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Supply Chain Design Complements
Current ERP and Supply Chain Management (SCM) vendors are not
likely to provide Supply Chain Design functionality. It is common wisdom that
the leaders of one wave of innovation often miss the next. SCM systems have
gotten broader rather than deeper, following the path of MRP-MRP II-ERP. Just
as SCM improved on ERP materials planning, Supply Chain Design improves on
SCM’s ability to optimize service levels, inventories, and costs. One recent
addition to SCM is event management (SCEM), or alerts that allow faster
reaction to change. Corey Billington, Hewlett-Packard’s VP Supply Chain
Services, says, “If you require SCEM, your supply chain is breaking too
frequently. A well-designed supply chain should deal with your environment’s
normal variation.”
that have a limited scope: i.e., network design, demand
forecasting, production planning, or warehouse management.
• Supply Chain Design provides a financial comparison of various
options for inventory strategy and policy as well as supply, outsourcing,
make-to-order, capacity and lead-times.
Supply Chain Design and SCM have different objectives, and the
“engines” or algorithms for design are fundamentally different than those used
in APS optimization. However, Supply Chain Design is complementary to SCM, and
can make current systems more effective: Supply Chain Design outputs are what
current Supply Chain Management (SCM) systems use as inputs or constants.
• The design problem must account for uncertainties in both demand
and supply, while APS is tasked with creating a plan for personnel to follow.
Uncertainty means plans and forecasts are always wrong, and Supply Chain Design
should prevent that reality from becoming a major customer service problem.
• Supply Chain design evaluates the impact of interactions between
plans and disciplines. It optimizes for total cost vs. service level across
departments, operational units, and even legal entities. Most SCM consists of
separate modules
Multi-Discipline View
Supply
Chain Design must, by nature, span supply, production and distribution. It also
delivers useful insights for sales, procurement, finance, and executives. In
many ways, it enables companies to realize the concept “Think
global. Act local.”
• Supply chain staff can make better decisions with visibility to
more interactions.
• Sales and marketing can commit to customer service levels.
• Procurement can address supply uncertainty and the cost of early
or late receipts.
• Operations can see the cost impact of WIP, cycle times, and
capacity constraints.
• Inventory managers gain insights into safety stock policy
and its effectiveness.
• Logistics staff can analyze the impact of freight modes and
distribution center efficiency on inventory.
• Financial analysts can better understand and predict cost of goods
sold (COGS). The breadth of factors considered in Supply Chain Design allows it
to calculate inventory costs by cause. (Figure 4.) With the service level target set, the design strives for lowest costs. Anyone can
quickly understand where costs lie and what inventory issues might jeopardize
their capability to deliver to the service targets.
Supply Chain Design enables companies to Think Global. Act Local.
- Safety Stock Cost to cover
- Demand Uncertainty
- Safety Stock Cost to cover
- Stage-Time Uncertainty
- In-Process Stock Cost
- Early Arrival Stock Cost
- Batch Cycle Stock Cost
Supply Chain Design develops inventory level recommendations based
on issues across the enterprise: sales and demand forecasting, operations time,
WIP Requirements and batching, procurement issues around early parts arrival
and purchase quantities. All of these are viewed by cost, not just quantities. Supply Chain Design provides mutual ground for a range of
individuals and departments to take part in the process and improve their
performance. Changing the Basis of Competition with Supply Chain Design 8
Two Levels of Design Decisions
Design may sound like something that happens only occasionally,
but as with product design, Supply Chain Design can be part of weekly and
monthly business processes to review the best response to changes in supply,
demand, or competition.
Most companies use Supply Chain Design for strategic purposes
first, as in the HP example above, and later move into tactical uses.
Strategic: Supply Chain Design adds insight to the annual and quarterly decisions company executives must make. Its financial impact views help make decisions on sourcing and outsourcing; analyze capacity investments and lead-time reductions; set inventory strategy; and understand tradeoffs between make-to forecast and make-to-order business models with varied postponement configurations. Tactical: On a quarterly or monthly basis, most companies need to review their inventory policies. Supply Chain Design can optimize safety stock locations and safety stock levels based on the projected demand and mix for a given period – and the service levels desired. It can also show the cost impact of changing service levels for various customers, geographies, or product families.
An increasingly respected type of tactical Supply Chain process is
frequent Sales and Operations Planning (S&OP). This is where supply
planning, sales, operations, demand planning, management, and finance come together to agree on a plan for the period.
As demand, supply, and logistics change, Supply Chain Design can contribute
major missing input to the process: optimized and costed inventory plans for
various service levels and delivery times to the customer. In short, Supply
Chain Design provides various groups and levels in an organization the ability
to make sound decisions – based on customer service and financial impact. It
also creates a Supply Chain Design knowledge base, storing the history of
decisions and the tradeoffs behind them. The addition of Supply Chain Design to
an enterprise can improve strategic and tactical business processes.
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