Supply Chain Decisions - Make Sure You Understand the Dollars and Sense

  • Written By: Jim Brown
  • Published On: July 21 2003



Decisions That Count

Companies make decisions about their supply chains every day. The decisions may relate to introducing or retiring products, making changes to manufacturing or distribution capacity, or modifying market segments, channels or customers. In their efforts to improve productivity, companies also make decisions involving the introduction of new processes, outsourcing, new supply structures and technology. When companies face these decisions, they must make trade-offs between a number of strategic and operational options. The selection between these options can have a very large impact on the success or failure of the company. Decision-makers know that the answers have to be right, because they result in the commitment of significant company resources and expose the company to significant positive or negative impact in the eyes of the customers and shareholders. Not to mention the impact it can have on the career of the person making the decision.

Supply chain decisions, like the ones mentioned above, are an executive's responsibility. That is what they are paid for. Too often, short-term pressures and limited analysis resources cause these decisions to be compromised. In market conditions where there is ample growth in demand, errors made in these decisions were often masked. Today's economic conditions are significantly different, and the repercussions of flawed decisions are becoming increasingly transparent in terms of a company's financial performance. In fact, the differences between high performing and poor performing companies will increasingly depend on the choice of strategic supply chain options and their execution.

So how does a company ensure that decisions are being made in the best possible way? Do they have the necessary information and tools to efficiently find all of the available options and analyze them effectively?

This is Part One of a two-part report.

Part Two discusses incorporating real costs into supply chain decisions.

There Has To Be A Better Way

To understand the challenges in making supply chain decisions, let's take the case of a Fortune 500 business that manufactures and sells industrial products. The business was being commoditized and its' brand was losing its strength with the onslaught of products from low cost countries. The company had acquired another company resulting in excess capacity, so some capacity restructuring was in order. Outsourcing to low cost countries was another option to be considered if lead-time issues could be addressed. One other option was adjusting the product mix by increasing focus on some products and dropping others. At the same time these options were being considered, there was continued investment in capital upgrades and productivity tools such as "Lean" manufacturing techniques.

All of the decisions were being made based on the best judgment of individuals and often with demonstrated ROIs. But were these the right choices? If the company could consider all of these decisions as a whole, would the decisions made work together to yield the financial goals that the company had set? Could the choices made stand up to potential changes in business conditions? The company wanted to ensure that the various decision-makers within his company were considering all these aspects sufficiently and making the right decisions. Another concern was making sure that the decisions weren't impacted by a natural tendency to quickly eliminate options that were considered to be "infeasible" due to a variety of perceived issues, biases, politics and, last but not least, the lack of time and resources to properly evaluate them. This early elimination of options can cause a company to lose the opportunity to objectively view the various opportunities that may be available to them.

The resulting decisions, including the tradeoffs between the options, were very difficult to conceptualize and to visualize. There had to be a better way to make business decisions, so the company decided to use Supply Chain Cost Modeling and Optimization. By modeling the cost and operational elements of the entire supply chain, the company was able to analyze the impact that the decisions would have, either independently or as a whole, on the business and it's customers. As more options were identified and explored, the company was able to quickly update the model to view all the options and their implications as a whole. The decisions made based on the modeling and optimization techniques proved to be more valuable, and the people involved were more confident in their knowledge of the total cost impact of the different choices and how the choices impacted each other.

Identifying the Most Valuable Business Options

Supply Chain Cost Modeling and Optimization provides the structured and analytical method to define and solve business problems. By allowing simulation of operational scenarios, they allow "what if" analysis to be conducted and help companies view the potential impact in terms of P&L cost items.

As the supply chain becomes more complex and there are more competing business options, the number of viable choices becomes substantial. That is where the need for supply chain cost modeling and optimization techniques come in, by providing the ability to generate scenarios that produce reliable financial outcomes and are based on real-life business constraints. This changes the decision-making from a purely gut-feel or experience-driven approach to a structured, standardize, unbiased and systematic approach.

This approach can lead to scenarios not previously conceived of, for example options that are valuable but may be counterintuitive or politically unpopular. Cost modeling and optimization expands the value of the supply chain model from simply validating current options to identifying new options and understanding the synergistic value created by the combined effect of the various options.

This concludes Part One of a two-part report.

Part Two discusses incorporating real costs into supply chain decisions.

About the Author

Jim Brown has over 15 years of experience in management consulting and application software focused on the manufacturing industries. Jim is a recognized expert in software solutions for manufacturing and has broad experience in applying enterprise applications such as Supply Chain Management, Product Lifecycle Management, CRM and ERP to improve business performance. Jim created his consulting firm, Tech-Clarity Associates, to help make the value of technology clear to business. Jim can be reached at jim.brown@tech-clarity.com.

 
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