Keeping SCOR of your Supply Chain Design Options

As traditional supply chain designs take on new shapes, leading companies are searching for robust, new optimization techniques and enabling technologies to enhance the overall performance of their supply chain.  When considering the various supply chain design options to support any new business strategy – the impacts on revenue, cost, and service levels must be clearly understood before a new supply chain design is deployed.  How do you initially develop the scenarios which should even be considered?  How do you quantify and prioritize supply chain design optimization options?  Further, how do you measure or keep score of their effectiveness?

This article addresses both the need for advancement in optimization as well as provides sound advise on how to use the industry standard Supply Chain Operations Reference model (SCOR) as the foundation to enable both the building out of the various scenario alternatives as well as enabling you to better measure the effectiveness of these scenarios.

Why use Supply Chain Design and Optimization (SCDO) in creating the Next Generation Supply Chain?

In meeting the need to advance up the Supply Chain Maturity Matrix, it is imperative that companies seek new and advanced techniques to address the ever-changing and challenging competitive environment.  One of these advanced techniques being successfully utilised by leading companies such as 3M, Intel, Hewlett Packard, and Gillette is to employ SCDO as a way to create and consistently challenge supply chain designs at the product level throughout the product’s life cycle. AMR Research¹ suggests that there are four business drivers accelerating this trend:

• Global manufacturing has increased complexity.  Global sourcing adds the complexity of longer lead times and higher supply variance.
• With outsourcing, inventory accounting within a network has never been more important.  Manufacturing outsourcing is increasing.
• Innovation cycles and governmental regulations have increased complexity.  The number of Stock-Keeping Units (SKUs) and parts within a company are proliferating and will continue to grow as innovations cycles increase.
• Inventory ownership is being pushed to suppliers.   Power brokers within the supply chain are continuing to redefine inventory ownership in the network.

What decisions can SCDO help you take? 

The power behind SCDO is that it allows you to take a complex environment of factors that might affect supply chain design and use this information as input so that once the SCDO analysis is complete, you can actually take key decision decisions with comfort – now having a complete and fact-based understanding of the impacts.  When SCDO is properly employed you are in a position to answer such compelling questions as:

• Will a move to a low labor-cost region really drive operational cost savings?
• What’s the business impact of a move from a Make-to-Stock to a Make-to-Order strategy?
• How will "postponement" impact my inventory and service levels?
• Do I need to have a differentiated supply chain by product?  Where is aggregation a possibility?
• How do I account for the uncertainty of my demand and supply?

But the big question on every supply chain decision makers mind is where to begin? 

Companies that recognize their supply chain as a competitive differentiator are naturally open to the potential of new options.  If your company has the basic desire to use their supply chain as a weapon in the war, then the starting point is clear.  The organization must first gain a clear, visual picture of how the current-state supply chain compares to any of the future-state options.  You must establish a baseline by adopting a uniform methodology of documenting and articulating your supply chain processes.  From there it becomes necessary to develop some top-level supply chain designs and understand how to measure the successful performance of each key supply chain process.  Performing this “mapping and measuring” activity will help you discover the opportunity that lies in the supply chain and later to analysing and comparing various supply chain design options. Before concluding on the final solution you will use the acquired information to drive the highest level of positive impact (top-line and bottom-line) to your company.

To accomplish this task, it is best to use the industry standard Supply Chain Operations Reference (SCOR) model to allow us to visualise our cross-enterprise supply chain.  The SCOR model which is advanced through the efforts of the Supply Chain Council (www.supply-chain.org ) is the most often used tool for this effort and can provide us the “scenarios” that will be used as the basis for the development of our design options.  SCOR allows us the opportunity to capture the “as-is” or current-state of a process and derive the desired “to-be” or future-state (see Diagram 1 below).

Diagram 1 SCOR® as a Reference Model

Step 1 – Discover the opportunity

SCOR - as a “reference” model provides a framework to diagram the main processes of the supply chain, measure the performance of these processes through a pre-defined set of metrics, as well as consider cross-industry best practices that when employed could enhance performance.

