How Supply Chain Design is Rising to Prominence
Early in my career, supply chain design as a discipline was just emerging. It used to be a once a year or so exercise. A company would charter a project to assess how its network consisting of its suppliers, plants, distributions centers, and points of delivery was performing to support the demand and the overall business objectives. Design decisions were made, policies were set, product flows were determined, capital expense decisions were made, and the initiative would go on the back burner until the next year or whenever the project was revisited. However, I am seeing a significant shift in this practice with supply chain design becoming much more of a frequent, ongoing practice. Here are some factors influencing this shift:
- Increasingly dynamic supply chains: With the rise in digital technologies and the app economy, consumers now have far more information at their fingertips than ever before. This empowered consumer is no longer stuck at the receiving end of a plan-source-make-deliver chain. Instead, (s)he is at the center of every brand owner’s value network with more choices than ever! Thanks to the digital technologies, brand owners and retailers also have far more avenues to engage with consumers with dynamic pricing, personalized offers, and tailored fulfillment options such as direct to home or BOPIS (Buy Online Pickup In Store). This in turn mandates organizations to be far more agile in terms of how they flow the product through the network, even if the network nodes themselves may stay relatively stable during shorter time windows. Once a year design and policy decisions can get stale rather quickly if they are not constantly revisited.
- Record M&A activity: Mergers & Acquisitions hit a new record this year with US $3.3 trillion in agreed upon deals so far! With stock markets near record highs and relatively low interest rates – deal making is in full swing with several companies embarking on an acquisition spree. Even if the two entities prior to M&A have the best performing networks, when they are put together, the supply chain design in almost all cases will end up being suboptimal from an overall business objectives perspective. Hence as part of the M&A due diligence, organizations need to model the distinct networks under one model as the baseline and then optimize the network holistically in consideration of various business objectives such as optimizing service levels while balancing total landed cost with consideration to capital investments. With detailed enough cost modeling, organizations can clearly identify as well as financially and operationally quantify the synergies. Such analysis can be done in a matter of days and weeks with the powerful simulation and optimization capabilities that are available now.
- Rising nationalism and protectionism: The renegotiation of NAFTA, escalating trade wars between US and China, and Brexit are all very current events, the effects of which are not fully known or knowable at this time. Harley-Davidson shifting a big chunk of its production for the European markets, from US to Europe is much in the news. The company is facing the double whammy of tariffs on the raw materials, such as steel and aluminum, it imports for making its bikes, and tariffs on the finished bikes it exports to European countries. From an entirely different industry, Wallstreet Journal recently reported on how the pig farms in Spain and South America are ramping up production as the Chinese pork firms significantly ramped down the sourcing from US. All these factors cause major, if I may say, seismic shifts in the network flows. Now, a lot of this can change on a dime depending on how the diplomacy between US and China plays out. However, many leading companies are now running a variety of scenarios to plan for all sorts of contingencies around supply chain networks, making design exercises far more frequent and prevalent.
- The rise of cloud computing: Traditionally supply chain design was done completely on a user’s desktop. However, due to some of the above factors, organizations are finding it necessary to run many scenarios and evaluate tradeoffs on an ongoing basis. Thanks to the elasticity of cloud computing, planners can now spin off multiple scenarios into a cloud environment where they can all run in parallel at a scale never imagined before, significantly speeding up the decisions.
- The convergence between design and planning: The artificial boundaries that existed between design and planning are starting to blur significantly, especially so with more mature organizations that are bringing design principles into planning processes. One of the fundamental limitations of planning applications is that several of the policies driving supply chain decisions are set in stone. As an example, if a product is sourced from three different factories with primary, secondary, and tertiary sources, planners typically accept this prioritization as a hard constraint and try to do the best job they can to balance demand and supply. However, design fundamentally challenges this assumption and reconsiders sourcing constraints from a Total Landed Cost perspective. Other examples include build ahead limits, minimum order quantities, order multiples, etc. The analogy I like to draw is that planning tries to play the best hand it can with the cards that are dealt, whereas design can reshuffle the deck, picking the best cards to play out of the deck. Being the dealer and player at the same time can be a wonderful winning strategy! Needless to say, such agility in the digital world will need to be matched with adequate responsiveness in the physical world.
- Supply chain design professionals are the new superheroes: By its very nature, design takes an end-to-end view of a supply chain breaking down the traditional planning silos in sourcing, manufacturing, and distribution. Design professionals need to be holistic thinkers with consideration to an end-to-end network. I recently visited a major north American car manufacturer. The supply chain leader in charge of design center of excellence told me that they drive decisions that are worth tens of millions of dollars to the bottom line that are directly attributable to design, and planning decisions influenced by design. His team members are now viewed as the strategy and process experts across the entire company! Design teams are best equipped to provide a total landed cost view to the executive team as they are modeling all the details of an end-to-end network including all the fixed, variable, and step-wise costs. They essentially create a digital twin of the network in the process, on which one can run a variety of scenarios and simulations. These professionals are significantly upping the game for their organizations, in the process enjoying tremendous professional success and rise in profile. Besides, through efficient supply chain design, these individuals are making the world more sustainable and a better place to live!
The above factors are transitioning supply chain design from a one and done exercise to an ongoing operational practice built on design principles. Leading companies are realizing that strong design discipline is the foundation upon which planning and execution need to take place.