The Supply Review – Deploying Strategy With Integrated Business Planning

The Supply Review – Deploying Strategy With Integrated Business Planning
Number 4 of 7 in the Oliver Wight Strategy Deployment white paper series
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Introduction

In our first white paper in this series, ”Connecting Strategy to Execution,“ we showed how to integrate corporate strategy with operations by cascading it down the organization by creating individual strategies and plans at the business unit and functional levels (see figure 1). It then becomes the role of Integrated Business Planning to operationalize the strategies and plans of the business units, managing any performance gaps over a 24-to-36-month horizon.

We used the analogy of portfolio investment for retirement planning, and in the three white papers before this one (Connecting Strategy to Execution, The Portfolio Review, and The Demand Review), we learned that a robust business strategy is needed to drive growth. In the equation of delivering a corporate return on investment, it is the responsibility of the portfolio and demand teams to grow the numerator. At the same time, it is the responsibility of the supply team to manage the denominator, i.e., the cost-to-serve.

The portfolio and commercial sides of the business have to consider which products should be sold and which should be retired, what markets to serve, which sales channels to use, what the value discipline is, and what the customer service expectation is. The supply chain must fully understand these strategies to develop its effective supply tactics and strategies in response. The integration of these decisions must continue to deliver the expected corporate returns.

The Supply Review is the third step in the monthly Integrated Business Planning process (see figure 2). It is where the supply chain articulates its response in a forward-looking, time-phased plan within the context of well-defined tactics and strategies. The supply review seeks to provide insight on performance to budget, both past and (most importantly) projected, modeling the impact of tactics within manufacturing, sourcing, distribution, and logistics, including the documentation of assumptions, opportunities, and vulnerabilities around the forward plans, as well as the risks from commodities and FX.

The leading exponents of Integrated Business Planning use the monthly process to deploy and check in against strategy. They operationalize the strategic plan by incorporating the strategic activities, typically initiatives and projects, into the functional and whole-of-business plans reviewed through the IBP process each month to check for:

  • Changes to initiatives and projects that impact the operational plans and their alignment going forward.
  • Validity – that deliverables and timelines are balanced against planned resources.

Where the IBP process identifies gaps or misalignments, the IBP participants are tasked with resolving those gaps, making strategic trade-off decisions and communicating those to the broader organization so priorities are clear.

They use the IBP process to check the organization’s progress toward its strategic goals by comparing actual and projected performance detailed in the IBP plan with the strategic objectives and measures detailed in the strategic plan.

Supply Chain Priorities

On the face of it, supplying product is straightforward: buy the materials, manufacture the product, package it, and ship it. The three most important priorities are:

1. To have the right product available at the right time for the commercial team (sales and/or marketing).

2. To make sure it’s the right cost.

3. To manage the working capital (i.e., cash) associated with inventory.

It may seem straightforward, but optimizing cost, cash, and service in a highly dynamic marketplace is not as simple as it may seem.

The problem is that the first priority, having product available for the commercial team (sales and marketing), can be detached from the second and third priorities listed above. In Oliver Wight’s experience, the supply side of the business often focuses on delivering product without clearly understanding the financial consequences of its plans. The supply side is often regarded as a support to the business by delivering the required product; the cost and cash implications of doing so are an issue elsewhere. Consequently, its strategic and tactical decisions can unnecessarily and inadvertently increase the denominator and consume cash resources that might be better invested in supporting the portfolio strategy.

For example, the supply decision might be to manufacture all products in-house because it provides maximum flexibility and the shortest lead times. However, this may drive up costs to the extent that it is unpalatable for the corporate function – manufacturing in-house may be constrained by the available capacity, in which case there is a capital investment implication. Therefore, supply must understand its decisions, costs, and cash considerations so it can be part of the trade-off discussions around the cost, flexibility, and control of manufacturing in-house vs. outsourcing.

 

The trade-off discussions must consider the long-term implications of any strategies (over a 24-36-month horizon or more) based on assumptions of what will happen over that time. Of course, it’s a well-worn saying that as we consider the future, the only thing we can be certain of are assumptions. In other words, nothing is certain.

