Strategy Alignment(= Supply Chain Excellence)
SCM Global ConferenceSeoul, Korea
24 June 2010
Larry Lapide, Ph.D.Research Affiliate, MIT-CTLFormer Project Director, MIT Supply Chain 2020 [email protected] @
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Introduction: Supply Chain 2020 Methodology
Scenario 2Scenario n
Scenario 1Scenario 2
Scenario n
Scenario 1 Scenario 1
BusinessBusiness
Business Strategy
Supply Chain
NetworkBusiness Business EnvironmentEnvironment
Business Capabilities
Supply Chain Strategy
Network Design
Strategy Alignment
Scenario Planning
S ppl Chain Strateg De elopment
2
Supply Chain Strategy Development
Agenda
• SC2020 Excellence Supply Chain ResearchSC2020 Excellence Supply Chain Research
• Excellent Supply Chain Framework
• Illustrations and Case Studies
• Strategy Alignment Process and Takeaways
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SC2020 Excellence Research: What is an excellent supply chain?
Some myths on what is an excellent supply chain:
• Is part of a profitable company
• Is not part of an unprofitable company
• Is comprised of supply chain “best practices”
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SC2020 Excellence Research: It’s about focusing on doing a few things well, not merely copying best practices
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SC2020 Excellence Research: ..it’s also about aligning to Corporate Strategy, not necessarily leveraging the ‘best practices’ de jour
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Agenda
• SC2020 Excellence Supply Chain ResearchSC2020 Excellence Supply Chain Research
• Excellent Supply Chain Framework
• Illustrations and Case Studies
• Strategy Alignment Process and Takeaways
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SC2020 Excellence Research: Excellent Supply Chain FrameworkQualitative research on 21 companies and 9 industries supports that an excellent supply chain: *
Corporate Competitive Strategy
Excellent Supply Chain
Strategy1. Supports, enhances, and is an integral part of a
company’s competitive business strategy.2. Leverages a (not necessarily unique) supply chain
Operating Model
Operational Performance Objectives
g ( y q ) pp yoperating model to sustain competitiveness
3. Executes well against a balanced set of operational performance objectives/metrics
Tailored Business Practices• Fit• Principles leveraged
4. Focuses on a few “tailored” business practices that reinforce each other to support the operating model
d b t hi ti l bj ti• Principles leveraged
* L. Lapide, “MIT’s SC2020 Project: The Essence of Excellence”, Supply Chain Management Review, A i 2006
and best achieve operational objectives.
April 2006
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1. Supports, enhances, and is an integral part of a company’s competitive business strategy
Example supply chain-related competitive strategy elements (support, enhance and is an integral part)• Lowest prices• Highest margin products• Highest qualityg q y• Fastest customer response• Most innovative• Highest Return-on-Assets• Broadest product line• Best customer serviceBest customer service • Best post-sales support• Most environmentally responsible
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2. Leverages a (not necessarily unique) supply chain operating model to sustain competitiveness
Performance Management
Product Portfolio Management
Relationship Management Supply Chain Governance &
Partner Relationships
Design Source Make Sell Deliver ServiceReturn RecycleBusiness Practices
Order Promising & Fulfillment
Inventory Replenishment
Supply–Demand Alignment
Supply Chain Design and Capacity Planning
Post-sales Support
Product Launch
Product Phase out& FulfillmentReplenishment SupportLaunch
Technology & Info/Funds Flows
Phase-out
$$$$
Contract Manufacturer
Contract Manufacturer Virtual OEMVirtual OEM Web
StoreWeb Store
Operating model is the design of the SC including:
CustomersCustomers
Operating Models SupplierSupplier
ManufacturerManufacturer
RetailerRetailerE-marketplace
StoreStore
DistributorOEM
• Where to Source / Make /Deliver
• Push-pull points
Off h i• Offshoring
• Outsourcing
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2. Leverages a (not necessarily unique) supply chain operating model to sustain competitiveness
SC-Related Competitive Strategy Elements Example Characteristics of Operating Model Aligned To Support and Enhance
• Lowest prices • Lowest operating costs
i h i d i il bili i f l• Highest margin products • Maximum availability at point of sale• Lowest operating cots
• Highest quality • Highest quality of suppliers• Strongest manufacturing quality controls
• Fastest customer response • Shortest order-to-delivery cycle• Fastest request-to-promise date
• Most innovative • Most efficient new product launch
• Highest Return-on-Assets • Highest plant utilization• Highest Return-on-Assets • Highest plant utilization• Lowest inventories
• Broadest product line • Best inventory management• Shortest manufacturing changeover and setups
• Best customer service • Specific service for each customer segment• Best customer service • Specific service for each customer segment• Maximum availability at point of sale
• Best post-sales support • Maximum availability of service parts
• Most environmentally responsible • Minimize waste and maximize recycling
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3. Executes well against a balanced set of operational performance objectives/metrics
Customer Response (customer-facing)• Order cycle times• Perfect order fulfillment• Quality • New product time-to-market(Do not relate to financial statements)
?
