Supply Chain Planning Finding the Right Model

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Supply Chain Planning: Finding the Right Model

Introduction

Overview

A supply chain planning (SCP) model serves as an internal market mechanism or process for companies Its purpose is to match supply and demand, and align the entire organization around key operational plans that drive success and profitability given the demand for their products in the marketplace

In a competitive market, customers have many options to satisfy their demand for a product Companies must therefore anticipate that demand and provide products to customers on a timely basis and at a marketable price They do this by managing the functions and activities in the supply chain

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in connection with your personal, non-commercial use of a Supply Chain Academy course validly licensed from Accenture This document, may not be photocopied, distributed, or otherwise duplicated, repackaged or modified in any

way

Note: interactive elements such as activities, quizzes and assessment tests are not available in printed form

Benefits of a Supply Chain Planning Model

Companies that define and implement an effective SCP model realize tangible economic and qualitative benefits

o Improved customer service, e.g., increased fill rates and on-time delivery

o Improved competitive advantage

o Lower cross-functional and organizational friction

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Objectives

After completing this module, you should be able to:

• Define a supply chain planning (SCP) model

• Discuss why it is important for companies to have the "right" model in place

• Discuss how various factors (i.e., business model, manufacturing class, manufacturing operating model, procurement operating model, and fulfillment operating model) influence

a company's SCP model

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Supply Chain Planning Model

Overview

A supply chain planning (SCP) model is comprised of process, technology, and organizational assets Companies use these assets to intelligently commit, build, and deploy a company's physical assets (e.g., supply, manufacturing capacity, and labor) to meet the market demand for a product over time, and in the most profitable manner possible

SCP helps ensure that product is available to meet the customer's desired quantity and date In other words, it is the process of balancing available supply against demand Companies

accomplish this by understanding and predicting customer demand, and then fulfilling it with the most efficient allocation of available inventory and production capacity

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Supply Chain Planning Functional Areas

Supply chain planning allows companies to manage their supply chains by connecting the

functions in the supply chain via a set of plans and processes Companies use SCP capabilities

to plan and integrate the supply chain functions at the execution, operational, and strategic levels Supply chain functions include:

• Procurement - buying materials to support the manufacturing process

• Manufacturing - making the product

• Fulfillment - managing the activities involved in delivering the product, i.e., moving and

storing

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Supply Chain Planning Processes

SCP capabilities are grouped into four main planning processes—demand, supply, production, and fulfillment planning Click on the "Output" button to see process outputs

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Factors that Influence SCP Models

Business characteristics that influence a company's SCP model include:

Business Model

A business model describes in simple terms why a company exists and how it makes money The business model identifies the product a company makes, the customers they serve, and the unique aspect(s) of the business that enable the company to create value and generate income

Manufacturing Class

A company's manufacturing process usually differs based on the type of products they

manufacture Manufacturers are classified into three main classes—repetitive, discrete, and

process

Supply Chain Operating Models

Supply chain operating models explain the details of how a company manages its assets to execute against the business model strategy These operating models act as a set of rules under which a company operates, and are defined within the context of the key functional areas across a

company's supply chain—manufacturing, procurement, and fulfillment

The SCP model for a company is also influenced by the degree of integration between each

supply chain functional area Most supply chains are owned "piece-meal" (not "end-to-end"), with one executive responsible for each functional area—procurement, manufacturing, fulfillment, and

so on To achieve the potential benefits of an effective supply chain, companies must develop truly integrated supply chain planning capabilities To that end, the different functional areas must share with one another their operating decisions as well as their SCP models

Companies within a particular industry segment generally have common demand and supply characteristics, as well as operating constraints The unique characteristics of a particular

industry cause companies within that industry to have similar business model and supply chain operating model characteristics These common characteristics also drive similar SCP models from company to company within an industry

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Check Your Understanding

Indicate whether each of the following statements is true or false

way

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Topic Summary

A supply chain planning (SCP) model, comprised of process, technology, and organizational assets, is used to intelligently commit, build, and deploy a company's physical assets (e.g., supply, manufacturing capacity, and labor) to meet the market demand for a product over time, and in the most profitable manner possible Supply chain planning allows companies to plan and integrate their supply chain functions at the execution, operational, and strategic levels