It is crucial that the assumptions supporting any decisions are documented – why we made investments in capacity or decided not to invest in capacity and moved to external support instead; “By taking this course of action, we expect to reduce our current costs, in which case our margin back to the company will improve.” In this way, the assumptions can be revalidated if things change.

In the real world, it’s not always possible to square the circle. Sometimes, the gap between performance and strategy is insurmountable based on the current plan. For example, product delivery requirements may still be achievable but not in line with the previous cost projections. If this can’t be resolved within the supply review, options must be considered and resolved via Integrated Business Planning through the Integrated Reconciliation process. In this case, new product introductions from the portfolio team will present sufficient revenue potential to create some wiggle room on costs and facilitate the margin increase. (More on Integrated Reconciliation can be found in the sixth white paper in this series).

Notably, there has to be a constant feedback loop with strategy. In some cases, it may become impossible to meet the cost objective without changing the strategy, although this is always a last resort. In this case, any recommendations would have to be made via the IBP Management Business Review for consideration by the leadership team.

Strategy hierarchy

The supply chain strategy is linked to the corporate strategy via the strategies for the individual business units that it is designed to support. However, the definition of the supply chain itself often needs to be clarified, which hampers the creation of a coherent strategy. For example, distribution sometimes reports to the commercial organization; sometimes, it is part of supply chain. The same is true of logistics.

At Oliver Wight, we believe the definition of supply chain should be as follows:

1. Sourcing (materials and components)
2. Manufacturing (in-house and outsourced)
3. Distribution (finished product)
4. Logistics
5. Customer

Creating a visual representation of the organization’s supply chains is helpful. Although companies say they understand their supply chain, it’s important to have it documented. While supply chain people will intuitively understand and know their supply chains, creating the nodes or steps in the supply chain in a visual format paints the picture for the rest of the organization to understand the physical constraints. Providing everyone with the ability to view the steps and complexities involved ensures an understanding of how to time the formal decision points or time fences. If the nature of the physical environment is understood, informed decisions result in accurate outcomes.

A common question is, who should be included up and down the supply chain? Most organizations Oliver Wight works with tend to include their direct customers and suppliers, i.e., one node up and down the supply chain. This is a minimum requirement. In some cases, the reach extends further, but while the theory is that the more collaboration you can achieve throughout the supply chain, the better, the reality is that the further away you are from the supplier or customer, the less control you can exert. Two steps back in the supply chain may take you to a place where you are just one of a thousand or more customers.

Establishing a functional strategy for supply

Naturally, a supply chain that is tied directly to a single business unit is very different from one that serves multiple business units, with global distribution and varying manufacturing tactics – make-to-stock, make-to-order, design-to-order, and so on. The former will have a single strategy, but the latter will be more complex and require multiple strategies.

In either case, it is important to first establish clarity on the key attributes. Begin with the end in mind: delivering the right product at the right time at the right cost. These are the key considerations:

1. What is the distribution network?
2. What is the manufacturing network?
3. What is the sourcing strategy, in-house versus contract manufacturing?
4. Will there be centers of excellence for specific products, or will all products be made at all plants?

Getting this wrong can have catastrophic consequences. The strategy of one Oliver Wight client, a furniture manufacturer, was simply to lower the product cost to increase margin.

The company chose to move all its manufacturing from Canada to Vietnam. However, this decision was not aligned with its service strategy, which was to be flexible with the product mix. Since the supply line meant inventory would be tied up for six weeks at a time on the ocean, it had to establish a vast warehouse facility at the port of Los Angeles to maintain product flexibility, resulting in massively increasing inventory in its supply chain. Even though the product costs aligned with the supply strategy, customer service was damaged, and the business ultimately failed as it could not sustain the cash investment needed to support the new supply network.

Sadly, it is a situation that has been repeated countless times. Although the pandemic has exposed the significant risks of offshore sourcing and recent dramatic changes in the socio-economic landscape, not everyone is paying attention. Many organizations continue to prioritize driving costs down without properly considering the trade-offs.

