages, to ensure a

reasonable return on their investment and the most profitable allocation of resources. To

strike and sustain the appropriate balance between service and profitability, most companies

will need to set priorities, sequencing the rollout of tailored programs to capitalize on existing

capabilities and maximize customer impact.

For the second step you must customize the logistics network to properly serve your

customer and remain profitable across your customer segments. In many industries,

especially such commodity industries as fine paper, tailoring distribution assets to meet

individual logistics requirements is a greater source of differentiation for a manufacturer than

the actual products, which are largely undifferentiated. International Paper Co. found

radically different customer service demands in two key segments; large publishers with long

lead times and small regional printers needing delivery within 24 hours. To serve both

segments well and achieve profitable growth, the manufacturer designed a multi-level

logistics network with three full-stocking distribution centers and 46 quick-response

cross-docks, stocking only fast-moving items, located near the regional printers. Return on

assets and revenues improved substantially thanks to the new inventory deployment strategy,

supported by outsourcing of management of the quick response centers and the transportation

activities.

The third step is to understand market signals and align demand planning accordingly

across the supply chain, ensuring consistent forecasts and optimal resource allocation.

Forecasting has historically proceeded very redundantly with multiple departments

independently creating forecasts for the same products. Everyone using their own

assumptions, measures, and level of detail . Many consult the marketplace only informally,

and few involve their major suppliers in the process. The functional orientation of many

companies has just made things worse, allowing sales forecasts to envision growing demand

while manufacturing second-guesses how much product the market actually wants. Excellent

supply chain management calls for sales and operations planning that transcends company

boundaries to involve every link of the supply chain from the supplier’s supplier to the

customer’s customer in developing forecasts collaboratively and then maintaining the

required capacity across the operations. Channel-wide S&OP can detect early warning signals
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of demand lurking in customer promotions, ordering patterns, and restocking algorithms and

takes into account vendor and carrier capabilities, capacity, and constraints.

The fourth step is to differentiate your product closer to the customer and speed conversion

across the supply chain. Manufacturers have traditionally based production goals on

projections of the demand for finished goods and have stockpiled inventory to offset

forecasting errors. These manufacturers tend to view lead times in the system as fixed, with

only a finite window of time in which to convert materials into products that meet customer

requirements. While even such traditionalists can make progress in cutting costs through

set-up reduction, cellular manufacturing, and just-in-time inventory methods, great potential

remains in less traditional strategies such as mass customization. For example, manufacturers

striving to meet individual customer needs efficiently through strategies such as mass

customization are discovering the value of postponement. By delaying product differentiation

to the last possible moment and thus overcoming the problem. With the proliferation of

packaging requirements from major retailers, our number of SKUs (stock keeping units) has

exploded. We have situations daily where we backorder one retailer, like Wal-Mart, on an

item that is identical to an in-stock item, except for its packaging. Sometimes we even tear

boxes apart and repackage by hand! The key to just-in-time product differentiation is to

locate the leverage point in the manufacturing process where the product is unalterably

configured to meet a single requirement and to assess options, such a postponement,

modularized design, or modification of manufacturing processes, that can increase flexibility.

The fifth step is to manage sources of supply strategically to reduce the total cost of owning

materials and services. Determined to pay as low a price as possible for materials,

manufacturers have not traditionally cultivated warm relationships with suppliers. Excellent

supply chain management requires a more enlightened mindset. While manufacturers should

place high demands on suppliers, they should also realize that partners must share the goal of
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reducing costs across the supply chain in order to lower prices in the marketplace and

enhance margins. This fact-based knowledge is the essential foundation for determining the

best way of acquiring every kind of material and service the company buys. With their

marketplace position and industry structure in mind, manufacturers can then consider how to

approach suppliers. Through soliciting short-term competitive bids, entering into long-term

contracts and strategic supplier relationships, outsourcing, or integrating vertically. Excellent

supply chain management calls for creativity and flexibility.

The sixth step is to develop a supply chain-wide technology strategy that supports multiple

levels of decision-making and gives a clear view of the flow of products, services, and

information. To sustain reengineered business processes many progressive companies have

been replacing inflexible, poorly integrated systems with enterprise-wide systems. Too many

of these companies will find themselves victims of the powerful new transactional systems

they put in place.

Despite making huge investments in technology, few companies are acquiring this full

complement of capabilities. Today’s enterprise wide systems remain enterprise-bound, unable

to share across the supply chain the information that channel partners must have to achieve

mutual success.

The seventh step is to adopt channel-spanning performance measures to gauge collective

success in reaching the customer effectively and efficiently. To answer the question, How are

we doing? most companies look inward and apply any number of functionally oriented

measures. But excellent supply chain managers take a broader view, adopting measures that

apply to every link in the supply chain and include both service and financial metrics.

First, they measure service in terms of the perfect order; the order that arrives when

promised, complete, priced and billed correctly, and undamaged. The perfect order not only
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spans the supply chain, as a progressive performance measure should, but also views

performance from the proper perspective, that of the customer.

Second, excellent supply chain managers determine their true profitability of service by

identifying the actual costs and revenues of the activities required to serve an account,

especially a key account. For many, this amounts to a revelation, since traditional cost

measures rely on corporate accounting systems that allocate overhead evenly across accounts.

Such measures do not differentiate, for example, an account that requires a multi-functional

account team, small daily shipments, or special packaging. Traditional accounting tends to

mask the real costs of the supply chain focusing on cost type rather than the cost of activities

and ignoring the degree of control anyone has over the cost drivers.

The blueprint requires rigorous assessment of the entire supply chain, from supplier

relationships to internal operations to the marketplace, including customers, competitors, and

the industry as a whole. Current practices must be ruthlessly weighed against best practices to

determine the size of the gap to close. Thorough cost/benefit analysis lays the essential

foundation for prioritizing and sequencing initiatives, establishing capital and people

requirements, and getting a complete financial picture of the company’s supply chain before,

during, and after implementation.

By simultaneously enhancing customer satisfaction and profitability, these seven steps of

supply chain management can turn these once warring objectives into a formula for

sustainable competitive advantage and your company will be able to reap the full rewards of

an excellent supply chain management system!

Reference

Basics of supply chain management. Lawrence D. Fredendall. St. Lucie Press, Alexandria,

Va. Boca Raton, FL: 2001.

Customer-centered supply chain management: a link-by-link guide. Fred A. Kuglin.

New York, 1998.

The executive’s guide to supply management strategies: building supply chain thinking into

all business processes. David A. Riggs. New York: 1998.

Competing through supply chain management: creating market-winning strategies through

supply chain partnerships. David Frederick Ross. New York NY Chapman & Hall 1998.