The Future Perfect Supply Chain

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1 53 Perimeter Center Suite 201 Atlanta, GA (877) The Future Perfect Supply Chain Achieving Responsiveness and Efficiency By Art Brown VP Professional Services Competitive Logistics LLC 2005 Competitive Logistics LLC 1

2 The Future Perfect Supply Chain We agree with Michael Hammer s statement in his book The Agenda that the supply chain is the last untapped vein of business gold. With U.S. companies spending a trillion dollars annually on their supply chains (just under 10% of the nation s GDP), companies must begin to use their supply chain strategically in order to gain competitive advantage while increasing shareholder value. The dynamic, interconnected and complex business environment of today is strongly influenced by four very powerful forces that we believe will shape future supply chains and the way companies will serve their customers. This paper will review the major effects of these forces and provide key insights of how companies can develop a supply chain that delivers the products and services of the future perfectly, every time. 1. Globalization & Consolidation The gradual elimination of trade barriers around the globe is creating new market opportunities and new supply sources that are enabling dramatic increases in consumer satisfaction and shareholder value. These new opportunities are driving massive consolidations in order to achieve the ability to execute on such a large scale. Supply: Driven by the need to seek out the lowest cost sources for labor, commodities, and services. Today the low cost labor provider is China but who will it be tomorrow? Demand: Capitalism and democracy continue to integrate expanding regional markets into a global economy. This has created the opportunity to build global brands while satisfying regional needs for unique product configurations and capabilities Competitive Logistics LLC 2

3 2. Federation & Segmentation Federation is based on the principle that collaboration between the Enterprise and a network of strategic supply chain partners at every level of business strategic, tactical, and operational is the only realistic means of achieving supply chain integration and optimization. Segmentation is the only reasonable means of achieving Federation. Supply: Supplier Federation and collaboration on business plans, product designs, supply chain configuration, sourcing allocations, and order fulfillment. Demand: Customer Federation and collaboration on business plans, product designs, supply chain configurations, sourcing allocations, and order fulfillment. 3. Bifurcation & Proliferation Bifurcation is a market force that will ultimately penetrate every regional market, which in turn will have an affect on almost every industry and channel. It is based on the introduction of Mass Customization into Mass Markets that produces two modes of product price positioning Low and Premium. Growth will be at the low price and premium price positions. Closely associated with Bifurcation is the phenomenon of Proliferation of products, which occurs primarily in the premium category in the form of innovative solutions Competitive Logistics LLC 3

4 Supply: Bifurcation has forced changes in Supplier relations in terms of defining whether individual suppliers offerings are supportive of the Low Cost offering or the Premium offering. Demand: Bifurcation has resulted in retailers expanding private labels on the Low Cost side forcing manufacturers to innovate on the Premium side. Constant shifting of quality grades from Premium brands into Low Cost private labels is now the norm. 4. Integration & Modularization The Bifurcation of price positions and Proliferation of products have created the need for two different supply chain design concepts. The Low Cost functional products require predictability and integration in order to deliver lowest cost. The Premium innovative products require responsiveness and modularization in order to deliver unique solutions. Supply: The design and development of an Integral supply chain for the delivery of Low Cost functional products focused on Efficiency. The design and development of a Modular supply chain for the delivery of Premium innovative products focused on Responsiveness. Demand: Low Cost functional products are usually make-to-stock with Integral product architectures. Premium innovative products (solutions) are assemble-to-order or configure-to-order or packageto-order with Modular product (solution) architectures. Since the product portfolios of most companies consist of a combination of both Low Cost and Premium Product, we believe the Future Perfect Supply Chain will consist of a symbiotic combination of both Efficient and Responsive capabilities. Combining them effectively will be a major challenge facing supply chain professionals since these two capabilities are fundamentally different in nature. Our experiences indicate that when they are combined inappropriately, the results are neither efficiency nor responsiveness Competitive Logistics LLC 4

5 Designing Efficient and Responsive Supply Chains The remainder of this whitepaper will explore an approach that is based on designing and developing these two fundamentally different supply chains separately while leveraging shared resources. Figure 1 illustrates the key elements and variables associated with the flow of an Efficient Supply Chain design (some inventory stages are ignored). Figure 1 Efficient Supply Chain In an efficient supply chain the goal is to deliver products that have very predictable demand patterns at the lowest possible costs by tightly controlling the synchronization of flow while achieving targeted service levels. It is the most traditional use for a supply chain to provide make-to-stock items. In order to provide reliable forecasts of demand, only a narrow set of standard functional products (standard bills of material) will be allowed in the efficient supply chain. Using these reliable forecasts of demand, products will be pushed through standard manufacturing processes to the DC and then into the DC of Tier 1 Customers (each Tier 1 DC will be considered an individual demand area) using forecasted demand (co-managed or otherwise). The actual pull based on POS information can occur at one or all of three points on the supply chain. First, it can occur between manufacturing and the DC (mix adjusting). Second, it can occur between the DC and the Tier 1 DC (mixed loads or pallets). Third, it can occur between the Tier 1 Retail and the Tier 1 DC echelons Competitive Logistics LLC 5

