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 Objectives3. 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 Structure2. Value-Added Processes3. The Operating Network4. SKUs5. The Supply Base6. The Customer Base7. 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 StructureCentralized Structure

Pros ConsIncreases leverage Increased bureaucracyReduces duplication Reduced flexibilityFacilitates standardization Can lose touch with realityEnables specializationGreater control

Decentralized StructurePros Cons

Knowledge of local needs Reduces leverageBetter local relationships Leads to duplicationGreater 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 - SolutionsManagers 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 ComplexityProduct 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 ChryslerAnalysis 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 StoryBased 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?