5 Key Elements of Building a Supply Chain Strategy

Every Year, most companies and corporations design a new business plan for the next 3-5 years and these continously adjusted plans will usually affect most if not every department. So it makes senses that most supply chain departments will design a new vision and mission based on each new company plan and company destination statement. Generally, the overall mission of a supply chain is to get the correct goods or services:

Ö         To the right place

Ö         At the right time

Ö         In the desired condition

Ö         At the lowest possible cost

To determine what will be the most effective supply chain strategy, first every link should be clearly defined from the supplier, like purchasing/procurement, to the manufacturing division, like production planning and the logistics of raw material attainment, to the packaging, like material, to finished goods and, of course, distribution, which usually includes warehouse operations, transportation, delivery management and demand planning.

From the book Supply Chain Strategy, by Edward H Frazello, PhD, in the chapter called Innovation Logistics Practices and Systems, the supply chain strategy can be categorized into five main parts:

1.     Customer Response Principles and Systems

2.     Inventory Planning and Management

3.     Supply Management

4.     Transportation and Distribution Management

5.     Warehouse Operations

Defining these five parts will help to reinforce the basic idea that developing a successful supply chain strategy in the company requires a real synergy between the manufacturing and distribution divisions. We will try to explain these five parts in the following outline:

1.    Customer Response Principles and Systems

 

A thought from a practicing logistics manager: "Logistics would seem easy if not to serve the customer needs". From my points of view this quote sounds true but actually it is misleading because logistics has to serve the next process and its goal really has to be total customer satisfaction.

 

Customer demand must be the compelling force for all logistics activities. The goal of successful fulfillment of customer orders creates the need for every logistics resource and activity in the first place. Customer response, including customer service and order processing, is the first of the five logistics processes:

 

•         It is a head of inventory planning and management, because the objective of inventory management is to minimize the amount of inventory needed to satisfy the customer service policy

•         It is a head of supply, because supply quality must meet customer expectations

•         It is a head of transportation, because the transportation system must deliver the products within a customer demanded specific time window

•         It is a head of warehousing, because the warehouse must respond within the customer service policy response time limits, must support fill rate objectives and must offer the value added services which customers demand

The objective of each of the other four logistics processes is to satisfy customer response requirements at the lowest possible cost. Hence, customer response requirements must be fully understood and developed before the other logistics processes can even be planned, much less executed.

Customer response is first priority? Why? Because without a profitable customer response strategy, the other logistics processes are worthless. Customer response comes first because the company's official customer response plan is, in effect, a promise made by the logistics organization to both its internal and external customers. And finally, it is first because it defines the constraints of the logistics department's ability to minimize total logistics cost while maximizing customer service.

These are five main activities associated with customer response:

•         Customer service policy design

•         Customer satisfaction monitoring

•         Order entry

•         Order processing

•         Invoicing and collecting

 

2.    Inventory Planning and Management

If money makes the world go round, then inventory makes logistics go round. The planning, storing, moving and accounting of inventory is the basis for all logistics activities. Inventory availability is the most importance aspect of customer service and ironically, inventory cost is often the most expensive elements of logistics handling. It is a big challenge to convert physical inventory into a liquid asset, so that makes inventory a very risky investment. I dealt with the same problem in my previous company as I am dealing with now, and that is how to manage inventory in a way that achieves a balance between supply and demand, with clear common goals a no out of stock items and no costly over stock. This is one of the most important things to consider when creating any supply chain strategy, since the supplier to manufacturer to distributor supply chain structure may require inventory at just about any stage of any process. It could be raw materials at the manufacturing warehouse, or finished goods at the output production site, or transfers from the warehouse or DC and most commonly finished goods during shipment, in distribution, at wholesale sites and at retail sites.

As supply chain/logistics practioners, we have to understand that the goal of inventory management is to increase the financial return on inventory spending while simultaneously increasing service levels.

Based on my experience, and Edward Frazelle agrees in his book, there are five initiatives that lead the increased return the inventory while increasing inventory availability at the same time. They are:

Ø  Improve overall forecast accuracy or lower forecast error rate

Ø  Reduce cycle times

Ø  Lower purchase order/setup costs

Ø  Improve inventory visibility

Ø  Lower inventory carrying costs

With the dual objectives of maximizing service levels while minimizing inventory investment, it is important that those responsible for managing inventory make their own evaluations based on measuring service levels versus the inventory investment performance of the items under their management.

3.    Supply Management

Supply is the process of acquiring, through purchasing or manufacturing, inventory to satisfy the inventory requirements as demanded by the inventory master plan. This plan will usually include an inventory availability schedule, fill rate requirements and a deployment plan. Supply master planning precedes transportation master planning because the number and location of all inbound locations cannot be fixed until all sourcing decisions have been made.