As illustrated in the above diagram, it’s easy to see the value that SCOR can provide - as you can not only perform the necessary Business Process Re-engineering efforts enabling you to create the future-state vision of your supply chain, but quantify the operational performance gap between your company and the competition (internal and external) but also draw upon the best practices and suggested software solution enabling characteristics. 

Once you have mapped the current-state diagram and have quantified the operational performance of your company against the competition, only then can you begin to visualize the future-state options for consideration.  Your future-state design choices seek to incorporate best practices contained within the SCOR model as well best practices already identified within the company.  In essence, you can now see a clear “gap” in performance and have “discovered your opportunity”. 

Using SCDO you can validate these future-state alternative designs in more detail.  When you consider the potential risk (and reward) associated with major supply chain design choices - a deeper dive is justified and necessary.  If you are trying to assess the impacts of migrating manufacturing from your in-house production to outsourcing to China for example, the risks of that decision are massive but if done correctly can offer a reward that is sure to please the stakeholders.  But before taking such a strategic design decision – you owe it to your stakeholders to perform the most thorough analysis possible and show evidence that you have considered multiple design options, considered the variability and uncertainty of supply and demand, and can build a business case to justify such a migration by examining the trade-offs in both Total Supply Chain Cost reduction as well as service levels to the customer.  Using SCDO to take this analysis step to a greater level of detail is certainly a worthy investment.  In order to demonstrate this concept further, let’s investigate this technique in more detail.

What is the impact of a potential move to outsourcing within a low labor-cost region?

After all, this decision is being taken by many companies every day as the migration to low labor-cost regions such as Mexico, Eastern Europe, India and China become the “norm” rather than the exception. 

Through the application of SCOR and having done some mapping of both current and future-state supply chain designs – you can visualize the impact to the basic supply chain processes of:  Plan, Source, Make, Deliver and Return.  By examining these key supply chain elements based on SCOR, you can uncover examples (illustrative purposes only) of the potential impacts to both the supply chain processes as well as the associated metrics:

PLAN:  

• Customer requirements (demand information) must be shared (real-time) with new manufacturing supply source
• External production capacity may be difficult to isolate and/or extract and therefore make it more difficult to incorporate in the demand/supply balancing process
• Planning decision policies may not be respected (e.g. prioritization and allocation decisions)

SOURCE:

• Compounded difficulty in establishing rapid pull-based replenishment may occur
• Localization may require approval of multiple/new supply sources requiring more work for component approval work for engineering and Approved Vendor List (AVL) adjustments
• Increased lead-times and supply uncertainty from “new” supply sources being introduced may affect inventories

MAKE: 

• Loss of prioritization control may affect performance as manufacturer must meet the varying demands of multiple OEM customers (little fish in a big pond syndrome)
• Aggressive knowledge transfer becomes paramount as manufacturing and test data must migrate and you must have the trust that this information is kept confidential
• Cost of Goods Sold may improve due to lower direct labor rates but may not reduce Total Supply Chain Costs (TSCC)

DELIVER:

• Customer orders must be shared (real-time) with new manufacturing supply source
• Longer deliver cycle times may result from shipments by sea with potentially less certainty of supply
• Growing levels of inventory in transit result in less flexibility

RETURN:

• Extended return cycle times occur as defective items are returned to manufacturing source for evaluation, repair or replacement

The illustrative examples above are not in any way meant to suggest that using a contract manufacturer is a bad decision or that moving to a lower labor-cost region is an error in judgment but does highlight the need to investigate the impacts on processes and key metrics prior to taking such a decision in order to minimise the risk and understand the change management which must occur to capitalize on the potential of such a shift in strategy.

The trade-off for lower labor costs may result in an increase in Total Supply Chain Cost due to the potential for substantially more inventory in the supply chain in order to maintain service levels.  This may be an uncomfortable trade-off when service levels are negatively impacted and the company suffers with On-time Delivery to Commit and Perfect Order Fulfillment which may in turn affect the ability to sustain or grow revenue.

