Supply Chain Management From Vision to Implementation Chapter

Supply Chain Management: From Vision to Implementation Chapter 10: Supply Chain Rationalization and Role Shifting

Chapter 10: Learning Objectives 1. Articulate the challenge of complexity in SC design. Explain the relevance of Jim Collins’ quote, “’Stop doing’ lists are more important then ‘to do’ lists. ” 2. Identify and discuss the sources of SC complexity. 2

Chapter 10: Learning Objectives 3. Define SC rationalization, identify the key areas of the supply chain that must be rationalized, and discuss supply-base optimization as an example of the rationalization process. 4. Define role shifting, discussing its benefits and threats. Explain how role shifting improves the competitiveness of an individual company the entire supply chain. 3

The Challenge of Complexity n Complexity increases: n Confusion n Cost n The probability of counterproductive decision making and diminished competitiveness. n Complexity may be necessary to drive the value proposition. n Cost of complexity can not outweigh the value. 4

Sources of Complexity 1. 2. 3. 4. 5. 6. 7. Organizational Structure Value-Added Processes The Operating Network SKUs The Supply Base The Customer Base The Logistics System 5

Organizational Structure n Issue: decision-making authority n Centralized – leverages scale to reduce cost n Decentralized – leverages local knowledge to build relationships and promote rapid response 6

Centralized vs. Decentralized Structure Centralized Structure Pros Cons Increases leverage Increased bureaucracy Reduces duplication Reduced flexibility Facilitates standardization Can lose touch with reality Enables specialization Greater control Decentralized Structure Pros Cons Knowledge of local needs Reduces leverage Better local relationships Leads to duplication Greater responsiveness Is relatively inefficient 7

Organizational Structure - Solutions n Team-based structures n Policies to promote center-led, decentralized organization n Measurement systems that promote cooperation, support local autonomy and accountability n Modern communication and database technologies 8

Value-Added Processes add complexity because they: n involve a number of people from different functions; n consist of a large number of distinct activities; n employ a variety of capital equipment; n design, produce, or deliver a wide range of products. 9

Value-Added Processes - Solutions n Standardization n Error Proofing n Synchronization of Material Flows 10

Operating Network n Operating networks add complexity because of the number of distinct facilities that must be coordinated. n Efforts to “optimize the supply chain” using sophisticated mathematical models often fail over the long term because: n operating networks evolve over time; n acquisitions complicate network design; n macroeconomics and political stability influence network design. 11

Operating Network - Solutions Managers should analyze the supply chain in terms of the following questions: 1. How many facilities do we really need to achieve desired service levels? 2. Where should they be located? 3. What activities will be performed at each? 4. How will the value-added activities be coordinated and controlled? 12

Company SKUs n Product proliferation adds to SC complexity. n Breadth complexity n Wide range of products n Low profit margin n Relies on inventory turns and efficient operations n Depth complexity n large number of options for the products carried n High profit margin n Relies on customer service and distinctive products 13

Company SKUs - Solutions Managers wishing to reduce complexity due to product proliferation should: n Proactively manage the breadth versus depth decision n Using total cost analysis, eliminate unprofitable SKUs n Institute policies to reduce proliferation n Use postponement strategies n Use database and data mining tools 14

Impact of Options on the Complexity Product Characteristic Number of Options Color: Charcoal, Field Khaki, Cognac, Brown, Olive, Steel, Navy, and Black 9 Fabric: blended 60% cotton/40% polyester or 100% cotton 2 Front: pleated or plain 2 Rise: long, regular, short, big/regular, and big/tall 5 Waist Size: 30, 31, 32, 33, 34, 35, 36, 37, 38, 40, 42, 44, 46, 48, 50, 52 inches 16 Length: 27 -38 inches 10 Bottom: cuffed or plain 2 Total SKUs Simplified SKUs via Postponement: Simplified SKUs via Data Mining: 9 x 2 x 2 x 5 x 16 x 10 x 2 = 57, 600 9 x 2 x 2 x 5 x 16 x 1 x 1 = 2, 880 1, 300 15

