strategy+businessissue 70 SPRING 2013Designing the RightSupply ChainCompanies that align their operations to their strateg...
special section:                                the new functional leader                                Designing the    ...
uct among troops and individual Girl Scouts, tracking       style tailored to its own purpose and strategy. At Boozsales t...
Richard Kauffeld                       Curt Mueller                           Adam Michaels                            For...
•	 Value players develop low-cost supply chains           Exhibit 2: A Value Player Out of Sync withand pass savings on to...
strategy+business magazineis published by Booz & Company Inc.To subscribe, visit strategy-business.comor call 1-855-869-48...
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Designing the Right Supply Chain


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When a company's supply chain practices are directly aligned with its enterprise strategy, the result is superior performance and a strong market position. And yet, a true strategic fit between enterprise and supply chain strategy is all too rare in the business world. This article describes how to marry your strategic goals with your operational capabilities.

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Designing the Right Supply Chain

  1. 1. strategy+businessissue 70 SPRING 2013Designing the RightSupply ChainCompanies that align their operations to their strategy unleashsuperior RICHARD KAUFFELD, CURT MUELLER,AND ADAM MICHAELSreprint 00160
  2. 2. special section: the new functional leader Designing the Right Supply Chain Companies that align their operations to their strategy unleashfeature strategy & leadership superior performance. by Richard Kauffeld, Curt Mueller, and Adam Michaels When a company’s supply chain capabilities are directly aligned with its enterprise strategy, the results tend to be superior performance and a strong 1 market position. Among the organizations that have demonstrated this is the Girl Scouts of the USA, which annually funds about two-thirds of its operat- ing costs by enlisting its members, mostly girls age 9 to 14, to sell its well-known cookies. In 2011, the or- ganization simplified its product line from 28 varieties to 11, with special emphasis on the six most popular items (Thin Mints, Samoas, Tagalongs, Trefoils, Do- Si-Dos, and Lemon Chalet Crèmes). Variety beyond a handful of perennial favorites did not matter to cus- Illustration by Keith Negley tomers who were primarily looking to support their community Girl Scout organization. Simplicity en- abled the Girl Scouts to improve the effectiveness of a supply chain strategy that depends on a distributed, young volunteer “workforce” that comes together for only a few months annually. Suddenly, the tasks in- volved in this once-a-year capability—allocating prod-
  3. 3. uct among troops and individual Girl Scouts, tracking style tailored to its own purpose and strategy. At Boozsales to replenish the troop’s inventory, and getting the & Company, we often divide strategies into categoriesright varieties of cookies to each participant—were all based on archetypal approaches to the market, whichmuch easier. Not only did the change allow the Girl we call puretones. These are some of the most com-Scouts to be more effective, focusing their efforts on monly found puretones in global enterprises.sales techniques rather than balancing inventory, but it • Innovators are known for introducing new andalso taught the young sales force “about supply chain creative products and services to the market; they needissues and the need for efficiencies,” as Denise Pesich, to balance their forward-looking creativity with practi-Girl Scouts vice president for communications, said in cality and user acceptance. Apple, 3M, P&G, and Hon-an article on the Atlantic website. eywell are noteworthy examples. The Girl Scouts concentrated on simplifying their • Premium players offer high-end products or ser-supply chain to better support their mission, but lead- vices and superior customer service. Their differentiated feature strategy & leadershipers at companies such as Procter & Gamble (P&G), position allows them to demand a higher price. SuccessCoca-Cola, Amazon, or Walmart face a different form as a premium player is not as easy as it might seem; itof the same problem: the sheer complexity of supply requires discerning and managing the costs of increasedchain management for multi-category, multi-market quality and attentiveness. Nordstrom, Herman Miller,enterprises. Their need to align supply chain solutions and BMW are successful premium more effectively support their company’s strategies is • Customizers make use of customer intelligence toeven more critical. And yet, a true strategic fit between offer tailored products or services to particular segmentsenterprise and supply chain strategy is all too rare in of their market. They can flexibly adapt to changing de-the business world. Few companies have been