A significant contributor to this policy is the very nature of the corporate environment and the supply chain’s role within it. Every function within a manufacturing organization, except the supply chain, adds dollars to the business, from the president or CEO through the CFO to sales, marketing, and product development.

The supply chain is often unfairly regarded as just a cost to the business and an impediment to what the organization is trying to accomplish – making money. Worse still, this extends to the personal remuneration of the board, whose bonuses are typically based on profit. No wonder then, that supply chain decisions are often focused on prioritizing cost savings and working capital reductions. Whatever the risks of manufacturing in Vietnam, China, or India, if a 35 percent cost savings goes straight to the bottom line, it’s a powerful argument to those at the top.

The realization of the broader benefits of sourcing decisions sometimes happens as an unintended consequence. Oliver Wight worked with a company that manufactures valves for water systems. The United States issued legislation preventing the inclusion of lead in any valve used to handle water. The company decided to build a new foundry and pull all manufacturing back from China. It also resulted in a huge reduction in lead time, and partly because of it, its ability to forecast accurately improved dramatically. This, in turn, reduced the risk of penalties for supply shortages from its major customers, the large depot chains.

Supply strategies and tactics

There are several levers available to supply that need to be aligned with the business unit strategy/ies. Some are strategic in nature while others are tactical.

Different products will require different resources and methods of distribution. The supply strategy will, therefore, be different for each, and the manufacturing and distribution networks must be planned and managed to support market-driven growth. A consideration to examine would be which technologies to invest in and those that might not have a long-term future but are helpful for the time being. Investing in new technology is likely to be tremendously capital-intensive, and there has to be clarity about future markets and capacity. With technology heading towards obsolescence, it may be better to outsource for the short term.

Equally, different products will benefit from different sourcing strategies. Some are more suitable for supplier partnerships, while others are a better fit for spot-buying, constantly pursuing the lowest price. In some cases, it is advantageous to have multiple suppliers, recognizing that this brings additional complexity because they will have to be qualified and managed. Conversely, depending on a single supplier carries the risk of that supplier failing.

Where the organization and, therefore, the supply strategy are complex, balancing capacity, inventory, and supply sometimes needs to be dealt with at a tactical level. Decisions must be made around the portfolio about where to meet the customer – with inventory, or capacity, or a combination of the two – and this will be determined by the type of manufacturing undertaken: make-to-stock, assemble-to-order, purchase-to-order, engineer-to-order, or design-to-order. Service expectations will be different for each, and each has its own trade-offs. For example, making-to-stock requires a high cash investment to maintain inventory, but lead times will be short. In contrast, for design-to-order, cash investment is low because the inventory and capacity are in the engineering team waiting for the orders to come in. This can be complicated to manage, especially if products for multiple business units are manufactured within the same facility. The danger is that capacity for design-to-order product is either reserved (for when the phone rings), or the production of make-to-stock items has to be interrupted to accommodate the custom product. This may be resolved on a short-term basis, simply by supply asking sales whether they can sell any capacity of the custom product so it can be scheduled. However, this means supply becomes hugely dependent on the commercial team and its management of customer expectations.

Communication through IBP is crucial, especially between the portfolio management team and the supply team. The portfolio team that has an early view of which new products are being introduced over the next two or three years and beyond, and this will inform the decisions on which technologies to invest in. Some of these may be cutting-edge technologies, and an early understanding of them means decisions can be made sooner rather than later, with the trade-offs properly considered. “Are we going to invest in manufacturing in-house versus sub-contract so we aren’t exposed to the risks of sharing proprietary intellectual property outside the business?” The answers to these types of questions are driven by the supply strategy. In some cases, in pharmaceutical manufacturing and aerospace, for example, decisions need to made years in advance. Of course, this carries the risk that things may change in the interim, so inbuilt flexibility is crucial.

Complexity isn’t just reserved for high-tech manufacturing, though. One Oliver Wight client manufactures commercial plastic components. The product is not environmentally sustainable, and with the prospect of customers turning away from them en masse in the future, the company has had to create a strategic roadmap to convert to recycled and recyclable/biodegradable materials. This involves evaluating all the critical cost elements, from establishing a supply network of usable recycled raw materials to the ability to hold tolerance utilizing current manufacturing technology, all while remaining a viable option to customers.

