Strategic Alignment An White Paper Goos Kant, Chief Strategist, Transportation & Logistics
So it begins Everyone who has seen the epic movie series Lord of the Rings remembers the scene of the King of Rohan looking over the walls of Helm s Deep, uttering the words: so it begins when the orc legions storm his fortress. The leader of the most mobile force in Middle Earth immobilizing himself away in a fortress. A clear case of strategic misalignment. Just like in the adventures of Tolkien, where the horsemen were nearly defeated and their fortress largely destroyed, strategic misalignment in a business can be a costly affair. Luckily, it doesn t take a wizard to solve it. The secret for lasting business improvement lies in strategic alignment A recent survey by Supply Chain Insights lists the ability to use and access data, visibility, de-mand and supply volatility, the executive team s understanding of the supply chain, and cross-functional alignment as the top 5 pain points troubling supply chain leaders. Cross-functional alignment refers to the alignment across functions like sales and marketing, and operational supply chain functions such as source, make and deliver. These functions must be aligned to meet supply chain performance targets. If strategies across these departments are not aligned, supply chain performance targets may not optimally contribute to business value. Very often these strategies are misaligned, causing supply chain to optimize the wrong strategy - for in-stance. In our view, the alignment of business strategy and supply chain strategy should be listed in this top 5 as well. But how often do supply chain leaders target misalignment in their supply chain improvement projects? 2
In this article, we elaborate on the importance of identifying and closing strategic alignment gaps. In addition, we show how mathematical models can be used to quantify supply chain im-provement projects in order to maximize business value and keep your supply chain in good shape. Identifying and aligning gaps in your company strategies A helpful framework to understand the variety of alignment gaps that could exist, is depicted in Figure 1. Business Strategy Strategy Alignment Marketing Strategy (Demand creation) Infrastructure The physical supply chain & assets SC Design Supply Chain Alignment Operational Model The way the physical SC will be managed SC Management Figure 1: Strategy alignment versus supply chain alignment Generally speaking, alignment gaps can occur at two levels: Strategy alignment gaps: misalignment of business strategy, supply chain strategy and marketing strategy. Supply chain alignment gaps: misalignment of infrastructure and the operating model within the supply chain strategy. At the highest level, the main challenge is to meet value propositions as efficiently as possible. To meet the customer s expectations, the value proposition must be met. But in order to create shareholder value, this must be done efficiently. To do so, supply chain leaders should realize that a one size fits all strategy will typically not work. If value propositions are differentiated, supply chain strategies should probably be differentiated too. Segmentation is a powerful way to identify different product market combinations and their customer needs, as well as the required supply chain performance in order to create strategic alignment. Once strategic alignment is achieved, the supply chain should be configured and operated in line with the agreed upon strategy to ensure that the overall business strategy is achieved. 3
What causes misalignment in the first place? Typically, companies change their business strat-egies to align with new customer needs and market opportunities, but they forget to align supply chain strategy accordingly. For instance, many companies tend to broaden their range of prod-ucts and serve more markets. This means the company would have to differentiate between relevant segments to keep its supply chain strategy aligned. However, this segmentation and realignment of the supply chain rarely takes place. Let s look at some examples in detail. Examples of misalignment Take for example the case of a beer brewer. Traditionally, its portfolio consisted of a limited number of products, typically barrels, cans and a couple of bottle sizes with only a few different types of beer. The manufacturing focus was on operational efficiency, meaning that lot sizes should be large to prevent frequent product changes resulting in large lead times. As a result of changing customer needs and international expansion, the company s product portfolio rapidly expanded to a much broader proposition. However, their supply chain strategy was not changed accordingly. As a result, a vast amount of inventory was built up due to large production lot siz-es. After reconsidering the supply chain strategy, it turned out that a differentiated strategy was called for to differentiate between slow and fast movers and between the customer order de-coupling point per product. By creating more flexibility in production planning and scheduling, inventory working capital could almost be halved. Let s explore another example from the high tech industry. A producer of expensive high tech machines always focused on product leadership and customer intimacy. The cost of inventories or the consequences of engineering changes were not considered important. However, some of the product lines matured, and for a significant part of the portfolio and turnover, competitors were able to match the company s quality at a more competitive price. Due to its inherent cul-ture and structure, the