A company's SCP model may be influenced by their business characteristics, including their:

• Business model

• Manufacturing class

• Supply chain operating models

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Business Model Influences

Overview

A business model describes in simple terms why a company exists and how it makes money The business model identifies the product the company makes, the customers they serve, and the unique aspect(s) of the business that enable the company to create value and generate income

It could be with a new type of product (such as a wireless cell phone or a laser disc), a new way

of selling or distributing old products (such as online retailing), or a new twist on new or old products, sales and marketing techniques, and distribution strategies

The bottom line is that a business model answers several key strategic questions about a

company:1

• What is the product or service provided?

• Where is the product in its life cycle, e.g., early growth, maturity, or decline?

• Who is the customer?

• What does the customer value?

• What is the underlying economic logic that explains how a company can deliver value to customers at an appropriate cost?

It is critical for every company to define its business model as they address strategic and tactical issues concerning their business, including which SCP models they ultimately use

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Business Model Example

Amazon.com is a well-known example of a new twist on the old business model concept of retailing.2 The online retailer began with the simple premise to sell books directly to consumers while minimizing the distribution assets it owned The idea was to capture consumer demand while simultaneously building relationships with book publishers to gain favorable wholesale prices based on large volumes Amazon would then mark up the product, receive an order, and have a carrier ship it directly to consumers

Amazon.com has since grown to carry most consumer durable products And, while they have acquired some of their own distribution assets to maintain appropriate service levels, the

business model (illustrated in the responses to the key strategic questions below) remains essentially the same

Key Strategic Questions Amazon.com Business Model

What is the product or service provided? Books, printed materials, and other consumer durable

products

Where is the product in its life cycle? Products vary in their marketplace maturity, e.g., for books,

the product ranges from new releases to "classics"

What does the customer value? Selection, convenience, and home delivery at a reasonable

price

What is the underlying economic logic? Drive scale/volume over time with a lower fixed-asset base

Aggregate demand to command low wholesale prices and have a lower break-even point because they have fewer assets in place

2

Spector, Robert Amazon.com: Get Big Fast New York: HarperCollins, 2002

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Business Model and SCP Model Alignment

It is critical that a company's SCP model supports its business model If it does not, two things can happen:

1 The SCP model can fail because the investment required to build the model does not see

an adequate return

2 The business model can fail because it requires changes, along with the planning model,

to be viable over the long term

Decision makers must be keenly aware of this dynamic as they strive to ensure alignment and consistency between the two models—business and supply chain planning

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Indicate which of the questions below are answered by a company's business model Check all that apply

Answered by a company's

business model

What is the product or service provided?

Who is the customer?

Who are the suppliers?

What is the underlying economic logic that explains how a company can

deliver value to customers at an appropriate cost?

None of the above

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Business Model Influence on SCP Model

The influence a company's business model has on the SCP model varies from case to case Decision makers must consider the basic characteristics of their company's business model and how those characteristics impact the supply chain

Specifically, they must consider the following:

• Influence of customer and customer values on the SCP model

• Influence of product mix and product life cycle on the SCP model

• Influence of underlying economic strategies on the SCP model

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Influence of Customer on SCP Model

Supply chain planners analyze and react to customer needs based on who they are and what

they value, including:

Customer Size

Large customers with many locations may be interested in collaborating on demand and

promotion planning to better enable their own production and distribution processes A large customer may want to replenish or place orders on a daily basis to own less inventory and ensure appropriate in stock positions In addition, they may require visibility to the status of their orders,

as well as receipt of product at a regional distribution center

On the other hand, a small company will likely want to place orders and replenish stock monthly, with a focus on customer service and minimal activity related to restocking They may also prefer

to have the product delivered directly to their stores rather than a regional distribution center A supplier dealing with both large and small customer groups must consider their different needs when determining the appropriate supply chain planning models to use