Telling the story of supply through the supply review

The supply review provides the means to operationalize the strategy based on four key parameters:

1. Monitor (supply, inventory and capacity plans, supply/demand balancing and key strategic initiatives)
2. Align (with strategies and tactics)
3. Measure (against KPIs)
4. Adapt (gaps, risks, opportunities and actions)

In the monthly meeting, the owner of the supply review will tell the story of the changes to the demand plan since the previous month and will indicate how supply will execute against it – building inventory here, reserving capacity there – thus meeting the (updated) requirements of the commercial team and customers.

Where the latest IBP view of the future indicates a gap in the strategic goals, this triggers the supply review participants to work on actions to close the gaps. See figure 3 below.

The supply chain team uses the IBP process and supply review to monitor the progress of strategic objectives, projects, and initiatives to ensure timely completion. These typically encompass the changes required to the organization’s supply chains, detailed in a time-phased supply chain roadmap, to support the product and portfolio, and sales and marketing strategies, which should detail how the organization sees the market developing over the strategic horizon and how the company’s offerings will change over time.

Typical strategic projects and initiatives include:

  • Supply chain network design changes to support market and customer segmentation.
  • Supply chain capability changes to support planned changes to the product offering.
  • Improvements in supply reliability, cost and quality in support of customer value proposition and the organization’s cost to serve.
  • Reductions in lead time across the supply chain to increase agility and support the customer value proposition.

The IBP process is an effective way to check in on the deployment and execution of the supply chain strategy; key requisites include:

  • The IBP supply chain plan extends to a minimum 24-month horizon (ideally to 36 months) so the degree of alignment of the latest view with strategic objectives can be understood.
  • That the supply chain strategic objectives are measurable and expressed at a level of detail that enables them to be compared with the bottom-up IBP plan every month.
  • Visibility of the resources required across the planning horizon to execute the strategic initiatives and projects so alignment with operational plans and any gaps can be understood.

The discussion in the review can then focus on the trade-offs. Some of the considerations might be, maybe there isn’t enough existing capacity, or can a supplier deliver in the original time frame? So, if we are to achieve our KPIs, what are the options and the trade-offs that need to be considered in planning or making a recommendation to the leadership team? This is the essence of an effective Integrated Business Planning process.

What will it take to operationalize the strategy?

Strategy doesn’t just happen; operationalization requires turning the strategy into very specific actions and defining where to start and the goals. It is all too common in organizations for there to be no clearly defined supply chain strategy.

Begin by understanding the functional strategy from a supply chain perspective. Remember that the supply chain’s priority is to have the right product available at the right time and at the right cost for the commercial team.

It is vital to have clarity over exactly what the service expectations are for customers – is it 95 percent on time to the customer, 98 percent, or 90 percent? This is the foundation upon which you size your supply chain and define your strategies to meet that service expectation. The service expectation should be established by the leadership team and delivered to the rest of the organization through the IBP Management Business Review (see paper six in this series). In some cases, the service expectation will be one-size-fits-all; however, for companies with a large portfolio of products in multiple markets and categories, it is more likely to be different for each segment. It is important to understand this principle as it ties directly to the complexity of supply chain tactics, strategies, and design.

A major driver of the service expectation will be competition. If your competitor can deliver in two days while you deliver in five, and the cost and quality are little to no different, it will be tough for you to compete. Your strategy is there to direct you to which markets you serve, and you can choose not to play in those markets. However, this does not mean that the supply organization can set its costs and lead times for sales and marketing in isolation. The supply chain should be designed to meet the customer’s needs and deliver expected value.

Your competitors will look for better, quicker, and cheaper ways of doing things. Elevating your supply review beyond simply balancing to demand requires a business focus. Supply reviews must explicitly prioritize product availability, cost, and working capital (cash). Furthermore, by testing forward-looking plans against your strategy, you maintain your competitive edge in your selected markets to ensure continued success satisfying customers and stakeholders.