Supply divisions vary so much that I can only offer the most general strategies which are often successfully implemented in relation to improvements in customer service and inventory reductions:

•         Vendor Managed Inventories (VMI) can be used for stable or popular items that come from reliable suppliers. For example, material packaging

•         Cross-Docking can be used for time sensitive products which need to be consolidated to other trucks and delivered soon

•         Traditional warehousing and delivery systems may still be used for slow moving products which are of less demand, but ordering of these items must be faster and more efficient so they sit in the warehouse for the least amount of time possible

•         Use consignment inventory for promotional item whenever possible

•         Use outsourcing for the slowest moving items and also for items which are already at full capacity in the factory. You may have to consider confidentiality when it comes to original designs so they are not copied by competitors. This is especially true for new fashion products.

4.    Transportation and Distribution Management

As we know, inventory is very costly, but transportation is usually the most expensive logistics activity in Indonesia. While handling smaller, more frequent orders, with poor infrastructure, rising fuel prices, rising wages, and a fluctuating exchange rate, transportation expenses tend to ruse disproportionately to and more rapidly than any other logistic expense. In my experience, management is almost always constantly asking the logistics division to find ways to lower the costs of transportation, commonly through negotiations with the transporter. This usually does not resolve the problem because the transporter cannot lower the price more than a few percent. In the peak season is where the least support van be found because the trucks that the prepared to serve the company are not fully dedicated to it so they will naturally choose the customers that will give a better price. In this case, it is advisable to carefully map out all delivery stops, note the frequency of each delivery and analyze the revenue. Then, compare you findings with your transportation costs as a percentage of revenue and if trucking costs cannot be lowered, compare those costs to the revenue and decide what is best to do. The supply chain may be able to boosting product availability and allowing the sales force team to sell more products to increase in sales at each point of sales (POS). The percentage of transportation (trucking) cost versus revenue may become more make sense while the cost of trucking will continue to increase because of rising fuel costs eventually. More products availability means more sales, and it will reflect more revenue.

The logistics of transportation includes:

•         Transportation Network Designing

•         Shipment Management

•         Fleet Management

•         Carrier Management

•         Freight Management

I usually prioritize transportation network design and shipment management first because manufacturing division usually outsource their transport rather than buy their own trucks to send products to distributor branches in Indonesia or they may even use 3PL (third party logistics) if the manufacturing division is inclined to focus on its core business. For distribution, the focus should be on fleet management and strategic network designing, including the setting of sensible distribution points to get the product closer to the customer.

5.   Warehouse Operations

As a logistics or supply chain practitioner, we need to be aware of the vital role the warehouse plays in the success or failure of the business since it is the place where the goods may spend most of their time. In determining a strategy for warehouse operations, there are two aspects to consider. First, we need to look at the amount of flexibility the warehouse has to increase the performance of its operations, like dealing with excess stock and other related issues. Secondly, the warehouse network strategy must be feasible when taking into account the amount of warehouse space available versus the sales targets set for the next 3-5 years. The second parts could be especially problematic for new manufacturing companies, but this will depend whether the focus is on the core business or not. If the focus is on the core business, in general, the manufacturing company will outsource the duty of creating a warehouse network strategy to the third party logistics. If not, then the development of the warehouse network will have to go forward with whatever resources are available and the plan should be adjusted as necessary.

A distribution network is characterized by its warehouses, depots, and branch warehouses located at all points of the distribution channel. Generally, goods are delivered from the manufacturer to the distribution center (DC) first and then are distributed to all other warehouses in the distribution network and the finally on to either traditional or modern markets. The most important decision to be made here is whether you want to develop your own network of warehouses or outsource to 3PL. if you want to develop the network yourself, then of course you will need to assess how many warehouses are needed, where they should be located, what kind of supporting infrastructure is needed, how much of a budget do you have to work with, should you rent or build your own warehouses and how dependable are your human resources, among other questions. So, in determining your initiatial strategy for warehouse operations, many aspects require consideration.

Just like Edward Frazelle said, first, if your customer response principles and system are in order, then the other four areas of logistics may eliminate the need for warehousing altogether. Second, the specific requirements found in the other four areas of logistics will suggest whether or not you should use a third party warehousing firm. Third, if warehousing is necessary, then they must be designed to meet all the requirements of your customer service policy, house all the inventory required by your inventory master plan, receive in quantities stipulated by the supply master plan and serve the mission stipulated by the transportation master plan. Remember, the warehouse must be designed to serve all the other areas of logistics, not the other way around.

To summarize, the five key elements to building a supply chain strategy serves as a general reference to determining the best supply chain strategy for your company. These elements make up a unified network which can still be further developed by changing the details of any of the components of heir derivatives. For example, details of warehouse operations can be changed to better support the strategy of the warehouse network by using a hub and spokes system or by using small warehouse which are spread all around the area. Or, if the warehouse operations of the company still cannot support the first element related to customer service, then the picking and loading processes could be sped up while focusing on minimalizing errors, by utilizing the WWS (Warehouse Management System) as enabler. So, the five elements of the supply chain strategy can and should be adapted in order that your supply chain strategy is aligned with and supports your company's goals.

Reference book: Supply Chain Strategy, By Edward H Frazelle, PhD.

Source:

Logistics+ Vol. XI Issue No. 59