The Supply Base n Traditionally, American manufacturers have sourced parts from multiple suppliers to hedge against disruptions and create leverage to drive down costs. n Multiple redundant suppliers, add complexity to the supply chain. 16

Single or Multiple Suppliers 17

The Supply Base - Solutions To reduce complexity, supply-chain managers may seek to reduce the number of suppliers and aggregate purchasing. n ABC Classification Systems n Supplier Certifications n Long-Term Partnership Style Relationships 18

Supply Base Optimization Process 19

ABC Suppliers Classification 20

Supply Base Optimization Process 21

Supplier Selection Process 22

Supply Base Optimization Process 23

Supply Base Optimization Process 24

The Customer Base n Customers generally have greater power in supply chain relationships. n Customers use this power to demand consistently higher levels of service without additional compensation. n Customer proliferation may result in suboptimal profits. 25

The Customer Base - Solutions Managers may seek to address an unwieldy customer base by: n ABC Classification Systems n Customer Relationship Management (CRM) software to segment customers n Sophisticated cost analysis to evaluate customers 26

Logistics System n Logistic systems are complex due to: n n n The number of transportation modes available The number of different facilities involved Geographic dispersion Product proliferation Variation in demand Variation in customer requirements 27

Logistics System - Solutions Managers may seek to address logistics system complexity by: n Adopting advanced technology – ERP, DRP, CRM systems; database management; data mining. n Outsourcing – third-party logistics n Insourcing – on-site third-party logistics n Innovative practices 28

SC Rationalization n Supply chain rationalization is the process of systematically evaluating the company’s operating network, suppliers, customers, and product offerings to find and eliminate inefficiencies and redundancies. n The goal is to efficiently allocate scarce resources to a company’s most profitable and strategically important activities and relationships. 29

SC Rationalization n 44 percent of companies have rationalized their supply base n 38 percent of companies have performed a customer profitability analysis n 28 percent of companies have streamlined product offerings - Cap Gemini (2002) 30

Chrysler’s Supply Chain 31

Rationalization at Chrysler Analysis of the supply chain to eliminate unnecessary or wasteful activities. n Step 1 – Identify and eliminate redundant suppliers. n Result: Fewer SKUs and fewer and higherperforming suppliers n Step 2 - Classify remaining suppliers on the basis of importance. n Result: Discovery of potential threats and ability to focus resources on collaborative relationships with key suppliers. 32

Shifting Roles Among Members n Traditionally, roles for individual members of the supply chain were well defined. n Today, roles are far less certain. n To insure survivability, supply-chain participants must add unique value. 33

Role Shifting n Role shifting enhances supply chain efficiency thereby enhancing the value proposition. n Functional shiftability – allows firms with unique capabilities to undertake additional roles. n Dis-intermediated – a company that is shifted out of the supply chain, replaced by a more capable firm. 34

Role Shifting – Best Practices n n Second-Tier Sourcing Contracts Supplier Certification Vendor-Managed Replenishment Supplier-Integrated Manufacturing 35

Second-Tier Sourcing Contracts n Coordinated purchasing with first-tier suppliers. n Allows for aggregation of purchases. n Leverages purchasing power to reduce cost. 36

Supplier Certification n Supplier certification is the formal process of working with selected suppliers to evaluate and improve supplier quality. n “Dock to Stock” – incoming shipments no longer are inspected, they go straight to inventory or the point of use. 37

Supplier Certification Process 38

Vendor-Managed Replenishment n Suppliers actively manage inventory for customers. n Suppliers benefit due to improved demand information and improved ability to allocate productive resources. n Customers benefit from lower labor and inventory costs, improved item availability. 39

Supplier-Integrated Manufacturing n Customer firm invites suppliers to establish manufacturing facilities at the customer’s location. n Suppliers provide their own specialized equipment, manage their own inventory, and hire and train their own workers. 40

A Return to the Opening Story Based on what you have now read and discussed: 1. Is all complexity bad? Why or why not? What are the costs of complexity up and down the chain? 2. What are the sources of complexity? Why do so many managers make the decision to “just live with it”? 3. What best practices might Charlene share with Doug regarding how to deal with the challenge of complexity? 41