Efficiency (internal)• Labor productivity• Supply chain costs
Asset Utilization (internal)• Facility utilization• Inventory turns
? ?
pp y(Relate to income statement)
y• Cash-to-cash cycle(Relate to balance sheet)
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Balanced operational objectives vary by industry in absolute terms
High Margin and Short Life Cycle Products•Pharmaceutical
Customer Response
•Fashion apparel•Media & Entertainment
Capital Intensive Industries• Semi-conductor fab
Low Margin and Mature Products• Food & Beverage Semi conductor fab
• Petrochemical• Commodities (steel, paper,
coal)
Food & Beverage• Basic goods retail• Industrial supplies
Asset UtilizationEfficiency
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Competing is positioning against industry competitors on a relative basis (best-in-class rather than peer average)*
Relative Objectives
Customer
Absolute Objectives
Customer Response
Best Buy
AppleIBM
Amazon
Asset UtilizationEfficiency
Dell Wal-Mart
However, the competitive positioning will likely vary by product line as well as supply chain within a companyp y
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Positioning is setting operational performance targets to be best-in-class versus performing at a peer (average) level*
Illustrative Balanced Operational Performance Metrics
OperationalMetric
Metric Type
Performance Target
Focus(%)
Order fill rate C Best 50%Customer Response
Product Quality C Best 20%
Plant Utilization A Best 20%
Supplier delivery E Best 10%
Response
pp yperformance
Inventory turns A Peer 0%
Procurement costs E Peer 0%
Asset UtilizationEfficiency
* L Lapide “The Operational Performance Triangles” Supply Chain Management Review November 2008
Supply chain costs E Peer 0%
* L. Lapide, “The Operational Performance Triangles”, Supply Chain Management Review, November 2008
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4. Focuses on a few “tailored” business practices that reinforce each other to support the operating model and best achieve operational objectives.
Tailored (not best) business practices that:
– Align to performance objectivesAlign to performance objectives
– Fit
C i t t ( k t th )• Consistent ( make sense together)• Reinforcing ( support each other)• Cross-optimized (work together to achieve common C p ( g
goals, 1+1=3)
– Leverage underlying operating principles for cost-benefit
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Supply Chain Principles Illustrations
Fashion versus Basic Supply Chains:
Service Window Management:Practices
Excess Line Capacity and pp y
LimitedBrands Management:Cisco Systems
O i
Partial ShiftsToyota
Costs of cycle time and inventory tradeoff Constraint Relaxation
Operating Principles
Constraint Relaxation
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Agenda
• SC2020 Excellence Supply Chain ResearchSC2020 Excellence Supply Chain Research
• Excellent Supply Chain Framework
• Illustrations and Case Studies
• Strategy Alignment Process and Takeaways
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Aligning Corporate Strategy and Operational Performance Objectives
Illustrative Aligned Customer-Focused Corporate Strategy and Operational Performance Objectives
Customer ResponseCustomer-focused
Operational Performance Objectives
performance objectives• Highest supplier quality
standards• Shortest time-to-market• Shortest manufacturing
• Highest quality products• Most innovative• Broadest product line
Customer-focused corporate strategy
• Shortest manufacturing changeover times
• Broadest product line
Asset UtilizationEfficiency
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Aligning Corporate Strategy and Operational Performance Objectives
Illustrative Non-Aligned Customer-Focused Corporate Strategy and Operational Performance Objectives
Customer Response
p j
Efficiency and asset-focused performance objectives:
• Highest quality products• Most innovative• Broadest product line
Customer-focused corporate strategy
• Lowest procurement costs• Highest plant utilization• Lowest inventories
• Broadest product line
Asset UtilizationEfficiency
L Lapide “GM Was Out of Alignment" Supply Chain Management Review July/August 2009
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L. Lapide GM Was Out of Alignment , Supply Chain Management Review, July/August 2009
Tailored Practices Aligned to Operational Performance ObjectivesTailored practices need to align to strategically-aligned SC performance objectives
Customer ResponseSC performance objectives:• Highest supplier quality standards• Shortest time-to-market• Shortest manufacturing changeover
i Customer-focused corporate strategytimes
Tailored Practices
• Highest quality products• Most innovative• Broadest product line
Customer focused corporate strategy
Tailored Practices•Core ‘strategic’ supplier program•Collaborative development and design
•Multi-product production lines with quick changeover
Asset UtilizationEfficiency
g
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‘Old’ Dell Supply Chain Framework
Operating Model• Direct sales to customers via web/phone• Build-to-order manufacturing• Box-level service
Customer Response
Box level service
