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Page 1: Five ways to simplify your supply chain - Universidad Icesi · Five ways to simplify your supply chain Rick Hoole PRTM, Abingdon, UK Abstract ... Wal-Mart, and Zara are transforming

Insight from industry

Five ways to simplify your supply chainRick Hoole

PRTM, Abingdon, UK

AbstractPurpose – To provide five ways of simplifying the supply chain.Design/methodology/approach – Uses the Complexity Reduction Framework to break down supply chain complexity into its component parts.Findings – Reveals that ongoing globalisation brings increased complexity to virtually every aspect of the business world, and supply chains are thelatest to be affected; thus adaptability has never been more crucial. Many company failures can be traced back to an inability to adapt rapidly tochanging market expectations; overly complex supply chains are not adaptable. It is best to take some of the complexity out of the supply chain.Originality/value – By simplifying the supply chain process overall performance will usually be enhanced, leading to more consistent quality, loweroperation costs, and inherently greater responsiveness; and this will most certainly yield more satisfied customers.

Keywords Supply chain management, Quality improvement

Paper type Viewpoint

With the acceleration of global competition in the pastdecade, supply chain performance has become a criticalsource of sustainable advantage in many industries. Totalsupply chain costs can vary by as much as 5 per cent to 6 percent of annual revenues between companies in the sameindustry sector, based on PRTM’s benchmarking of morethan 500 supply chains. Our research also shows thatcompanies with more mature supply chain practices arereducing costs faster than their less mature peers andachieving higher profit margins. Industry leaders are usingthis advantage to increase market share and drive out theircompetition. Through supply chain innovation, companieslike Dell, Wal-Mart, and Zara are transforming the industriesin which they compete.

To a large degree, the success of these companies stemsfrom their ability to reduce the complexity of their supplychain architecture. All aspects of the supply chain contributeto the problem: physical breadth and configuration,management, relationships with suppliers and customers,organisational structure, and information technologycapabilities.

The overly complex state of supply chains stems from anumber of causes. Competitive pressures that constantly drivebusinesses to expand their capabilities are partly responsible.In addition, most people in large organisations continue towear functional hats and, as one might expect, strive forfunctional excellence: As each function does what is in the

best interests of its customers or internal stakeholders, itplaces demands on other functions. This lack of an integratedapproach can introduce greater complexity. Finally,complexity simply evolves over time from the cumulativeoutcome of many seemingly unrelated functional decisions.These decisions are driven by business needs that evolve overtime, leaving in their wake supply chain artefacts that service aneed that may no longer exist. Just as the hard drive on yourcomputer needs to be de-fragmented from time to time, soyour supply chain needs to be simplified.

The case for simplification

It is often the case that one compelling insight can lead to thedevelopment of a multitude of best practices. Simplification isone such insight that can impact the entire supply chain. It isonly common sense that if a business process can besimplified, it will usually enhance overall performance, leadingto more consistent quality, lower operation costs, andinherently greater responsiveness. That powerfulcombination will most certainly yield more satisfiedcustomers (see Figure 1).

Approach to analysing simplificationopportunities

The Complexity Reduction Framework breaks down supplychain complexity into its component parts. Since the supplychain is a “process view” of a company’s logistical activities, itis appropriate that we break the supply chain first into itsprocess elements. The process elements, in turn, can bedefined by a number of other attributes, or “performancelevers” that can be modified to increase supply chainperformance. The framework of supply chain processelements and performance levers is illustrated in Figure 2.

The Supply Chain Operations Reference-modelw

(SCORw), endorsed by the more than 750 member

The Emerald Research Register for this journal is available at

www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1359-8546.htm

Supply Chain Management: An International Journal

10/1 (2005) 3–6

q Emerald Group Publishing Limited [ISSN 1359-8546]

[DOI 10.1108/13598540510578306]

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Page 2: Five ways to simplify your supply chain - Universidad Icesi · Five ways to simplify your supply chain Rick Hoole PRTM, Abingdon, UK Abstract ... Wal-Mart, and Zara are transforming

companies of the Supply-Chain Council, breaks the outboundsupply chain into four process elements:(1) plan;(2) source;(3) make; and(4) deliver.

“Plan” includes all the supply chain activities related todemand management, sales and operations planning (S&OP),and overall supply chain strategy planning. “Source” coversthe identification of supply sources and the execution ofmaterial and services sourcing on an ongoing basis. “Make”covers all the conversion activities performed internally.Finally, “deliver” includes the taking of customer orders andtheir fulfilment, including the management of the distributioninfrastructure and outbound transportation.

Five critical performance levers have the greatest impact onsupply chain performance:(1) configuration;(2) management practices;(3) external relationships;(4) organisation; and(5) systems.

Configuration addresses the physical assets and material flowsof the supply chain. The management practices lever coversthe specifics of how the supply chain is managed. Externalrelationships deal with how the company leverages thecapabilities of its partners and suppliers. Organisationidentifies who in the company is responsible for what and,perhaps more importantly, how performance objectives arealigned. Lastly, the systems lever refers to the retrieval ofinformation needed to make decisions and support leadingpractices.

A number of specific simplification techniques can beapplied to the supply chain. The key is to identify those thatwill improve the different performance levers for each supplychain process element. By creating a matrix, we can begin todevelop a comprehensive toolkit of simplification techniques,as illustrated in Figure 3.