company stuck to the same supply chain strategy that made it a success-ful product leader. Yet, further analysis showed that the old strategy was no longer aligned with the value proposition. More mature product lines required more focus on operational excellence to be competitive. In addition, for these more mature products, the company s policy needed to change in order to limit the number of engineering changes and reduce complexity. Both examples address the challenge of balancing service with efficiency. A good supply chain strategy should deliver the value proposition at the lowest cost. A good business strategy should contain propositions that meet customers needs. In the first example, the focus on efficiency was too narrow. In the second example, a competitive proposition called for more focus on effi-ciency. As shown in these examples, thinking of operational improvements in isolation, without a correct understanding of how these improvements relate to the overall business and supply chain strat-egy, will not lead to a successful operation. In the long run, key performance indicators should be measured, defined (if a company has none), or refined (for a particular improvement project). This helps evaluate the impact of each decision and gather learnings for the future. 4
Evaluating your Supply Chain Improvement Opportunities Once you have identified strategic gaps and the areas where there is room for improvement, the next step is to decide where and how to start implementing the changes you want to make. A Supply Chain Opportunity Assessment, as depicted in Figure 2, is a perfect method to identify and close alignment gaps. It signals performance gaps between current and target perfor-mance. Performing a root cause analysis makes opportunities to improve supply chain perfor-mance visible, helping you close the gaps and thus create more business value. Figure 2: Selection of your supply chain improvement opportunity The promise of modelling? Better insights, faster results and a better shape After performing an Opportunity Assessment, you can use supply chain modelling to judge each opportunity s potential and prioritize them as you see fit. Modelling offers a great means to quantify expected impact on relevant performance metrics like cost-to-serve, reliability, respon-siveness or working capital. 5
In the supply chain, strategic modelling typically addresses infrastructure optimization (the lower left corner of the supply chain alignment triangle in Figure 1), while tactical modelling addresses optimal infrastructure usage in processes like: S&OP Tactical routing Inventory management Capacity planning Order management When you re starting to identify various opportunities, a model is typically created to measure the actual situation and evaluate scenarios in order to calculate the impact of each change. In such a way, a business case is created for each improvement project. With modelling tools becoming more mature, companies are starting to use models even further down the line. The model is not only used to compare the As Is situation with the To Be situa-tion; it is also used to calculate the best implementation path. Imagine that you have identified an opportunity to downsize your supply chain from 60 warehouses to 45 warehouses. Which warehouses should you close first? Modelling can help you measure not only straightforward attributes like cost, but also other attributes like reliability. Models that can predict the impact of a specific improvement project on all relevant KPIs are increasingly being used. These trends are accompanied by a catalyst for model development: decision & implementation throughput speed. While supply chain design is becoming faster-paced, the throughput time of decisions and their implementation is decreasing. A supply chain can no longer be studied over a year, and the resulting changes cannot be implemented over the next 1-3 years. Nowadays, the supply chain horizon for infrastructure changes is typically 6 months to 1 year, from study to implementation. When it comes to identifying operational opportunities, the implementation time is weeks rather than months. The use of models strongly contributes to getting better insights and faster results. Moreover, these insights are not only used for identifying improvement oppor-tunities, they can also be used to keep a supply chain optimized. Keeping your supply chain optimized A constantly changing supply chain, with changing customers, volumes, suppliers and prices, cannot be expected to be robust to all changes. Dashboards monitoring the supply chain, with models underneath that identify possible improvements, can keep your supply chain in good shape. These models are typically of a different setup and easier to operate: more aimed at quick analysis that is done constantly, rather than a full rethinking done every couple of months. 6
Tying it all together: achieving excellence through alignment As illustrated in this article, to ensure that you re generating value, supply chain strategy and marketing strategy must be aligned with your business strategy and with each other. A Supply Chain Opportunity Assessment can be used to identify gaps and opportunities. Once you have identified these opportunities, supply chain modelling offers a great way to quantify expected impact on relevant performance metrics. Furthermore, modelling can keep your supply chain in optimal shape to respond to any market disruptions or changing customer needs going forward. Closing alignment gaps means doing the right things right! 7
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