Seven Decision-Making Capabilities to Drive Supply Chain Excellence

     

The topic of supply chain excellence is extremely broad and spans a smorgasbord of topics associated with People, Process and Technology. However, if we focus on key decision-making capabilities that can help companies achieve supply chain excellence, we come up with the following seven areas. By mastering these capabilities, a company is almost guaranteed to succeed in the industry. In fact, supply chain decision making capabilities can result in 2-5% of revenue in bottom-line profit.

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1. Understand the role of supply chain in meeting core competency

Supply chain has traditionally been looked at as a cost center or a service center. We continue to see surveys in the market place that reflect that supply chain has not been recognized as a key element to raise revenue and gain a competitive advantage. The bottom line is that, if the core competency of an organization is to make their customers the center of their business, then supply chain better have the same focus. If building new, innovative products is the core competency of an organization, then time to market for products should be the key focus of the supply chain.

2. Make strategic decisions and convert them to actionable plans that operations can implement

Strategic decision making often takes place in different processes and systems as compared to operations. This is perfectly fine as long as these are integrated from a process perspective. In other words, any strategic decision that has been made needs to immediately reflect – and be informed by – its impact on operational processes. Any operational constraint or misalignment that is large enough will have an impact on the strategy already in play. This bi-directional communication is critical to supply chain excellence.

Sales and Operations Planning (S&OP) is the process that is supposed to help provide the bridge between strategy and operations. Unfortunately, it has been relegated to a completely operational focus by the market at large.

3. Develop analytics driven optimized plans versus heuristics driven in-feasible plans

One of the key reasons why S&OP fails to achieve any semblance of alignment between strategic decision making and operational execution is the lack of ability to respect constraints between processes, where strategic planning is driver and hypothesis based with limited ties into business realities. Analytics driven optimized planning takes into consideration business realities (i.e. constraints, fixed/variable costs are they are incurred) and supports what-if analysis across multiple scenarios to arrive at a go-forward plan that is not only optimal for the business but that seamlessly feeds into the operational plan. This will ensure that the operational plan is explicitly aligned with the optimal strategy and that if it goes out of bound, it can be automatically flagged and corrective actions can be taken.

However, most organizations don’t focus on developing optimized plans — instead, they develop infeasible heuristics plans that leave significant value on the table. Worse still, the organizations have a misconception that it is not possible to develop optimized plans and rely on heuristics solutions that work only for the situation they were designed for.

4. Make course corrections and modify the plan based on real-time inputs

Agility is a key enabler of supply chain excellence. In order to be agile, one has to be able to identify deviations, make course corrections rapidly, quantify the impact on plans and re-map plans in a rapid fashion. Having an automated, constraint-driven system makes it very easy to identify gaps in performance. It essentially enables companies to shine a spotlight on areas of improvement that might otherwise be overlooked.

5. Drive on-boarding and retention of analytics talent

Data science and analytics are touted to be the next big area of growth among employees all over the world. The reason for this is definitely the explosion of data across all facets of a business. Companies today see a distinct gap in availability of trained employees in the field of data science and analytics, yet they’re unfortunately not doing anything to resolve it. There should be greater focus in sending key employees to MBA courses that teach better understanding of analytics-based decision making and managerial accounting. The employees who are identified as analytics oriented must be recognized and placed in a stronger position of influence. In order to accelerate the infusion of analytics DNA into an organization, leverage partners that specialize in analytics.

6. Understand how cost & revenue are incurred and tie them to decision making

Most supply chain organizations think of revenue as volume multiplied by price, when in reality their companies spend enormous energy in marketing, trade promotions, bidding and discounting that can drive revenue up or down, and which affect the price on the margin. Similarly, they think of unit costs as fixed and stable, whereas reality indicates they are driven by volume, product mix, input costs and other factors in a highly non-linear way when considering the myriad ways costs are incurred: per unit, per batch, per truckload, per hour, per shift, etc.

Companies need the ability to create end-to-end business models driven by managerial accounting that dynamically understand the revenue, cost and marginal profit impact of their decisions on a forward-looking basis. At the same time, they must be able to report the solution in a way that reconciles with financial accounting. Organizations should have a way to see the total financial effects of the set of decisions on their business. These should be comparable directly to financial statements for the business.

7. Ability to understand opportunity costs associated with any decisions being made

To achieve supply chain excellence, companies need to understand the marginal profitability of all of their resources, specifically the constrained resources. S&OP provides a great launch pad — the supply planning function of most companies has already identified the constrained resources in their operation.

By next understanding what additional products could be sold with an extra hour of each constrained resource (or with an extra day, if that's your level of granularity), and netting the additional revenue against the additional cost of supplying the product, we can understand the value of releasing that constraint. If we can also understand a) the tradeoffs of the products that can be produced and b) which combination will generate the highest marginal profit, then we can truly optimize for profit and capital allocation.

Closing Remarks

In conclusion, in order to improve the supply chain excellence of organizations decision making skills can be improved by the adoption of analytics capabilities. A deep understanding of the costs, constraints, capabilities of the business will help supply chain professionals to truly become business partners and attain their rightful place in the board room.

Editor’s Note: This post was originally published March 20th, 2016 and revised September 30th, 2018.

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