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APICS Operations Management Body of Knowledge Framework, Third Edition

2.2 Supply chain strategy

Supply chain strategy considers the following, as well as all the elements of operations strategy listed previously.

2.2.1 Building strategic partnerships

One effective way to reduce costs and improve service in the supply chain is to develop strategic partnerships. These alliances should be chosen based on the overall strategy of the firm, and are typically limited to suppliers of strategically important goods and services. These partnerships are based on trust and rely on predictable communication streams and management systems. Rules of engagement between the parties normally include how schedules are communicated, how engineering changes are executed seamlessly, how engineering expertise is shared, how often deliveries are expected, how often demand expectations are forwarded or otherwise made available to the supply chain, and how suppliers are involved with product and processes at the customer’s site.

Other considerations in these partnerships include what securities are offered in terms of longer contract expectations, defining options and features and their lead time expectations, and any other communication requirements specified by either party.

2.2.2 Insource/outsource (make-buy)

Outsourcing decisions generally are made to improve service or cost for the supply chain. An outside firm is selected to provide a good or service that currently is provided internally. Outsourcing normally occurs when off-site resources are better suited for a particular task; however, these tasks typically are not core competencies of the firm.

Some important factors to consider when deciding whether to insource or outsource: costs of production; costs of transportation; costs of ordering, which can range from a simple pull signal to bulk orders in more complex systems; costs of delivery time, such as transportation time for a part or service agent; quality assurance of the potential supplier; and the loss of proprietary processes or other trade secrets.

Also influential are any flexibility benefits the supplier can offer, especially where the supplier might be able to trade capacity or products between multiple customers, such as a freight forwarder using truck space to ship product from more than one customer, and any other competitive considerations, such as the supplier’s relationship with the firm’s competitors.

One of the most frequent areas of outsourcing in recent years is in the use of third party logistics (3PL) providers. This usually means subcontracting traffic operations, but sometimes more comprehensive services are provided. This choice is based on the same cost-benefit analysis as any other sourcing decision. In many such decisions, economies of scale are brought to bear in the 3PL’s ability to negotiate with freight companies. Unique skill and knowledge requirements drive many global shipping and receiving transactions; subcontracting these duties is often attractive due to cost considerations.

2.2.3 Drivers of supply chain performance

The drivers for performance of the supply chain are no different than those for the end member of the supply chain, or the customer. These drivers include quality, speed, delivery fidelity, flexibility, pre- and post-service, and cost, as well as the following factors.

Facilities. Supply chain performance often is affected by the design and location of facilities. Having facilities in close proximity enables flexibility as well as ease of communication. Network optimization studies can be performed to design a network of manufacturing sites, service areas, and distribution centers to deliver the lowest cost with optimal inventory and capacity levels.

Inventory. Inventory can improve supply chain flexibility by acting as a buffer to decouple supply from demand when appropriate.

Transportation. Transportation decisions can make major differences in both benefits and costs. Air freight is fast, but it is also expensive. Ocean freight can be economical but add weeks to the cumulative lead time. Speed and flexibility are factors in a total cost analysis, given the global competition in markets.

Information. Another major influence on supply chain effectiveness is the ease at which information is shared up and down the chain. Collaborative planning efforts are where suppliers and customers make joint decisions regarding costs and service risks. Information elements can include demand, new product plans, product design changes, and consolidation of freight into milk runs.

Sourcing. Sourcing decisions are important within the supply chain and rely on the maintenance of standards and policies. Changes to products several levels down the chain can manifest as problems at the end-user level. Changes to critical products and components need to be communicated and even approved by other parties further down the chain.

Pricing. Pricing is perhaps the most important strategic decision. Whether price is set high, low, or in the middle sends a strong message to all members of the supply chain, including competitors, customers, suppliers, and potential new entrants. Price must be set in concert with the firm’s overarching strategy of being a differentiator, a cost and price leader, or a niche player.

2.2.4 Synchronization

Synchronization is the simultaneity and speed of movement of information, funds, and goods or services through the supply network. Scheduling the supply chain effectively requires a clear demand signal to reach the extremities of the chain. Knowing when products are needed, where the inventory buffers will be held in the supply chain, and what the flexibility requirements and rules of engagement are greatly increases the overall performance of the supply chain. This flow and pace is enhanced by the free sharing of information and data.

2.2.5 Integration of suppliers, internal supply chains, and customer systems

The integration of supply chain elements is the essence of an effective supply network. Collaborative planning and sharing of information and data is critical to synchronized, efficient flow of material to the end user of the supply chain. Some concepts and commonly used acronyms in supply chain integration include the following.

Supplier relationship management (SRM). SRM is the focus on collaborative planning goals and processes between customers and their suppliers.

Internet supply chain management. With the introduction of the internet into everyday commerce comes the need for structured coordination of this commerce. Complex networks have developed that require free-flowing data streams. A major online bookstore is an example where many book suppliers are networked to create a virtual bookstore with almost unlimited resources. Stock balances and availability are widely visible through the network.

Customer relationship management (CRM). CRM is about understanding the customer and making sure that process design appropriately supports the customer and that communication streams are frequent and flow freely. Handshake management is often used in the description of CRM and refers to well-understood, well-defined expectations and accountability for those expectations. Communication is extremely important in developing an improved understanding of the customer.

2.2.6 Breadth of activities (designing, planning, controlling)

The activities within supply chain management are diverse and numerous for designing, planning, and controlling. In many respects, these activities correspond with the activities of a single business, but on a scale that incorporates the needs and capabilities of several businesses within a supply network with the goal of enabling the entire supply network to function as a single, virtual entity.

2.2.7 Reverse logistics

In many supply chains, the need to take inventory back to the source may arise. Examples include companies that process warranties and remanufacturers requiring cores returned for reconditioning. Often, inbound freight can be coordinated with outbound freight, lowering transportation costs. Other times, considerations such as consolidation at collection points are taken. Sustainability needs are playing an ever-increasing role in driving the growth of reverse logistics as firms are driven, sometimes by legislation, to collect and properly recycle goods they have sold. (See section 2.3.8.)

2.2.8 Product sustainability

Product sustainability is the ability to produce and distribute product over time without exhausting nonrenewable resources and in a manner that minimizes the impact on the environment.

2.2.9 Regulatory compliance

All businesses must be aware of governmental regulations and required compliance. Examples of regulations in the United States include the Sarbanes-Oxley Act regarding ethical practices and generally accepted accounting practices (GAAP) regarding financial reporting. As trade opens across the world, more and more countries add regulations, making regulatory compliance of global companies more complex.

2.2.10 Global considerations

As trade is opened to global sources and customers, many global considerations are needed to cover the wide array of possibilities in customer requirements.