A SUPPLY CHAIN STRATEGIC PLANNING FRAMEWORK Matthew J. Liberatore, Villanova University, 610-519-4390,
[email protected] Tan Miller, Rider University, 973-590-4638,
[email protected]
ABSTRACT Developing and implementing a supply chain strategy is essential for maintaining competitive position. As part of the strategy development process, firms must select projects that best achieve strategy. In this paper we present a framework that a firm can employ to select those projects which will best support the firm’s supply chain objectives and strategies. A multicriteria decision-making technique, such as the Analytic Hierarchy Process, can be used to support this strategic planning process. An example is presented to illustrate the proposed approach. INTRODUCTION We present a framework that a firm can employ to select those projects which best support the firm’s supply chain objectives and strategies. This framework offers a well-defined process by which firms can select those projects that will yield the greatest contributions towards achieving their objectives and executing their strategies. Our framework employs the analytic hierarchy process (AHP), a multi-criteria decision-making technique, to guide a firm through its strategic planning process. This guidance includes a methodology for developing project priorities subject to budget constraints and other organizational requirements such as the need to allocate resources across different functional areas and strategies.
LITERATURE REVIEW A supply chain strategy should be selected based on the characteristics of the product and markets served. Fisher [3] categorized products as either functional or innovative, depending on the predictability of demand, size of margins, length of product life cycles, and level of product variety. Functional products face a stable demand process and low margins, and so their supply chains should focus on cost efficiency. Innovative products face unpredictable demand but have higher margins, and so a responsive strategy is desired, and can be achieved using mass customization or product postponement. Characteristics of the supply processes, including the number of supply sources and process changes, and variable or stable yields can also be related to the choice of a supply chain strategy. Lee [5] proposes that products having predictable demand and stable supply sources require an efficient supply chain strategy, while those having unpredictable demand and stable supply sources require a responsive strategy [3]. However, if supply processes are evolving Lee [5] proposes two additional strategies, depending on the level of demand uncertainty. When demand is predictable and the supply process is evolving, Lee proposes a risk hedging strategy that pools resources to share risks in supply disruption. An agile supply chain is needed when demand is
unpredictable and supply is evolving. It must be flexible enough to respond to changing levels of demand, while trying to minimize the supply disruptions. Autry, Zacharia, and Lamb [1] developed a classification scheme for logistics strategy types based on the results of a survey of managers and executives knowledgeable about their firm’s logistics strategies. Using cluster analysis, two strategies were determined: functional logistics and externally-oriented logistics. Those firms taking a functional logistics strategy focus on inventory and order management, order processing, procurement, and storage. The underlying measurement items emphasize efficiency and cost management, analysis and control. Those firms employing an externallyoriented strategy are most concerned with ensuring that their logistics activities are compatible with the needs of their trading partners and/or directed toward stewardship of the overall business environment (e.g., green or socially responsible logistics). Firms adopting this strategy focus more on coordination and collaboration, social responsibility, strategic distribution planning and technology and information systems Defee and Stank [2] discuss how the strategy-structure-performance paradigm [4], [7] can be extended from a single-firm to a supply chain environment that includes the firm’s channel partners. The presumption is that competition has moved from the firm to the supply chain level. Therefore, inter-firm coordination is required to achieve a supply chain strategy. Sadler and Hines [8] discuss an integrated supply chain planning process that attempts to involve all partner companies or intermediaries into the process. They describe the application of their strategic operations and logistics process (SOLP) to the Australian meat processing industry [8] and at a heavy fabrication business in Australia [9]. However, the approach followed by many manufacturers is to develop a supply chain strategic plan internally, while considering the relationships with their partners during the planning process. A review of the supply chain strategy and planning literature has informed our research on the issues that must be addressed in the supply chain planning process.
PLANNING FRAMEWORK We use an example firm, the ABC Manufacturing Company, to illustrate how supply chain objectives, strategies and project selection process can be integrated into one aligned, comprehensive approach. ABC produces a wide variety of consumer goods and distributes its products to a broad array of retailers who then sell these goods to consumers. Recently ABC has also implemented its own direct-to-consumer channel of distribution, an effort still in initial stages of development. ABC’s supply chain organization is just now entering its annual strategic planning process. To develop and organize its supply chain objectives and strategies, ABC first employs the mission, objective and strategy (MOS) approach to strategic planning [6]. The MOS approach represents a planning framework in which a firm defines its overall mission (step 1), establishes objectives to support its mission (step 2), and then develops strategies to support its objectives (step 3). Similarly, a major organization within a firm, such as Supply Chain, can also adapt the MOS approach for its functional area. ABC’s supply chain organization utilizes the MOS
methodology to form the first three tiers of its supply chain planning framework. The first level – ABC’s overall supply chain mission – is stated as:
MISSION: Position ABC’s supply chain to support the overall firm objectives as efficiently and effectively as possible
In the second stage ABC evaluates its supply chain from both internal and external perspectives, and based on this evaluation, defines a set of objectives designed to achieve its mission. The ABC team reviewed a wide range of supply chain functional capabilities, and based upon this review, defined explicit performance objectives in the following areas:
SUPPLY CHAIN OBJECTIVES i. ii. iii. iv. v.