Service Level Expectation

Different customers may have different service level expectations that may influence the SCP model For example, an automotive company places significant value on receiving the product just prior to needing it for production so they don't have to carry excess inventory This dictates a certain service level provided by suppliers, which in turn drives safety stock and inventory

deployment decisions

Price Sensitivity

A customer that values low product cost usually requires minimum quantities for orders (to ensure that a full truckload can be shipped to the customer), as well as a minimum lead-time Companies take these factors into account when planning for the supply and fulfillment of orders from such customers

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Influence of Customer on SCP Model - Customer Segmentation

Customer service involves balancing customer needs against profitability This includes

assessing trade-offs and creating an optimal balance between meeting customer demands or service levels, and incurring the costs associated with doing so

Customer segmentation or prioritization is the process of segmenting customers based on

their strategic value and profitability, and establishing service guidelines accordingly Customer segments could include:

• Strategic Customer Segment - comprised of high-volume, high-profit level customers

that a company does not want to lose to competitors

• Growth Segment - comprised of up-and-coming customers that have the potential to

become strategic customers in the future

• Low Profitability Customer Segment - account for a small percentage of the company's

business While they may be good for brand awareness, they do not warrant costly service levels

Because a company may choose to segment their customers into different groups and provide each group with the different levels of service, they may not be able to use the same SCP model for each segment Hence, planners must take into account the various segments and service levels when determining the SCP strategies for the company

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Influence of Product on SCP Model

Product characteristics also affect the SCP model, including:

• Product Mix - A company that produces the same products over and over again may

require specialized manufacturing capability Furthermore, their objective during

production planning would be to ensure material availability and maximize capacity

throughput On the other hand, a company that produces unique and complex products requires significant manufacturing flexibility to manufacture the products

• Product Life Cycle Considerations - The life cycle of the product is an important

consideration in determining the appropriate SCP model For a new product introduction, planners do not have historical data on which to base demand projections They must be able to forecast the demand for such products using historical profiles of one or more similar or "like" products, and possibly even combine the profiles of such products In this case, the supply planning model must be able to quickly react to variations in the forecast

For mature markets and products, on the other hand, planners use the historical demand pattern to statistically forecast future demand, and develop the appropriate safety stock and inventory policies

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Influence of Underlying Economic Strategy on SCP Model

The underlying economic strategy of a company also influences the SCP model

Consider the impact of Amazon's strategy of driving scale and volume over time with a lower fixed asset base The company does not actually manufacture the products it sells, and may not

carry some of the products in its inventory As a result, it must tightly integrate itself with its

suppliers' information base to meet customer requirements It would be bad business for

Amazon to promise to ship a book in two days when the book is actually out of print and not available through any of their suppliers

Conversely, a company such as Wal-Mart has invested heavily in its distribution system Their supply chain model3 requires that product demand at their stores be fulfilled through this

distribution system (exceptions to this rule exist, but we will not discuss them here) In this

situation, it is important for the company to plan their safety stock levels, inventory policies,

and transportation to optimize the cost of their entire network

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SCP Model Influence on Business Model

There is a symbiotic relationship between business models and SCP capabilities Supply chain strategies or capabilities often drive and influence the business model A good business model is often anchored around a carefully designed customer channel and supply chain strategy that leverages a company's SCP and execution capabilities to gain advantage in its marketplace Dell and Wal-Mart are recognized for creating a competitive advantage through their respective supply chain advancements.4 Both companies have invested in supply chain assets to enable, and then create, unique and effective business models that are increasingly difficult for

competitors to replicate or compete against

In fact, it is often difficult to delineate where a good business model ends and where a supply chain strategy or unique capability begins What matters is that the business model works, drives value, and allows a company to effectively compete in whatever they do

perspective Without their fulfillment capabilities, they might not have the direct-to-classroom customers

5

Mulani, Narendra P., and Lee, Hau "New Business Models for Supply Chain Excellence." Achieving Supply Chain Excellence Through Technology (ASCET), Volume 4 San Francisco: Montgomery Research, May 2002, www.ascet.com

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Influence of Technology Advancement on Business and SCP Models

The advancement of technology influences the dynamic between business models and key SCP capabilities

