Scm Rationalization

Supply Chain Management: From Vision to Implementation

Chapter 10: Supply Chain Rationalization and Role Shifting

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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.

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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.

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The Challenge of Complexity

Complexity increases: Confusion Cost The probability of counterproductive decision making and

diminished competitiveness.

Complexity may be necessary to drive the value proposition.

Cost of complexity can not outweigh the value.

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Sources of Complexity

1. Organizational Structure

2. Value-Added Processes

3. The Operating Network

4. SKUs

5. The Supply Base

6. The Customer Base

7. The Logistics System

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Organizational Structure

Issue: decision-making authority

Centralized – leverages scale to reduce cost

Decentralized – leverages local knowledge to build relationships and promote rapid response

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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

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Organizational Structure - Solutions

Team-based structures Policies to promote center-led, decentralized

organization Measurement systems that promote

cooperation, support local autonomy and accountability

Modern communication and database technologies

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Value-Added Processes

Processes add complexity because they: involve a number of people from different

functions; consist of a large number of distinct activities; employ a variety of capital equipment; design, produce, or deliver a wide range of

products.

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Value-Added Processes - Solutions

Standardization Error Proofing Synchronization of Material Flows

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Operating Network Operating networks add complexity because of the

number of distinct facilities that must be coordinated.

Efforts to “optimize the supply chain” using sophisticated mathematical models often fail over the long term because: operating networks evolve over time; acquisitions complicate network design; macroeconomics and political stability influence network

design.

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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?

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Company SKUs

Product proliferation adds to SC complexity. Breadth complexity

Wide range of products Low profit margin Relies on inventory turns and efficient operations

Depth complexity large number of options for the products carried High profit margin Relies on customer service and distinctive

products

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Company SKUs - Solutions

Managers wishing to reduce complexity due to product proliferation should:

Proactively manage the breadth versus depth decision

Using total cost analysis, eliminate unprofitable SKUs

Institute policies to reduce proliferation Use postponement strategies Use database and data mining tools

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Impact of Options on the Complexity

Product Characteristic Number of Options

Color: Charcoal, Field Khaki, Khaki, Cognac, Brown, Olive, Steel, Navy, and Black

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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

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Length: 27-38 inches 10

Bottom: cuffed or plain 2

Total SKUs 9x2x2x5x16x10x2 = 57,600

Simplified SKUs via Postponement: 9x2x2x5x16x1x1 = 2,880

Simplified SKUs via Data Mining: 1,300

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The Supply Base

Traditionally, American manufacturers have sourced parts from multiple suppliers to hedge against disruptions and create leverage to drive down costs.

Multiple redundant suppliers, add complexity to the supply chain.

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Single or Multiple Suppliers

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The Supply Base - Solutions

To reduce complexity, supply-chain managers may seek to reduce the number of suppliers and aggregate purchasing.

ABC Classification Systems Supplier Certifications Long-Term Partnership Style Relationships

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Supply Base Optimization Process

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ABC Suppliers Classification

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Supply Base Optimization Process

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Supplier Selection Process

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Supply Base Optimization Process

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Supply Base Optimization Process

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The Customer Base

Customers generally have greater power in supply chain relationships.

Customers use this power to demand consistently higher levels of service without additional compensation.

Customer proliferation may result in suboptimal profits.

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The Customer Base - Solutions

Managers may seek to address an unwieldy customer base by:

ABC Classification Systems Customer Relationship Management (CRM)

software to segment customers Sophisticated cost analysis to evaluate

customers

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Logistics System

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

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Logistics System - Solutions

Managers may seek to address logistics system complexity by:

Adopting advanced technology – ERP, DRP, CRM systems; database management; data mining.

Outsourcing – third-party logistics Insourcing – on-site third-party logistics Innovative practices

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SC Rationalization

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.

The goal is to efficiently allocate scarce resources to a company’s most profitable and strategically important activities and relationships.

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SC Rationalization

44 percent of companies have rationalized their supply base

38 percent of companies have performed a customer profitability analysis

28 percent of companies have streamlined product offerings

- Cap Gemini (2002)

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Chrysler’s Supply Chain

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Rationalization at Chrysler

Analysis of the supply chain to eliminate unnecessary or wasteful activities.

Step 1 – Identify and eliminate redundant suppliers. Result: Fewer SKUs and fewer and higher-

performing suppliers

Step 2 - Classify remaining suppliers on the basis of importance. Result: Discovery of potential threats and ability to

focus resources on collaborative relationships with key suppliers.

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Shifting Roles Among Members

Traditionally, roles for individual members of the supply chain were well defined.

Today, roles are far less certain.

To insure survivability, supply-chain participants must add unique value.

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Role Shifting

Role shifting enhances supply chain efficiency thereby enhancing the value proposition.

Functional shiftability – allows firms with unique capabilities to undertake additional roles.

Dis-intermediated – a company that is shifted out of the supply chain, replaced by a more capable firm.

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Role Shifting – Best Practices

Second-Tier Sourcing Contracts Supplier Certification Vendor-Managed Replenishment Supplier-Integrated Manufacturing

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Second-Tier Sourcing Contracts

Coordinated purchasing with first-tier suppliers.

Allows for aggregation of purchases.

Leverages purchasing power to reduce cost.

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Supplier Certification

Supplier certification is the formal process of working with selected suppliers to evaluate and improve supplier quality.

“Dock to Stock” – incoming shipments no longer are inspected, they go straight to inventory or the point of use.

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Supplier Certification Process

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Vendor-Managed Replenishment

Suppliers actively manage inventory for customers.

Suppliers benefit due to improved demand information and improved ability to allocate productive resources.

Customers benefit from lower labor and inventory costs, improved item availability.

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Supplier-Integrated Manufacturing

Customer firm invites suppliers to establish manufacturing facilities at the customer’s location.

Suppliers provide their own specialized equipment, manage their own inventory, and hire and train their own workers.

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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?