able to mand. The challenge they face is balancing this flexibil-marry their strategic goals with their operational ca- ity with profitability. Well-known customizers includepabilities. Their supply chain leaders struggle with a Dell, Burger King (“Have it your way”), and direct-salemyriad of often conflicting demands from marketing, cosmetics firms like Avon and Natura.sales, engineering, manufacturing, and procurement. • Green companies are an increasingly commonWith little agreement across the organization—and no form of reputation player—building on the principle 2way to make or manage trade-offs—issues like cost, that sustainability is good business. They stake outcustomization, speed, and price are rarely addressed in a customer base by addressing the supply chain needsan effective cross-functional way. of low-carbon-emissions and toxin-free products; they Conversely, when a company is strategically coher- are ready to invest in differentiated technologies. Theyent, its supply chain can be a linchpin of superior per- must learn to manage a green supply chain at competi-formance. For example, clothing retailer Nordstrom tively low costs. Some differentiated green companiesuses extremely sophisticated inventory and product are GE, Seventh Generation, and automakers such aslife-cycle management capabilities to move products Toyota and GM (those building businesses around hy-through its channels in half the time of Macy’s or Saks brid or electric cars).Fifth Avenue, cycling through each season’s new fash- • Aggregators combine offerings from a variety ofions more efficiently and effectively than its competi- sources, providing people the convenience of a one-stoptors. This is a major factor in Nordstrom’s consistent solution. They may manufacture some products andability to outpace its rivals in profit margins and EBIT outsource or subcontract for others. Their concerns areas a percentage of sales. related to differentiation: They must ensure that the Would Nordstrom’s supply chain model work for value of their own contribution is recognized. Someyour company? Probably not. Every successful company examples of aggregators are Amazon, eBay, and W.W.should have an operational design and management Grainger.
  4. 4. Richard Kauffeld Curt Mueller Adam Michaels For an interactive online tool that can help you diagnose is a partner with Booz & is a partner with Booz & is a principal with Booz & the value of your supply chain Company based in New York. Company based in Chicago. He Company based in New York. in light of your company’s He develops supply chain specializes in value creation He specializes in product strategy, see and channel strategies and through supply chain strategy launch strategies and supply SCCprofiler. supporting capabilities to en- and building operations capa- chain solutions for consumer able growth and efficiency for bilities for consumer, retail, product manufacturers and consumer products companies and industrial companies. media companies. and retailers. Exhibit 1: Supply Chain Models as Fit for Purpose PURETONE VALUE PROPOSITIONS The essential task in developing a capabilities-oriented supply chain is to match the supply Pr Gr em nova chain’s basic characteristics (represented by the 12 models at the left) against your company’s ee Va Cu Ag pany n C izer ium strategy (represented by the puretone archetypes at the right). lu In sto er gr eP om eg Pl m l ay ay ato SUPPLY CHAIN MODEL AND CHARACTERISTICS SAMPLE METRICS to er r r Go-to-Market “Profit to serve” and other metrics used in Responsiveness to customer demand pricing; revenue growth by target segmentfeature strategy & leadership Product Life Cycle and Launch Time Average product development time; average Ability to introduce new offerings quickly and easily, and product life cycle; percentage of custom willingness to cannibalize older versions content (vs. shared) in the product Complexity Management Percentage of revenue from items introduced Modular mix of products, tailored processes and material within past three years; average revenue and flows, minimal redundancy and confusion cost per item Process Technology Rework costs or time as a percentage of total Investment in the latest information and manufacturing output; yield percentage; year-over-year labor equipment and software cost reduction Make-vs.