Despite the collapse of many Internet-based businesses, the promise of an Internet-based network economy has driven numerous technology advancements Technology will continue to fundamentally shift how people and companies exchange information and work together to conduct business

As companies strive for productivity improvements and innovation, new business models and supply chain capabilities will depend on information sharing and low cost networking capabilities Businesses will interact differently with customers, suppliers, and employees New software packages will also continue to leverage this underlying technology, influencing how companies do business and how they choose to compete

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Indicate whether each of the following statements is true or false

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in influencing business models and supply chain capabilities

Business Model: Key

Strategic Questions

Influence on the Supply Chain Business Model

What is the product or

Demand and Supply Planning

New products that don't have a market history require various modeling techniques to estimate their demand and to set initial supply levels

More mature products rely on history to drive statistical demand plans

Who is the customer? Demand Planning

Larger, strategic customers are candidates for collaborative demand planning

Supply and Fulfillment Planning

Larger customers receive products in regional distribution centers, while smaller customers may need store or factory location delivery

Customer segmentation and prioritization may lead to multiple SCP models, with more costly service levels provided to the most strategic customers

Need for speed of delivery drives service levels as well as inventory deployment and safety stock settings

Need for low cost drives minimum order quantities and lead-times

What is the underlying

economic logic?

A company such as Amazon.com must be tightly integrated with suppliers to plan supply and deployment to meet customer needs

A company such as Wal-Mart must optimize the cost of inventory, safety stock, transportation, etc., for its entire network

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Manufacturing Class Influence

Overview

A company's manufacturing processes usually differ based on the type of products they

manufacture Furthermore, the processes used to create a company's finished goods influence the design of the SCP model Companies generally fall into one of three manufacturing classes

SC Manufacturing

Class

Manufacturing Class Definition

Discrete Product uniquely manufactured, requiring resources capable of being

retooled to work on different products (e.g., aircraft manufacturer)

Repetitive Production lines repeatedly manufacture a product from the same product

family (e.g., automobiles)

Process Large batches of product produced simultaneously (e.g., wine and beer)

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Manufacturing Class - Discrete

In discrete manufacturing, each manufactured item is different from the previous one, requiring

customized machinery and specialized tools Manufacturing resources are capable of working on different products at different times; for example, a lathe machine may be used to make an auto transmission axel at one time, and a long cylindrical steel bar at another Given that each item is unique, it does not make sense to forecast the demand for each Thus, companies forecast requirements for raw materials, semi-finished goods, and sub-assemblies

Emphasis in discrete manufacturing is placed on the production planning process Each item may have multiple alternative routes through the production facility Thus, during the planning process, companies must ensure the availability of resources, materials, and labor, while at the same time considering alternate routes for the product In addition, companies must minimize production lead-time The goal of production planning in this environment is to maximize throughput

(produce the maximum amount of product given a limited set of resources), as well as resource utilization (keep the resources working and minimize down times)

Once the goods have been manufactured, they must be shipped and distributed to the customers

at the lowest possible cost

Manufacturing

Class

Demand Planning Supply Planning Production Planning

raw materials, semi-finished goods, and sub- assemblies

Raw material inventory planning Minimize distribution lead- times and costs

Schedule production facility to maximize throughput

Schedule production to minimize production lead-time

Schedule production to maximize utilization of resources

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Manufacturing Class - Repetitive

In repetitive manufacturing, a company repeatedly produces the same item on a manufacturing

line For instance, the same family of motorcycles or cars is produced on the same motorcycle or automotive assembly line, e.g., an automotive plant assembly line produces different versions of the same car model, another plant produces different versions of a different model, and so on

It is important for such manufacturers to continuously operate their assembly lines There are also

a limited number of "slots" on an assembly line; if an assembly line has 150 slots during a shift, the assembly line can produce 150 items during that shift, and items are slotted on the line to ensure that the line is balanced Furthermore, the amount of time needed to complete the

operations at each station is approximately equal Planners must ensure that items are scheduled such that the line is always balanced