6 What must be determined for this type of supply chain are the channels/ customers to be served, the different service times, the different service levels, and the products associated with these times and levels. The driving force behind a Responsive Supply Chain is the reduction of the Out of Stock and Over Stock conditions associated with products that have relatively uncertain demand. To manage this uncertainty of demand, we will use a supply chain design that is highly modular and employs one or all of the following principles: Reduce Uncertainty: Use collaborative approaches with Federated customers. Avoid Uncertainty: Cut the supply lead time and increase supply chain flexibility in order to delay committing resources as late as possible (up to the point of becoming Make-to-Order) Hedge Against Uncertainty: Invest in component buffer inventories or reactive capacity as a means of minimizing over/under stock penalties. In Figure 2, these methods are depicted in the form of Postponement (Postpone), Cross-dock (X-dock), and Store activities that drive the outbound mixed load (perhaps multi-stop) shipments to Tier 1 DCs or Tier 1 Stores (DSD) Competitive Logistics LLC 6

7 Figure 2 Responsive Supply Chain Tier 1 Similarly, what must be determined for the responsive supply chain are the channels to be served, the different service times, the different service levels, and the products associated with these times and levels. In a responsive supply chain the objective is to react to demand and be flexible in the delivery of products with unpredictable demand patterns. For CPG and Food, these types of demands are representative of special packs, promotions, product launches, rollovers, emergency orders and SKUs that have lower demand or have less predictable demand patterns. The illustration suggests we should pull these products into the DC of Tier 1 Customers for cross docking as needed or into Tier 1 Retail via Direct Store Delivery. Each Tier 1 DC and cluster of Tier 1 Retail stores will be considered individual demand areas. The products stored in the responsive facility are pushed from manufacturing. Some replenishment of slow movers or rainbow pallets may be pulled from one of the efficient store facilities (DC) acting as a risk pool for the responsive network. In addition, as Figure 3 illustrates, the responsive supply chain enables the servicing of Tier 2 customers not previously possible due to lower volume purchases but with very predictable demand patterns. Merging Tier 2 Retail DSD for predictable demand products with those for Tier 1 DC and Retail allow greater consolidation opportunities for greater transportation savings and fixed cost absorption Competitive Logistics LLC 7

8 Figure 3 Responsive Supply Chain Tiers 1 & 2 As before, the items to be determined for this Tier 2 model are the channels to be served with the responsive supply chain, the different service times, the different service levels, and the products associated with these times and levels. One final extension of the responsive supply chain concept involves the idea of Cooperative Logistics as shown in Figure 4. In this approach the responsive supply chain is shared with symbiotic partners who have the same Tier 1 and Tier 2 channels and customers but are not inherently competitive Competitive Logistics LLC 8

9 Figure 4 Responsive Supply Chain - Cooperative These partners form a Value Network that can accomplish a number of very strategic objectives. First, it is possible to provide a Collaborative Logistics approach to warehousing and transportation where these resources are shared between members of the Value Network. Second, additional value-adding activities such as co-packing can be shared that would otherwise be absorbed by a 4PL. Third, cooperative promotions, cross-sell, and up-sell between members could be accomplished. Conclusion As the four major forces of Globalization & Consolidation, Federation & Segmentation, Bifurcation & Proliferation, and Integration & Modularization exert their growing influence, companies must begin to focus on strategic supply chain design. It is becoming increasingly important for organizations to understand the mission of their product offerings and then tailor their supply chains to that mission, whether by using an efficient model, a responsive model or both. Additionally, organizations will need to explore the different alternatives offered by each model Competitive Logistics LLC 9

10 Many logistics problems are solved with the Cooperative Logistics approach while providing organizations with many market advantages. It is certain that future supply chains will require both efficiency and responsiveness. Now is the time to begin forming the Federated partnerships, the sharing of resources, and become a first mover in driving greater value for customers, consumers, and shareholders alike. The ability to differentiate your company and the degree of success you experience in the ever-changing global market place will depend to a large extent on how your supply chain is designed. The business imperative is to begin building your Future Perfect Supply Chain today Competitive Logistics LLC 10

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