-Buy Decisions Return on investment cost; time between Reviews of production capabilities to assess whether sourcing reviews in-house or external manufacturing is optimal Manufacturing Footprint Manufacturing cost per unit; overall equipment Arrangement of facilities to complement important effectiveness and utilization; logistics cost per markets, maximize serviceability, and reduce costs unit; quality scores by location Distribution Network Order and delivery cycle times; proportion of 3 Maximum efficiency, speed, and flexibility in delivery and service that is “on-time in full”; cost-to-serve inventory movement (as a percentage of revenue) Inventory Planning Internal and external order fill rate; forecast Sales and operations planning to facilitate inventory and accuracy; error rate material replenishment Strategic Sourcing Supplier performance (including on-time Working relationships with optimal suppliers to stabilize performance); right quantities and conditions; production price and cost reductions over prior year Continuous Improvement Production error rate; average unit cost; yield; Efforts to increase operational excellence, including lean rework as a percentage of total production; and Six Sigma methods increase in overall equipment effectiveness Network Policies Order and delivery cycle times; customer External distribution and logistics practices, focused on satisfaction scores strategy+business issue 70 improving efficiency and boosting service levels Process Effectiveness and Execution Overall equipment effectiveness and quality; Overall supply chain processes availability; changes in quality rating Source: Booz & Company
  5. 5. • Value players develop low-cost supply chains Exhibit 2: A Value Player Out of Sync withand pass savings on to customers. They may also lever- Its Supply Chainage savings to make additional investments elsewhere. This self-analysis of the supply chain of a real company, which preferred to remain anonymous, shows how the skills needed to compete as aThey soon discover that to avoid being commoditized, value player (shown by the gray shading) did not match its existing strengths (the orange line). Without correcting this mismatch, thethey cannot let low cost affect quality or service. Ikea, company could not realize benefits from supply chain improvements.Walmart, Southwest Airlines, Tata Motors (maker of the The numbers represent the strength level or importance of each skill, as judged by company executives (4 is the strongest).Nano), and McDonald’s are all value players. In real life, of course, every successful company is REQUIRED FOR WAY TO PLAY (IMPORTANCE) CURRENT COMPANY CAPABILITIES (STRENGTH LEVEL)unique. The most successful strategies tend to be com-binations of puretones, representing highly distinctive Go-to-Marketways to play in the market. Amazon’s value proposition, Process Effectiveness 4 Product Life Cycle and and Execution Launch Timefor example, involves being an aggregator, a value play- features title of the article feature strategy & leadership 3er, and an innovator. It sells products from extremely Complexity Network Policies Managementvaried sources at very low prices, using its own form of 2online marketing and innovative logistics. Elements of 1 Continuous Processall three puretones are essential to its strategy, and are Improvement Technologyreflected in its value chain. For each of the puretone archetypes, a different mix Strategic Make-vs.- Sourcing Buy Decisionsof supply chain characteristics is required. Thus, in de-signing your supply chain, it’s helpful to know whichpuretones represent significant elements of your compa- Manufacturing Inventory Planning Footprintny’s way to play. Typically, a company can focus invest- Distribution Networkment on only three to five ways to improve its supplychain at one time. Exhibit 1 shows 12 of these opportu-nities for leverage, and the puretone value propositions Source: Booz & Companybest matched to them. Companies don’t have to excel 4at everything; they can determine the kind of organiza-tion they want to be and then develop a supply chain players have organized their supply chains in other waysagenda that matches this aspiration. (see Exhibit 2 ). If your company is a value player, you will benefit Alignment between your strategy and your sup-from supply chains that emphasize complexity man- ply chain has one final benefit. Because each form ofagement; make sure every new product conforms to leverage is associated with different metrics, it gives youexisting manufacturing processes and, thus, can be of- an effective way to measure the ongoing health of yourfered at a relatively low price. Manufacturing footprints supply chain. Keeping track of the right metrics is cru-should also be a priority. Place factories in developing cial, helping to differentiate you from competitors onnations, and adopt less-expensive logistics approaches, a daily basis. As an enterprise with an eye on its valuesuch as railroads and container shipping. Under the proposition, you can reap substantial rewards from hav-rubric of strategic sourcing, cultivate long-lasting sup- ing this sort of very capable supply chain. +plier relationships, with high levels of cooperation, so all Reprint No. 00160stages of the supply chain can be constantly improved.Indeed, continuous improvement should be an overallarea of emphasis: Implement lean manufacturing tech-niques in all your facilities. Unfortunately, many value
  6. 6. strategy+business magazineis published by Booz & Company Inc.To subscribe, visit strategy-business.comor call 1-855-869-4862.For more information about Booz & Company,visit••• Park Ave., 18th Floor, New York, NY 10178© 2013 Booz & Company Inc.