By using the SCOR model you can begin to design and map the future-state supply chain design options.  These options can be considered in our next step, a supply chain design and optimization (SCDO) study, to minimize potential negative impacts.  SCOR will also provide much of the information required to create an SCDO study as the detail of data requirements and constraints have been collected as you connect the inputs and outputs to the processes while doing the SCOR-based modelling. 

Step 2 - Supply Chain Design and Optimization (SCDO)

As you pursue the ability to quantify and prioritize supply chain design options, companies are in need of a solution that can calculate the full implication of each of the scenarios you have built using the SCOR model.  The mathematical demands have exceeded the capacity of spreadsheets and even the functionality of most legacy systems.  This ushers in the opportunity to deploy SCDO and its components:  Network Design and Inventory Optimization.  It is within the integration of these techniques that there is the basis for a comprehensive ability to consider the financial and service implications of any of the valid alternative options of supply chain design.

Network design decisions often include the location of manufacturing, storage, or transportation related facilities and the allocation of capacity and roles to each facility.  Whereas, Inventory Optimization techniques can operate at various levels:  strategic, tactical and operational and share a common goal of satisfying the customer service objectives and the minimal total delivered cost of all products.  Most inventory optimization techniques employed however focus on the operational and sometimes tactical level basically optimizing inventory levels around a pre-determined inventory policy which unfortunately even at some companies today is based solely on history, intuition or “rule-of-thumb” inventory policies.  Both network design and inventory optimization are commonly used by companies today but disappointingly they are used sequentially and in isolation and therefore individually produce a sub-optimal result.

SCDO provides us the ability to capture and quantify the elements of Total Supply Chain Cost (TSCC) and enables the understanding of their linkages and interdependencies.  One of the main differences with SCDO versus traditional Network Design or Inventory Optimization techniques is that within SCDO you not only consider the element of “uncertainty” but in addition you consider the cross-enterprise supply chain and the multiple echelons within – you must examine the network and inventory solutions together and not in isolation.  

With the use of sophisticated math, you can do a more “exhaustive evaluation” of our various alternative future-state scenarios developed through our SCOR modeling, examining the network designs and inventory requirements concurrently rather than sequentially with all constraints, variables and uncertainties considered.

Using Network design in isolation produces a sub-optimal result.  Likewise, employing inventory optimization techniques alone are not likely to deliver optimal results either.  Designing and managing our supply chain requires a move away from these independent solutions that produce feasible, yet sub-optimal results to SCDO which calculates an optimal result for consideration. 

Employing the SCOR model and SCDO together creates a powerful combination which undoubtedly yields a better result and minimizes the risk of complex design designs.  Can you afford not to spend the time and resources on such a strategic decision?

Conclusion:

With the increased pace of change driving a need for business flexibility, corporations are increasingly turning to SCDO solutions to develop strategies and tactics to satisfy volatile customer demand while balancing uncertainties in supply and the need for operational efficiency.   The use of both SCOR and SCDO can be a powerful combination to tackle the difficult questions you must face in your struggle to compete with the best-in-class supply chains.

1. AMR Research, “Redefining the Role of Inventory for Demand-driven Supply Networks” – Jan. 2005, by Lora Cecere, Alexi Samevitz, and Laura Preslan
   

More about Supply Chain Design and Optimization
Attend one of the KNOWledge Academy’s workshops on the Next Generation Supply Chain.  For more information on the next workshop to be held in Amsterdam in May, simply send us an email at SCDO@eKNOWtion.com and we will forward these details to you.

More about SCOR Education
Attend one of the Supply Chain Council’s 2-day SCOR Awareness workshops. Visit one of the upcoming workshops at your favourite location.  Why not consider the workshop in Rome in June 2006.  For more information on a workshop being held near you, click here.