Regulatory Compliance Cost Efficiency Delivery Effectiveness Flexibility Security
We note that ABC (and any firm utilizing this process) should formulate precise objectives against which it can accurately evaluate itself in these defined functional areas. However, for illustrative purposes, we limit our discussion of ABC’s objectives to this simple description of the general areas of objectives. In the third planning stage, ABC develops strategies designed to meet those objectives posed in the second stage. Here ABC’s managers consider and address the needs of all of the major stakeholders and constituents of the firm and its supply chain. ABC’s supply chain management addressed six key areas where it believed that well-defined and “measurable” strategies were necessary to achieve these five objectives. ABC determined that it required strategies to address the following major stakeholders and constituents of its supply chain: SUPPLY CHAIN STRATEGIES i. ii. iii. iv. v. vi.
The Consumer (CONS) Its Customers (CUST) Its Governmental and Societal Responsibilities (G&S) Its Financial Well-being (FIN) Its Suppliers and Partners (S&P) Its Internal Operations and Employees (OPS&E)
Again, for the illustrative purposes of this paper, we will not describe the details of the explicit strategies that ABC would have developed. Instead, we simply note the general areas of strategy that address all of ABC’s stakeholders and constituents.
The mission, objectives and strategies defined by ABC’s supply chain management provide a framework for the organization to move forward. With its strategies defined, now ABC must select and initiate individual projects that will facilitate the successful implementation of its strategies. For ABC, this next process consists of first identifying a set of potential supply chain strategic projects, and then selecting the actual projects it will pursue among the candidate projects proposed. The list of potential supply chain projects and the strategy they support are shown in Figure 1. Figure 2 displays the complete framework. No.
Project Description
1
Streamline Existing Direct To Consumer Delivery and Internet Ordering Services Integrate POS (point of sale) Data As Input To The Current Forecasting and Production Scheduling Processes Establish and Enhance Customer Relationship Management Services (CRM) Implement A Customer Segmentation Program Based On Customer Profitability & Activity Based Costing (ABC) Analyses Expand Supplier Relationship Management (SRM) Programs Evaluate and Benchmark Current Security Processes and Procedures on Supply Chain, and Recommend Enhancements Integrate Current Individual Country Sales & Operations Planning Processes Into One Global S&OP Process Develop And Implement Plan to Optimize Use of RFID In Supply Chain and use of RFID vs. use of Bar Codes Evaluate Current Use Of Third Party Logistics (3PL) Firms And Recommend If Firm Should Increase Use Of 3PLs Develop and Implement Labor Productivity Measurement Systems For plant and warehouse operations Expand Current Import / Export Compliance IT Capabilities Benchmark Firm’s Current Carbon Footprint and Develop Long-Term Green Manufacturing Operations Plan Figure 1. Project Descriptions and Strategies Supported
2 3 4 5 6 7 8 9 10 11 12
Strategy Supported CONS CUST CUST CUST S&P G&S OPS&E OPS&E FIN OPS&E G&S G&S
ANALYSIS To determine the set of projects that best supports the supply chain mission, a multicriterion method such as the Analytic Hierarchy Process could be used [10]. An AHP analysis uses judgments in the form of pairwise comparisons to measure the impact of items on one level to the next higher level. At each level, the pairwise comparisons are organized into a matrix and the weights of the items being compared are determined by computing the maximum eigenvalue of the matrix. A weighted averaging approach is used to combine the results across levels of the hierarchy to compute a final weight for each alternative.
