It is that time of year when leadership starts talking about strategy. The result will be very nice-looking slides that will be discussed in every town hall for the next month. When you are looking at the presentation, two questions will go through your mind.
First, how relevant are these initiatives to the company? You’ll have your own thoughts the direction the company wants to go in and wonder how serious the enterprise is about it. You’ve seen before how leaderships fails to follow through on their own guidelines or change direction for some reason or another, making it hard for people on the ground to understand what the priorities are.
The second question that arises is: What’s my role in this in strategy? This is where you try to understand the impact it will have in your area and what will be required of you to support these strategic objectives Translating impactful PowerPoint slides to what we actually do day-to-day is easier said than done.
COVID showed business leaders the importance of Supply Chain Management so there is usually a section that links the overarching business plan to this area in a way that helps everyone involved in the process. As planning professionals, this is where we should focus our attention and seek to understand not what good enterprise strategy looks like but what good supply chain strategy looks like.
The Link Between Business Strategy & Supply Chain
“Plans are worthless, but planning is everything”, said Dwight D. Eisenhower. What we do as Demand Planners will invariably fail to reflect reality perfectly but are nevertheless valuable—indeed critical— to responding to demand and changing marketplace dynamics.
During the strategy ideation stage, the main question that the planning organization needs to answer is how to create value—value for the customer, employees, and even for our suppliers. If this is done successfully, it will set your company apart from the rest. I will not delve into the details of how this is done, rather I will provide an example of how to link this into the value chain.
Supply chain is a pilar that supports some of the core business objectives. How does your company’s strategy allow you to compete in it’s chosen market? And what supply chain model will support it most effectively? Supply chain can create value for our customers either through consistent and reliable delivery, truly short lead times, or great pricing. It is important that we choose the supply chain model that best aligns with the value creation strategy. Some examples of these are if we produce to a forecast, make to stock, only manufacturing when an order is received, or even only start designing the product once the order is confirmed. The following is a real-life example.
Real Life Example of a Planning Model
This happened during my first experience working in supply chain as a Master Scheduler. I worked for a factory that produced brass goods and had a wide assortment of products that kept growing over time. The main idea was to be able to manufacture these products in a reasonable amount of time and with an optimized amount of working capital. So, the model we used was Late Configuration. The company offered a wide variety of finished goods but with a lot of commonalities at the component and subassembly level.
The intent of the Late Configuration model was to wait and produce at the latest point of differentiation possible. To accomplish this, for example, you create buffers before a color change, or before you assemble the product and add a different option like another handle or trim. This allows you to absorb some of the demand variability of the finish goods in a subassembly that is common to several products, thus smoothing some of the variation by netting out puts and takes in the ordering pattern across different SKUs.
At the same time, it lets you reduce lead time as you are not starting productions from scratch and it has an inventory benefit as well, since the valuation of a semi-finished product is less than the finish goods and has a lower storage cost.
Finally, the supply signals were based on a pull system, using Kanban. This meant that if there was no demand, production would not be trigged and inventory would be kept at a component level. Components were acquired based on a forecast due to the long lead times, being sourced from Asia. This meant that if demand dropped after you filled the pipeline of semifinished products, all the excess inventory would be accumulated at the component level, which costs less and is cheaper to store. Obviously, the tradeoff is that you need to flex capacity. Adjusting staffing was the main way to change the output.
Real Strategy Vs Pie in the Sky
At the end, any strategy that you choose will be different depending on how you are creating value for the stakeholders in your business. But there is a sure way to identify a real strategy versus a wish list. Look at the tradeoffs. If you see a statement where the organization wants to provide an elevated level of service with little to no inventory, long lead times from suppliers and at a low cost, then this might be a clue. The classic tradeoff example that comes to mind when discussing this topic is about three attributes in a product or process. You can be fast, good, or cheap—but you can only pick two. This helps clarify supply chain decisions in a quite a straightforward way.
If you consider the Late Configuration example from the previous section, the model helped you reduce inventory, align production to demand, and have a reasonable lead time. But if demand changed a lot, you would have idle resources at the shop floor, creating additional costs or manufacturing variances to the financial plan. Another strategy for the company in question would be to produce all the finished goods assortment per the forecast. This could optimize manufacturing costs, reduce set ups, and slightly reduce lead time but will increase inventory and storage costs due to the complexity in product mix.