Complexity reduction techniques

Starting with the plan process element and the configurationperformance lever, one’s first thought might be that there areno physical assets related to planning processes. So what dowe plan? Products. And are products not physical assets? It ispossible to simplify planning by changing the configuration ofwhat is planned. First, look for ways to reduce the number ofshippable products that must be forecasted. Consolidatingproduct and packaging configurations will further reduce thecomplexity of the planning process.

Moving to the next performance lever, managementpractices, we can simplify the planning process by makingmore products to customer orders, thus eliminating the needto forecast specific product configurations. One importanttechnique employed is postponement, which involves delayingthe completion of end products to the last possible point in

Figure 1 The case for complexity reduction

Figure 2 Complexity reduction framework

Five ways to simplify your supply chain

Rick Hoole

Supply Chain Management: An International Journal

Volume 10 · Number 1 · 2005 · 3–6

4

Page 3: Five ways to simplify your supply chain - Universidad Icesi · Five ways to simplify your supply chain Rick Hoole PRTM, Abingdon, UK Abstract ... Wal-Mart, and Zara are transforming

the supply chain. Dell has done this with PCs and, as a result,has greatly simplified its forecasting process while bettercatering to the needs of different consumers and reducinginventory costs.

When it comes to simplifying external relationships, it isimportant to recognise that not all relationships are createdequal. Some customers generate greater profits and are easierto service than others. By segmenting our customer baseeither by market or by strategic value, we can develop distinct,effective policies for each. This strategy could, at the extreme,even involve reducing the number of customers dealt withdirectly; for example, by encouraging low-volume customersto use indirect distribution channels.

The first step in simplifying the organisational elements ofthe planning process is to develop a structured S&OP process.Next, reduce the number of people involved by combiningfunctions such as forecasting, production planning, andmaster production scheduling. The appropriate flattenedstructure varies with the company. Regardless of the finalstructure, make sure the S&OP process and schedule are veryclear and tight, without extraneous cycle time.

The information system’s performance lever can also beleveraged to simplify planning. Use technology to captureyour customers’ sell-through data and get visibility andcontrol of their inventory. The more visibility you can get totrue end-user demand and your customers’ inventory, thesimpler it will be for you to plan your own inventory andproduction needs. These examples provide a general idea ofsupply chain simplification techniques. A total of 15 more arelisted in Figure 3, although even this list is far fromexhaustive.

The term “configuration” has conditioned us to think ofways to reduce physical complexity. That could mean fewersuppliers (source), fewer plants (make), or fewer distributionlayers (deliver). The management practices lever may be themost intuitive one to pull, since we often think of applyingnew management practices to reduce complexity. Althoughapplying lean manufacturing techniques is the most obvious

solution, it may also be worthwhile to examine sales practicesand the volatility they create. Eliminating the end-of-quarter“hockey stick” spike in sales can simplify production planningsignificantly.

The concept of using the relationships lever to reducecomplexity is to share tasks with your trading partners. Thisoften can be done in a way that benefits both parties. Theorganisational lever is similar, except it usually refers to thesimplification possible as a result of outsourcing work to amore expert third party. To realise the full benefits ofoutsourcing, however, it is important to have a very clear planfor reducing the internal resources that previously performedthat work. The IT lever is also useful for exporting work (e.g.e-commerce portals) to trading partners. Another example isthe utilisation of simplifying features provided by enterpriseresource planning (ERP) software, such as repetitivemanufacturing logic.

The process and performance levers matrix can prove auseful tool in compartmentalising a complex supply chain anddeveloping many different simplification techniques.

Choosing your targets – developing a plan forreducing complexity

Like any other methodology, supply chain simplification hasto be properly applied to the specific situation to be mosteffective. It is important to choose the appropriate techniqueswith the greatest leverage. If a particular technique has provedsuccessful in the past, see if it can be applied to anotherprocess or performance lever. The framework provided canboth help structure your approach and challenge yourorganisation to identify and apply effective simplificationtechniques. You can also use competitive benchmarking tohelp establish priorities. The Performance MeasurementGroup, LLC (PMG) offers two types of benchmarking thatcan be used in this manner. Quantitative benchmarking usesthe SCOR Level One metrics with a balanced scorecard thatcan help identify performance gaps in each of the major

Figure 3 Complexity reduction techniques

Five ways to simplify your supply chain

Rick Hoole

Supply Chain Management: An International Journal

Volume 10 · Number 1 · 2005 · 3–6

5

Page 4: Five ways to simplify your supply chain - Universidad Icesi · Five ways to simplify your supply chain Rick Hoole PRTM, Abingdon, UK Abstract ... Wal-Mart, and Zara are transforming

supply chain processes. You can then focus your efforts wherethe greatest opportunities exist. The second type ofbenchmarking, also organised by the SCOR processelements, evaluates an organisation’s process maturityagainst other companies in the same industry. In manycases, immature processes are the most complex and thereforeare the best candidates for simplification. Once benchmarkinghas identified the priority process areas, the framework canprovide ideas on which simplification techniques to try first.

Ongoing globalisation brings increased complexity tovirtually every aspect of the business world, and supplychains are the latest to be effected. Adaptability has neverbeen more crucial. Many company failures can be traced backto an inability to adapt rapidly to changing marketexpectations. The truth is that overly complex supply chainsare not adaptable. Instead of attempting to master complexitywith the latest optimisation software, take some of thecomplexity out of your supply chain first. It is that simple.

Five ways to simplify your supply chain

Rick Hoole

Supply Chain Management: An International Journal

Volume 10 · Number 1 · 2005 · 3–6

6