Someone from P&G once said, “80% of the cost of the supply chain is set by the design, but we spend about 80% of our time trying to fix it once it’s built.” Now of course, no one wants to make major structural change to their supply chain frequently, so getting it “right” is vitally important.
So what is “right?”
Supply chain professionals often talk about “right” in terms of customer service, flexibility, inventory levels, cost or gross capital employed. What they are striving to define is value. Value is a measure of functionality divided by cost. This is the fundamental trade off.
Functionality is measured in terms of:
Customer Service. Although there are many definitions of customer service, in the context of supply chain design, our definition is, “the on-time, in-full delivery of products to customers.” Although “in-full” is definitive, “on-time” is a value agreed between the customer and the supplier. Differentiating customers based on delivery time gives the supplier a degree freedom to manage the supply chain and reduce inventory and cost.
Flexibility. Generally for flexibility we talk about “range” and “response.” Range covers maximum and minimum values, while response covers the speed at which the supply chain can react. Range and response are relevant to volume, mix and the introduction of new products. There is a clear trade-off between flexibility and cost and inventory. This determines the supply chain design bandwidth. In many cases flexibility has been built into individual nodes within the supply chain without considering the opportunities which are available from say international sourcing. So does a deodorant business with a factory in the northern hemisphere and another in the southern hemisphere both need to cope independently with seasonality i.e. volume flexibility or could it deploy International Sourcing?
Quality. Although in principle it is possible to trade off quality against cost, over the past twenty years or so in many markets this has become less of an option. Product quality at the point of sale, based on market place standards, is non-negotiable.
Environmental Impact. The environmental impact of the supply chain is generally set by company policy and is therefore non-negotiable. What does become important is minimising the impact on cost through supply chain design. For example, collaboration with other companies in distribution can have a dramatic impact both in terms of carbon footprint and cost.
Cost and gross capital employed (fixed and variable) are variables that emerge after the “right” functionality of the supply has been defined. However in some cases, cost can be a constraint in which case, part of the functionality of the supply chain may be compromised. In these circumstances, the risk that this compromise will have a significant impact on business performance needs to be assessed.