Going From Strategy to Execution
“Culture eats strategy for breakfast”, said Peter Drucker. This highlights that while strategy is critical, it requires buy in and support from the whole organization to bring it to life. Since Management by Objectives was introduced in the 1950’s, the intention of closing the gap between what needs to be done and what is executed has been a very intensive journey. The combination of academic research and practical approaches has yielded a few frameworks that we can use. The main idea behind these concepts is that metrics drive behaviors and these in turn create a culture of execution in the company.
So, the next logical step is to go from top-level guiding principles to long term objectives, zoom into what the annual operating plan will look like and, finally, link this to Key Performance Indicators (KPIs). This is a straightforward process, and there are several methodologies available, like the Hoshin Kanri matrix if you are a fan of the Toyota Production System, or a balanced score card if you prefer classical methods.
The important aspect is to understand which part of the high-level objectives your area will have a real impact on. Then the priority is to cascade the measurements that are important for the organization in general into specific metrics that your department will own and deliver. In my experience, this is a terrific opportunity to spend some time together with your team (offsite to avoid distractions) and talk about how the supply chain organization creates a positive impact in the company and how we can measure it. At the same time, you can combine this with some team building activities to create relationships conducive to the development of a high-performance team.
A widely used method to define and deploy objectives is SMART Goals (Specific, Measurable, Attainable, Relevant and Time-bound). A recent trend, which is now one of my favorites, is FAST Goals (Frequently-discussed, Ambitious, Specific and Transparent), created by Don Sull from MIT. The main components of the former are intensive communication and stretch targets; both are key factors in developing the necessary culture. I will go back to my own experience to explain how this works in practice.
Several years ago, I was hired for a turnaround role as a Supply Chain Manager for a manufacturing site. The challenge was to increase the service level. The metric we had in place was on-time in-full (OTIF). After getting my head round their process, two things became clear. First, the bottleneck was at the finished goods warehouse. Second, Production was focusing on their own efficiency metrics. From an operations perspective, we had to add an additional shift and create Standard Operating Procedures (SOPs) to remove the constraint; this was very straightforward. However, from a scheduling perspective, we had to implement a daily cadence to discuss production deviations from the plan and understand the root causes. At the same time, we published the metric all over the plant, including the cafeteria.
At first, it was hard to stomach lunch while looking at an extremely low fill rate (OTIF). However, it generated a lot of internal discussion and a noticeably clear sense of priority. This created a tense but positive environment that supported the daily scheduling meeting and finally the process enabled the team to change the priority to mix over volume and hitting committed dates versus reducing the amount of set ups at the plant. After a few weeks of this, the metric started taking off and since it was very visible all over the plant, it generated a positive feedback loop that helped gather engagement from everyone and changed a very defeatist environment into one where everyone wanted to participate and contribute.
This allowed us to move the meeting cadence from daily to weekly and it became part of the operational review and culture of the plant. From this example you can see the importance of frequent communication and how a prominent level of transparency around metrics helps link the strategy directly into the culture of the organization.
One last word of caution when deploying FAST Goals: It is extremely critical that when reviewing stretch targets that there is a range in place and that the incentive plans for leaders are set up in tiers, so you can recognize ‘good’ and really reward the achievement of ambitious goals.
The Framework in a Nutshell
- Identify the role that Supply Chain plays in the bigger picture and make sure that the model fits the strategy.
- Call out the tradeoffs in the supply chain strategy to clearly define priorities.
- Cascade the business strategy all the way down to metrics that will define what success looks like. This will generate visibility of the impact that supply chain has in the organization.
- Make sure that there is frequent discussion around the metrics and the current performance of the team. Recognize ‘good’ but really reward excellence.
- Make sure that these processes are incorporated into the culture of your team; this will enable the creation of a high-performance organization.
Next time you are sitting in the strategy town hall, make sure that you apply some of these ideas. This will change your perception of these meetings from pretty slides with all power and no point (pun intended) into meaningful ways to make a difference in your organization.
This article first appeared in the winter 2022 issue of the Journal of Business Forecasting. To access the Journal, become an IBF member and get it delivered to your door every quarter, along with a host of memberships benefits including discounted conferences and training, exclusive workshops, and access to the entire IBF knowledge library.