Overview of Supply Chain Strategy
Improving supply chain strategy is HARD and if you’re reading this, you more than likely have a supply chain that you’re looking to improve.
The problem with supply chain strategy is that they’re viewed as an operational necessity, not as an opportunity to leverage a competitive advantage.
This old-school way of thinking considers supply chain strategy as part of business strategy, with the sole goal of cost reduction. Whereas, the supply chain presents the chance to strategically add value to the business as a whole, which is directly reflected through the market positioning.
This article will explain:
- What is supply chain strategy
- Why they are important
- The components they contain
- The 6 best supply chain strategy models
- How to implement the right strategy
- The final alignment
What is Supply Chain Strategy?
Before diving into detail, the term supply chain needs to be defined. A supply chain can be defined simply as the sequence of processes involved in the production and distribution of a product.
This is essentially the start to finish journey of all information, resources, money, etc involved during the process of bringing a product to market. So a supply chain strategy is a plan that a business develops to organize the process of bringing its product to market.
A good supply chain delivers customers the products that they want when they want them whilst being as cost-effective as possible.
Why is Supply Chain Strategy Important?
The process of how supply chains are managed has a major impact on an organization's competitiveness. An organization’s supply chain needs to be aligned with the overall business strategy, to ensure that the organization remains competitive within internal processes.
This includes measures of business performance such as responsiveness to market and working capital for example.
The conceptual and practical application of supply chain strategy is dynamic and ever-increasing in complexity, as more and more organizations are starting to place emphasis on their strategies.
This is a necessity in the current business environment as businesses face more competition than ever before. Businesses need to differentiate themselves and provide value to consumers, as consumers have more options through more channels than ever before.
Businesses also have to encounter the ever-changing external factors of political, socioeconomic, and health landscapes. So having an aligned supply chain strategy is vital for success.
The 3 Core Components of Supply Chain Strategy
Whilst there are many different methods in which a business can approach supply chain strategy, all successful methods incorporate elements of these three main components.
In order to improve your supply chain it is important to analyze these components to identify potential weaknesses or inefficiencies, and potentially pivot your strategy.
- The marketplace
- Unique value proposition
- Aligning internal processes
The marketplace essentially refers to the interactions that a business has within its industry. For example, a business’s interactions with its suppliers, consumers, economy, and any additional developments in the industry environment.
The areas that these interactions affect are a key influence in supply chain strategy development.
The most important area is that of supply and demand, where demand variation can significantly affect the lifecycle of a product.
If supply chain strategy is poorly planned and/or managed, a business can be left with an excess supply of a product with minimal demand or an undersupply of a product with high demand.
Unique Value Proposition
This is a fundamental aspect in forming a supply chain management strategy. A business needs to be able to identify and capitalize on its best-positioned product, as this is what the market considers the best value proposition from the business. This identification enables the business to structure its supply chain strategy around that product.
Aligning Internal Processes
This is a very overlooked part of planning, implementing, and acting out a strategy. It doesn’t matter how good a strategy is if it isn’t aligned throughout the business, it may as well not even exist.
The importance of alignment cannot be overstated, in the case of supply chain management a business’s market position and supply chain processes need to interact and remain aligned to maximize profitability.
The supply chain processes themselves need to be in alignment too, it is critical to have asset utilization aligned with the point in the value chain where the product gains its unique value proposition.
This is why supply chain strategy is vital as management needs to ensure coherence between supply chain execution and a business's unique value proposition.
The 6 Best Supply Chain Strategy Models
In order to improve your supply chain strategy, you need to know all of the available strategies. It’s important to acknowledge that it isn't always necessary to completely change your strategy in order to improve. Sometimes a few adjustments are all that’s required to improve inefficiencies.
Most supply chain strategies are typically run using one of two overarching models. One is focused on efficiency or the other that’s focused on responsiveness.
This article will explore the three best under each!
- The Efficient Centered
This model is best utilized by businesses that are situated in a very competitive market. This is a specific model for industries that have many businesses competing in the same or similar market, where the products provided have minimal differences in their value proposition.
The efficient-centered model suits these businesses as the competition is determined mostly by product price. The main objective for supply chain management in this model is to ensure asset utilization and maximum efficiency in supply chain processes to achieve the lowest production cost.
The production of these products shouldn’t be in a continuous flow as the product life cycle can be short. The production cycle should be based upon sale forecasts, due to the nature of the model depending on production costs to drive the market positioning of the product.
- The Fast Focused
The fast supply chain model is ideal for companies that manufacture a trendy product with a short life cycle. This supply chain model is typical for fast-fashion brands such as Zara and H&M for example.
The main value proposition to the consumer is the ability to stay up to date with trends, developing and manufacturing new products that are fast and affordable.
Due to the nature of this supply chain model, competitiveness in this space is determined through market mediation. What is market mediation? Simply put, market mediation is the costs associated with the imbalance in supply and demand.
To use fast-fashion as an example, product price markdowns to compensate for excess supply, and lost sales when demand exceeds supply.
The fast-focused supply chain requires accurately forecasted sales data, as due to the nature of the supply chain strategy the product will generally only have a single manufacturing run.
Getting the sales forecast right is key, oversupply will lead to excessive markdowns and lost profit, and undersupply will result in lost profit as there isn’t enough time to manufacture additional stock before it goes out of fashion.
Supply chain managers operating a fast-focused supply chain strategy need to prioritize a dynamic and continuous product portfolio. This relies on efficient and fast ideation to market, accurate sales forecasting, and a fast end-to-end supply chain.
- The Continuous-flow Oriented
The supply chain strategy oriented towards continuous flow is applied to businesses that have minimal variation in the demand for their products.