Level 1 Mission/ Goal
Mission: Position the firm’s supply chain to support the overall firm objectives as efficiently and effectively as possible. =============================================================================== Goal: Determine the relative importance and priority of individual projects in achieving the firms’ supply chain objectives and strategies
Level 2
Level 3
COST EFFICIENCY
REGULATORY COMPLIANCE
Objectives
Criteria
SECURITY
CONSUMER
CUSTOMER
GOV’T/ SOCIETAL
FINANCIAL
SUPPLIER/PARTNER
INTERNAL
•CONS RATE •PRODAVL •ACCESS
•CUST. RATE •FILL RATE •PARTNER •CUST SEG •CRM
•ENVIRON •SEC_REG •RELATION •INFLUENCE
•COST vs DIR •COST vs IND •SCROI •INVENTRY •CASH FLOW
•RELIABILITY •QUALITY •FLEXIBLE •PARTNERS •COST COMP
•SCCAPABL •NON ITTEC •ITTEC •SKILL SET •PRODIVTY
Strategies
Level 4
FLEXIBILITY
DELIVERY EFFECTIVENESS
Level 5
EXCELLENT
VERY GOOD
GOOD
FAIR
Rating Scale
Level 6 Projects
P1
P2
P3
P4
P5
P6
P7
P8
P9
P10
P11
P12
Figure 2. Supply Chain Strategic Planning Framework As applied to Figure 2, the planning team would determine the relative importance of the objectives in achieving the mission. For example, how much more important is regulatory compliance than cost efficiency (or vice versa) in achieving the mission? Next, the team would determine the relative importance of the strategies in achieving each objective. For example, with respect to the cost efficiency objective, how much more important is the consumer strategy as compared to the customer strategy? For each strategy, the criteria must be compared so that the weights needed to evaluate the projects can be established. For each criterion a rating scale is then established, such as excellent, very good, good, and fair. Weights are developed for each of these ratings, and so projects can be scored. For example, since project three supports the Customer strategy, it must be rated with respect to the five Customer criteria (CUSTRATE, FILLRATE, PARTNER, CUSTSEG, CRM). Each of the criteria has specific definitions. For example, the ratings scale for FILLRATE is: Excellent = project will move firm’s line item fill rate to customers to 99% or higher from its current 95% level, Very Good = 98% to 99% fill rate, Good = 96% to 98% fill rate, and Fair = 95% to 96% fill rate. Those projects having the highest scores would be funded, subject to budget availability.
CONCLUSIONS In this paper, we have developed a comprehensive framework to support a firm’s supply chain strategic planning activities and its project selection process. Our framework combines two well
established methodologies, the MOS (for strategic planning) and the AHP (for multi-criteria decision-making/project selection) to formulate one aligned planning process. In particular, this framework and methodology allows a firm to ensure that the individual supply chain projects that it pursues support and align with its strategies and objectives. The framework provides a firm with an approach to first establish its mission, objectives and strategies. Then this framework allows a firm’s management to qualitatively and quantitatively select and prioritize those projects that will best fulfill its strategies and objectives. In the corporate supply chain planning process, where difficult and often budget-constrained decisions must be made on which projects to implement, our framework offers the guidance necessary to assure aligned decisionmaking. REFERENCES [1] Autry, C. W., Zacharia, Z. G., Lamb, C. W., “ A Logistics Strategy Taxonomy,” Journal of Business Logistics, 29(2), 2008, 27 – 51. [2] Defee, C. C., Stank, T. P., “Applying the Strategy-Structure-Performance paradigm to the Supply Chain Environment,” The International Journal of Logistics Management, 16(1), 2005, 28 - 50. [3] Fisher, M. L., “What Is the Right Supply Chain for Your Product,” Harvard Business Review, 75(2), 1997, 105 – 116. [4] Galbraith, J. R., Kazanjian, R. K., Strategy Implementation: Structure, Systems, and Process, West Publishing Company, St. Paul, MN, 1986. [5] Lee, H. L., “Aligning Supply Chain Strategies with Product Uncertainties,” California Management Review, 44(3), 2002,105 – 119. [6] Liberatore, M. J., Monahan, T.F., Stout, D.E., “A Framework For Integrating Capital Budgeting Analysis With Strategy,” Engineering Economist, 38(1), 1992, 31-43. [7] Miles, R. E., Snow, C. C., Organizational Strategy, Structure, and Process, McGraw-Hill, New York, NY, 1978. [8] Sadler, I., Hines, P., “Strategic Operations Planning Process for Manufacturers with a Supply Chain Focus: Concepts and a Meat Processing Application,” Supply Chain Management: An International Journal, 7(4), 2002, 225 – 241. [9] Sadler, I., Gough, R., “Applying a Strategic Planning Process to Several Supply Chain Planning Partners,” Journal of Manufacturing Technology Management, 16(8), 2005, 890 – 908. [10] Saaty, T. L., The Analytic Hierarchy Process, Pittsburgh, PA: RWS Publications, 1996.
