Change Implementation Techniques for Creating a Sense of Urgency

Technique 2.71 Supply Chain Management

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Introduction

. Supply chains involve delivering goods and services to customers as quickly and cost-effective as possible. On the other hand, the best supply chains aren't just fast and cost-effective, they are also agile and adaptive, and they ensure that all organisations' interests in the supply chain stay aligned so as to provide them all with sustainable competitive advantages

. Companies' requirements from a supply chain are linked with the industrial cycle. When business is booming, executives concentrate on maximising speed; when the economy is slack, executives desperately try to minimise costs

. A contradiction is that organisations, using supply chains, become more effective and cost efficient but do not necessarily gain a sustainable advantage over their rivals

. The reason efficient supply chains cannot deliver goods are

- unexpected changes in demand and supply are not catered for, ie demand for a particular product changes without warning, such as changes in the market structures

- too much centralisation of manufacturing and distribution facilities in endeavouring to generate economies of scale

- only deliver or prescribe set loads, such as container loads, of products to customers to reduce transportation time, freight costs and the number of deliveries. This can mean that even though the product is in stock, the order is not enough to fill the set load criteria. Furthermore, the set load will supply the customer with excess inventory to his/her requirements. This can result in excess product being price discounted. These markdowns reduce the company profits, erode brand equity and anger loyal customers who bought product at full price

- obsession with speed and costs can cause the supply chain to break down during the launch of new products. For example, an attempt to lower costs by reducing inventory levels can result in inadequate supplies of product to meet a fluctuating demand. Furthermore, the ramping of production up and down can result in lack of time to fix problems in the manufacturing of the product and this can cause more problems with customers

In summary

"...supply chain efficiency is necessary, but it isn't enough to ensure that firms will do better than their rivals. Only those companies that build agile, adaptable and aligned supply chains will get ahead of the competition..."

Hau Lee, 2004

. The best performing supply chains have 3 qualities, ie

i) they are agile by reacting speedily to sudden changes in demand or supply

ii) they adapt over time as market structures and strategies evolve

iii) they align the interests of all the organisations in the supply network so that the organisation optimises the chain's performance when they maximise their own interests

Agility

. Objectives are to respond to short-term changes in demand or supply quickly, and handle external disruptions smoothly. With both demand and supply fluctuating more rapidly and widely, organisations usually play speed against cost. In the need to be agile it is better to respond both quickly and cost efficiently rather than play speed against cost. External shocks, like terrorist attacks (9/11), strikes, SARS epidemic, etc further emphasize the need for agility to handle natural disasters, terrorism, wars, epidemics, etc.. Need to develop contingency plans to handle emergencies

. Contingency methods include

- promote a continuous flow of information with suppliers and customers so that everyone can respond quickly

- develop collaborative relationships with suppliers so that organisations work together on all matters associated with the supply chain, such as designing or redesigning processes, components, products plus back-up plans, etc

- design for "postponement", ie design products so that they share common parts and processes initially and differ substantially only from the end of the production process

- build inventory buffers by maintaining a stockpile of inexpensive, non-bulky but key components, such as accessories

- have a dependable logistics system or partner that enables the organisation to regroup quickly in response to unexpected needs

- draw up contingency plans and develop crisis management teams, ie back-up plans

Adaptability

. Objectives are to adjust supply chain's design to meet structural changes in markets, etc and modify supply chain networks to strategies, products and technologies.

Need to keep adjusting supply chains to meet changing market needs, such as political and social change, demographic trends, economic progress, technological advances, etc. Need to have access to the latest data (including trends, patterns, etc) to identify the structural shifts. Some of the adjustments can include relocating facilities, changing sources of suppliers, outsourcing activities, etc

"...Smart companies tailor supply chains to the nature of markets...They usually end up with more than one supply chain, which can be expensive, but they also get the best manufacturing and distribution capabilities for each offering..."

Hau Lee, 2004

When launching innovative new products, it is important to remember that products embody different levels of technology that can be manufactured in different locations suitable for the different levels of technology. For example, Microsoft decided to enter the video game market in competition to Sony's PlayStation 2. Thus it outsourced hardware production to a Singapore-based organisation (Flectronics); this organisation realises that marketing and technical support will be crucial to the product's successful launch; as a result, production was done in facilities in Mexico (near USA) and Hungary (Europe). Sony countered by price discounting; Flextronics' response was to shift production to China. With the resultant cost savings, Microsoft was able to gain 20% market share of the video game market from PlayStation 2

. Methods include

- monitor economies all over the world to spot new supply bases and markets (building adaptable supply chains requires the ability to understand trends and the capability to change supply networks. Tracking economic changes - especially developing countries - as nations open up their economies to global competition and costs, skills and the rest of global supply chain operations changes, eg a rise of specialised firms in developing countries that can handle outsourced stages of production subject to adequate infrastructure linking vendors and customers)

- use intermediaries to develop fresh suppliers and logistics infrastructure, ie develop new suppliers to complement existing ones

- evaluate needs of ultimate customers, not just immediate customers (this goes beyond customer forecasting)

- create flexible product designs, ie ensure that product design teams are aware of supply chain implications of their designs. Designers need to be familiar with the three design-for-supply principles, ie commonality (ensures the products share components), postponement (delays the step in which products become different), and standardisation (ensures that components and processes from different products are the same)

- determine where companies' products stand in terms of technology cycles and product life cycles

Alignment

. Objective is to create incentives for better performance, ie incentive alignment. Successful organisations take care to align the interests of all organisations in the supply chain with their own. If any organisation's interests differ from those of other organisations in the supply chain, its actions will not maximise the chain's performance. Misaligned interests ‐ having regard for different interests - in a supply chain can cause havoc, eg inventory problems can be caused as a customer does not take ownership until the product physically enters its premises. Therefore the cost of the inventory is borne by the vendor/supplier. To handle this dilemma, organisations need to develop relationships so that there is a sharing of risks, costs and rewards equitably. These arrangements require trust and commitment by all parties involved

If the alignment is correct, it produces 2 results, ie

i) everyone in the supply chain has the same objective, ie to deliver the best service to customers

ii)the right to veto decisions of other members in the supply chain

. Methods include

- equitable exchange of information and knowledge readily with vendors and customers, ie all organisations in the supply chain have equal access to forecasts, sales data, plans, etc

- align identities, ie roles, tasks and responsibilities are identified clearly for suppliers and customers in order to reduce the scope for conflict

- align incentives, ie equitably share risks, costs and gains of improvement initiatives so that the supply chain return is maximised for everyone. This involves understanding and predicting possible behaviours of supply chain partners in light of their current incentives. If need be, redesign incentives to partners in the supply chain in a way that is in the best interest of the entire supply chain. Furthermore, there can be disincentives for non-performance

In summary

"...companies must give up the efficiency mindset, which is counter-productive; be prepared to keep changing networks; and, instead of looking out for their interest alone, take responsibility for the entire chain. This can be challenging for companies because there are no technologies that can do those things; only managers can make them happen..."

Hau Lee, 2004

(source: Hau Lee, 2004)

 

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