As these businesses have a steady demand they can then continuously replenish their supply with a consistent process, as they would have an implemented supply level trigger point.
The value proposition through a continuous flow supply chain strategy is that of continuous supply. With this strategy, market positioning is determined by optimizing inventory costs.
The key point of emphasis for supply chain management of a continuous flow supply chain strategy is ensuring cohesion throughout the end-to-end processes.
The processes need to be aligned with the forecasted demand to promote inventory efficiency. As accurately manufactured demand predictions are vital for this supply chain strategy to be optimal.
- The Agile centric
The agile supply chain strategy is utilized within industries that experience volatile demand. This strategy is implemented by businesses that produce custom products specifically made for individual customers.
The value proposition in this context is typically the ability to meet the unpredictable customer demand in a time-efficient manner. Market positioning in this circumstance is determined by the quality and speed of the production.
Supply chain management’s most important responsibility to remain agile is to ensure excess capacity and design manufacturing processes that are capable of the smallest possible output.
- The Custom configured
The custom-configured supply chain model is suited towards companies that manufacture products with multiple and potentially unlimited product configurations. The model is characterized by a high degree of correlation between the cost of assets and the total cost.
This model is referred to as custom configured due to the product configuration during the manufacturing process, where products are manufactured to meet a consumer’s specific requirements.
The custom-configured strategy encompasses both the continuous-flow supply chain strategy and the agile supply chain strategy.
This is as the continuous flow model manages the product prior to the customer’s specifications which are completed under the agile supply chain strategy. Essentially, this means that under this model a product is customizable but only to a certain extent.
The product configuration isn’t purely limited to the process of assembling the product, it can include other types of processes such as packaging or printing for example. Due to the nature of the model the value proposition can vary, as the products produced can differ whilst in the same market.
- The Flexible Focused
A supply chain strategy focused on flexibility is generally used by businesses that have volatile demand. The key to this model is its flexibility to change internal processes to specific customer preferences.
This is typically utilized by service businesses involved with unexpected events, as speed and customizability are paramount for the customer. For example, emergency medical care.
The focus of management when implementing a flexible supply chain strategy is to have an extra capacity of critical resources, quick-response capability, technical strengths in process and product engineering, and a process flow that is dynamic.
How to Implement the Right Supply Chain Strategy
Choosing the right supply chain strategy for your business is no easy task. There are a number of different strategies in addition to the ones explained above. Supply chain strategies are not a one size fits all solution, many strategies are vastly different and designed for specific industries.
It is important to implement a strategy that has been developed for the specific industry that your business is in. Trying to adapt a strategy meant for another industry to fit your business, will result in inefficiencies throughout the end-to-end processes.
It is vital to not consider external influences such as other business models when developing your business’s supply chain strategy. What works for other businesses will more than likely not be the most efficient way for your business to best utilize existing capabilities.
- Identify Type of Demand
One of the most influential factors when choosing a supply chain strategy is demand. It is crucial to identify what type of demand the industry your business is situated in experiences.
Is it linear and consistent demand or cyclical and seasonal demand? Are you shipping the same volume week to week or is it fluctuating month to month? How are you developing your demand forecast? Answering these questions is the first step to choosing the right supply chain strategy for your business.
- Know Your Product Portfolio
The mantra of one size doesn’t fit all can apply to supply chain strategy within the same business. Businesses that manufacture multiple different products shouldn’t necessarily use the same supply strategy for every product.
While a business may be positioned in a cyclical and seasonal demand market, it may still have product lines that exhibit linear and constant demand curves.
So when choosing your supply chain strategy, it is important to consider each individual product line as a separate supply chain and go through this process for each product line. This should be done to ensure that all product lines are supplying demand optimally.
- Where Are Your Customers Located
A significant but often overlooked aspect when choosing a supply chain strategy is where your customers are physically located? Do you have to ship internationally to these customers? Do you ship regionally? Do/can you even ship at all?
This is impactful on the supply chain strategy as it potentially creates additional obstacles and limitations. This is an industry/market-specific component due to the fact that a lot of businesses are local or don’t ship at all.
For businesses that do ship their products, if they currently only ship locally they can’t then go use the same strategy to ship globally.
Society now demands fast and free (at least cheap) global shipping, you as a business need to have a strategy implemented that accommodates as this influences market positioning.
- How Do You Manage Your Inventory
Whether your business manufactures custom furniture or paper party hats, inventory management has an essential role in your supply chain management. If you as a business have to ask questions like what do we currently have in our inventory? Where is that inventory? Did we ship that yet? How much is it costing us to hold this inventory? Then your current inventory management is very poor.
The size, complexity, and nature of your inventory have a significant role in determining what supply chain strategy you should implement.
- Where Are Your Suppliers Located
Similar to where a business’s customers are located, where a business’s suppliers are located also has an effect on the supply chain. If a business has suppliers on the other side of the globe, then its lead times will be longer than a business using a local supplier.
Within this context, lead times refer to the amount of time it takes a business to manufacture a product end-to-end.
This can affect the supply chain by causing a shortage or excess of inputs due to potential shipping issues. This then goes on to affect the business’s inventory, with the effects cascading through the entire supply chain.
This is another component to consider when developing your supply chain strategy, as your supply chain needs to be designed to deliver what your customers want when they want it. All while being as cost-effective as possible.
Aligning Your Supply Chain Improvements
The process of improving your supply chain is no easy task, it requires self-awareness to acknowledge inefficiencies and weaknesses in current processes. This can involve small changes to maximize efficiency or a total restructure to better capitalize on existing capabilities.
This is why we have created a Free Supply Chain Strategy Template that enables you to visualize your current supply chain strategy, helping you identify inefficiencies and potential areas of improvement to align your supply chain strategy with your overall business model.