Principles of Supply Chain...Part2

Last time, we discussed the principles of supply chain in brief and its time, we dig a little more on the details of these principles so that they can be practiced practically.

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Principle 1: Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.
Segmentation has traditionally grouped customers by industry, product, or trade channel and then taken a one-size-fits-all approach to serving them, averaging costs and profitability within and across segments. The typical result, as I witnessed a manager admitting: "We don't fully understand the relative value customers place on our service offerings."

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But 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.

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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. One manufacturer of home improvement and building products might base segmentation on sales and merchandising needs and order fulfillment requirements. Others may find that criteria such as technical support and account planning activities drive more accurate segmentation.

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Research also can establish the services valued by all customers versus those valued only by certain segments. Then the company should apply a disciplined, cross-functional process to develop a menu of supply chain programs and create segment-specific service packages that combine basic services for everyone with the services from the menu that will have the greatest appeal to particular segments. This does not mean tailoring for the sake of tailoring. The goal is to find the degree of segmentation and variation needed to maximize profitability.

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Principle 2: Customize the logistics network to the service requirements and profitability of customer segments.
Companies have traditionally taken a monolithic approach to logistics network design in organizing their inventory, warehouse, and transportation activities to meet a single standard. For some, the logistics network has been designed to meet the average service requirements of all customers; for others, to satisfy the toughest requirements of a single customer segment.

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Neither approach can achieve superior asset utilization or accommodatethe segment-specific logistics necessary for excellent supply chain management. 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.

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One paper company may find radically different customer service demands in two key segments—large publishers with long leadtimes and small regional printers needing delivery within 24 hours. To serve both segments well and achieve profitable growth, let us assume that the manufacturer will need to design 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.

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They will certainly see return on assets and revenues improvement thanks to the new inventory deployment strategy, supported by outsourcing of management of the quick response centers and the transportation activities. The logistics network in this case, probably will be more complex, involving alliances with third-party logistics providers, and will certainly have to be more flexible than the traditional network. As a result, fundamental changes in the mission, number, location, and ownership structure of warehouses are typically necessary. Finally, the network will require more robust logistics planning enabled by "real-time" decision-support tools that can handle flow-through distribution and more time-sensitive approaches to managing transportation. Even less conventional thinking about logistics is emerging in some industries, where shared customers and similar geographic approaches result in redundant networks. Combining logistics for both complementary and competing firms under third-party ownershipcan provide a lower-cost industrywide solution.

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We will talk about the rest of principles in the next post

Principles of Supply Chain Management

We talked about few Supply Chain Metrics in the last post and couple of my readers asked that other than metrics what are those other things that need to be kept in mind while approaching a supply chain problem. Do we need to go the textbook route or there are few practical tips that can help resolve or improve an SCM condition? Yes, why not. There are a lot of books, examples, and research data available on this widely discussed topic that can help them.

In addition of that, let us also discuss few basic principles that we should follow usually. These can be:

• Segmenting your customers based on service needs
• Customizing the logistics network
• Keep an ear to signals of market demand and plan accordingly
• Differentiate product closer to the customer
• Source strategically
• Develop a supply chain-wide technology strategy
• Adopt channel-spanning performance measures

Managers increasingly find themselves assigned the role of the rope in a very real tug of war—pulled one way by customers' mounting demands and the opposite way by the company's need for growth and profitability. Many have discovered that they can keep the rope from snapping and, in fact, achieve profitable growth by treating supply chain management as a strategic variable.
These savvy managers recognize two important things. First, they think about the supply chain as a whole—all the links involved in managing the flow of products, services, and information from their suppliers' suppliers to their customers' customers (that is, channel customers, such as distributors and retailers). Second, they pursue tangible outcomes—focused on revenue growth, asset utilization, and cost reduction.

Rejecting the traditional view of a company and its component parts as distinct functional entities, these managers realize that the real measure of success is how well activities coordinate across the supply chain to create value for customers, while increasing the profitability of every link in the chain. The successful initiatives that have contributed to profitable growth share several themes. They are typically broad efforts, combining both strategic and tactical change. They also reflect a holistic approach, viewing the supply chain from end to end and orchestrating efforts so that the whole improvement achieved—in revenue, costs, and asset utilization—is greater than the sum of its parts.

Unsuccessful efforts likewise have a consistent profile. They tend to be functionally defined and narrowly focused, and they lack sustaining infrastructure. Uncoordinated change activity erupts in every department and function and puts the company in grave danger of "dying the death of a thousand initiatives." The source of failure is seldom management's difficulty identifying what needs fixing. The issue is determining how to develop and execute a supply chain transformation plan that can move multiple, complex operating entities (both internal and external) in the same direction.

The above said principles will help developing and executing a successful supply chain transformation plan. I know that just looking at these principles will not make much sense to newbies in this area and a little bit explanation is required so that actually these can be practiced. So, in my next post, I will explain in short on what they mean and how to practice them…

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