Once the items are off the line, the manufacturer sends them to the locations where they will be sold, i.e., car dealers During distribution planning, companies decide on the modes of

transportation that minimize costs and lead-times When doing so, the manufacturer must also ensure that transportation is available when needed, taking into consideration the number of stops, and the number of truckloads to ensure minimal unloading and reloading

Manufacturing

Class

number of items by type

Distribution planning to ensure:

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Manufacturing Class - Process

Process manufacturing is a capital-intensive process due to large and expensive machinery

(e.g wine vats, oil refineries), and high stopping and starting costs Producers would rather run a machine continuously at any given capacity than stop production to ensure 100 percent capacity

or to avoid build up of finished goods inventory

The paper industry is an example of this class of manufacturing There are essentially two steps

to the production process The first step is to convert the trees into paper The second step is to take the paper, print on it, cut it to the right shape and size, and then use it (e.g., by sticking it onto a juice carton) Not only is the capital investment in the machines large, the stopping and restarting costs are very high as well Hence, manufacturers want to continuously operate the machines, which means that raw material must be available to do so Forecasting the demand for the end paper products, however, is not as crucial

Deciding what shape and size to cut the paper is not simple either Paper manufacturers model this problem using various operations research techniques to determine the optimal "cuts" for the paper The manufacturers then need to determine the best way to distribute and ship the product

Maximize machine utilization Minimize stopping and restarting

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Heavy reliance on an accurate forecast for raw materials, semi-finished goods, and sub-assemblies Heavy emphasis on supply planning to make sure required material is available to meet production plan Heavy emphasis on reducing production lead- times/ensuring flexible schedule

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Manufacturing Model Influence

Overview

Manufacturing operating models determine the way in which a company plans and produces their finished goods inventory The major differentiation between the four primary manufacturing operating models is whether the manufacturer builds a product to stock or waits for a more specific demand signal to complete the product

The primary manufacturing operating models include:

Functional Area SC Operating Model Operating Model Description

Make to Stock Product produced prior to orders

Make to Order Product produced after order received

Configure to Order Build base product, then build add-ons after order

Manufacturing

Engineer to Order Design product with customer, produce after order

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Manufacturing Operating Models - Make to Stock (MTS)

A make to stock (MTS) manufacturer produces product in advance of receiving customer orders,

and then stores inventory at its warehouses When an order then comes into the order

management system, they locate product at a preferred distribution center for shipment to a customer During demand planning, MTS organizations rely heavily on forecasting and inventory planning

Example

An example of an MTS company would be a canned food producer There are a limited number

of months in the year in which food products are canned; yet the company must project demand and ensure availability of product on grocery store shelves for the entire season Lack of product

on the shelves translates directly to lost customer sales Click the example button to see an illustration of how goods flow through the supply chain of an MTS canned food producer

Example

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Influence of the MTS Model on SCP Model

An MTS company must forecast demand for their products and then ensure availability of the product when customers demand it Companies in this environment consider several important factors, including:

Forecasting Customer Demand

Forecasting customer demand is critical; under-forecasting translates to lost sales while forecasting means that product could sit on the shelf and perish To avoid this, companies typically use advanced statistical techniques to forecast customer demand Statistical techniques are most useful where historical data is a good predictor of the future, and where demand trends (due to variables such as seasonality, temperature variations, etc.) are apparent

over-Distribution of Product

Distribution of the product is also crucial Even if companies forecast demand accurately, they must still ensure availability of the product at the locations where customers want it To develop optimal distribution plans, planners need to understand the demand pattern and set optimal inventory and safety stock targets, which assist in managing demand fluctuations

Product Allocation

Allocating product to important customers plays an important role in this environment Typically, long-term agreements are established with such customers Failure to honor these commitments carries a financial penalty

Scheduling Production Facilities

Scheduling production facilities is key to maximizing throughput and resource utilization After forecasting the demand for the product, companies have a very good idea about what, when, and how much must be produced

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Develop optimal distribution and sourcing plans

Maintain and manage inventory targets

Manage safety stock levels

Allocate supply capacity to largest and most important customers

Schedule production facility for maximizing throughput and utilization

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