SC performance objectives:1. Lowest fulfillment costs2 Lowest inventories
Corporate strategy• Highest value-to-price
provider of commodity
2. Lowest inventories 3. Lowest procurement costs
Tailored Practicesprovider of commodity computers and accessories to price conscious customers
• Consigned inventory supplier hubs
• Demand shaping• Inbound transportation
collaboration
Asset UtilizationEfficiency
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Principles Illustration: ‘Old’ Dell’s Tailored Practices
Consigned Supplier Inv
Hubs
Demand Shaping
Inbound Transportation Collaboration
PracticesHubsCollaboration
Sphere of Influence
Supply Contracts
Demand-Supply
Matching
Economies of Scale
Operating Principles
Practices and principles support a competitive supply chain strategy focused on low-costs, low inventories, and minimum cash-to-cash cycle
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IBM Supply Chain Framework
Operating ModelDirect, single face to customer via
sales repsBuild-to-order manufacturing Extensive pre- and post sales support
Customer ResponseCorporate strategy• Diversified and value-added
provider of networked h l l i
Extensive pre and post sales support
SC performance objectives:• Highest customer satisfaction• Lowest inventories technology solutions to
businesses
Lowest inventories• Lowest costs
Tailored Practices• Consolidated customer
f lfill tfulfillment process• Launch ‘buffer’
manufacturing• Centralized
procurement• Consolidated and
Asset UtilizationConsolidated and outsourced logistics Efficiency
Supports a competitive supply chain strategy for high-end networked computer c stomers o er their lifetime of secustomers over their lifetime of use
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Wal-Mart Supply Chain Framework
Operating Model• Lowest cost brick and mortar retailer with
supplier to retailer DC to store flows• Large-format stores carrying a wide variety of
products (not necessarily brands and SKUs)Customer Response
Corporate strategy
SC performance objectives:1. Efficiency (e.g., supply chain costs)2 Asset utilization
products (not necessarily brands and SKUs)
• Everyday low pricing for cost-conscious customers
2. Asset utilization3. Customer response
Tailored Practices
Asset UtilizationEfficiency
• Vendor collaboration with co-managed inventory programs
• Flow logistics distribution including extensive cross-docking, DSD and differentiated flow
S t titi l h i t t f i i t b
differentiated flow• Network design incorporating
large-sized distribution centers and short-haul private fleets for economies of scale
Supports a competitive supply chain strategy for price-conscious customer baseLapide 2010
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LimitedBrands (Victoria’s Secrets) Supply Chain Framework
C t
Operating Model• Control supply chain operations from plants to DCs
to owned stores• High shelf availability at store level• Offshore sourcing with partial equity-ownership of Customer
Response
SC performance objectives: 1 C stomer response (e g
Corporate strategy• Sell innovative,
technologically-advanced high margin
g p q y p‘basics’ plants
1. Customer response (e.g., responsiveness)
2. Asset Utilization/Efficiency
fashion products• Reduce risk by
balancing basics vs. fashion mix
Tailored PracticesTailored Practices• Segmented fashion versus basic
supply chains• Open innovation model involving
four innovation sources• Captive global sourcing company
Asset UtilizationEfficiency
Supports a competitive supply chain strategy for mainstream fashion-oriented t th t t b i t
• Captive shared services logistics provider, from plants to stores
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customers that want basics too
Agenda
• SC2020 Excellence Supply Chain ResearchSC2020 Excellence Supply Chain Research
• Excellent Supply Chain Framework
• Illustrations and Case Studies
• Strategy Alignment Process and Takeaways
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Strategy Alignment Process
Go-To Market Strategy
Supply ChainStrategy
Step 1• Discuss how supply chain strategy supports business strategy• Identify supply chain competitive strategy elements
OperatingModel Step 2
• Develop operating model that supports SC
Performance Objectives
competitive strategy elements• Identify operational performance metrics
that are aligned with strategy
Tailored Practices
Step 3• Develop SC practices tailored to the
operating model• Discuss trade offs and alignments• Discuss trade-offs and alignments
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SC Excellence Key Takeaways
• Excellence means aligning your supply chain to your corporate competitive strategyco po e co pe ve s egy
• Align SC strategy to support, enhance and be an integral part of corporate strategy
• Set operating model and operational performance measures based on what you will excel in, and what you won’t!!you won t!!
• Implement a few tailored practices that reinforce each other
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Thank You
Questions??????
Larry Lapide, Ph.D.Research Affiliate, MIT-CTLFormer Project Director, MIT Supply Chain 2020 [email protected]
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