Part 2: High performance supply chains, by JDA Software Group
Written by Puneet Saxena (pictured) Vice President of Industry Strategies at JDA
A key success factor for rapid-growth products is inventory availability and corresponding customer service levels. The company’s decision to pursue market share growth through the 50 products will require an adjustment to inventory policies associated with these products in North America. Higher service levels demand higher investments of working capital in inventory. So the segmented approach to inventory planning for this subset will require an increase in service levels on these products in North America (say, to 99 percent), and perhaps a corresponding decrease in service levels on other products that the company is not marketing as aggressively (say, to 95 percent). As was the case with demand planning, inventory and customer service performance related to these 50 products will need to be monitored differently, in line with the company’s business strategy for focused growth on these products.
Master planning and replenishment:
Producing goods to meet higher service levels on the strategic products may have significant impact on manufacturing and replenishment policies. Demand prioritization policies may need to be adjusted to increase the planning priority associated with these products. If delivery leads times area competitive differentiator, positioning these products in finished goods form (make-to-stock), closer to customers may become a priority. Do manufacturing or replenishment postponement strategies (such as build-to-forecast to a semi-finished stage and assemble-to-order thereafter) still make sense for some of these products? Perhaps they still do, but they need to be deployed differently. As the company strives for profitable growth leveraging the strategic products, master planning policies for production and replenishment planning policies for distribution will need to be tailored accordingly to serve this segment effectively.
Allocation planning and order promising:
As the company strives for market share growth in North America, finished goods supply from across the company’s global manufacturing facilities will need to be allocated more heavily toward North America to support the expected spike in sales on these strategic products. As such, the company will need to adjust its allocation policies to make sure that projected supply is assigned appropriately across regions, in line with its business growth strategy.
With suitable allocations in place, order promising in North America should result in short lead times even with rising demand. On the other hand, unexpected demand in Europe or Asia Pacific would be promised longer delivery lead times because of limited supply allocations, in line with the business strategy. Strategic segmentation-based allocation planning and order promising helps balance value to the business against service levels required to support corporate objectives.
The best laid plans for your strategic products can be undone during execution if the cost to serve becomes too high. There are several factors that will need to be considered. First, the company will want faster cycle times and reasonable costs to fulfill high priority orders of strategic products. Warehouse slotting will need to be adjusted to place the strategic products in forward pick areas so workers can access them faster with less travel. This will help reduce cycle times and costs. Second, labor management systems could help reduce the effort and expense for receiving, replenishment, picking and shipping these strategic products by instituting best practices and standards for performing each task. The work is monitored in real time so supervisors can quickly make adjustments when work falls off schedule.
Finally, higher service levels for strategic goods may require faster replenishment. This often means smaller, more frequent shipments which raise transportation costs. Therefore, transportation expense must also be considered as part of the cost-to-serve model that is balanced against desired service levels. Careful planning of shipments associated with strategic products, including load consolidation, mode selection, routing and carrier selection, can significantly reduce transportation costs while ensuring high service levels.
The business strategy in this simplified example was to drive profitable growth through focusing on a subset of products in one specific region. That segmented business strategy required a segmented supply chain response, including specific adjustments to demand, inventory, master planning, replenishment, allocation, order promising, warehouse, workforce and transportation management processes. In doing so, even though physical resources remain the same, the end-to-end value chain for strategic products operates differently from the value chain for all other products. That is supply chain segmentation at work.
Segmentation strategies impact all aspects of supply chain operations, as demonstrated above. They require careful analysis, planning and monitoring to balance higher service levels with associated cost to serve. While conceptually appealing, companies have long struggled to deploy segmented supply chains because underlying decision- support technologies have not been readily available for end-to-end value chains. The good news is that much has changed with technology over the past few years. The technology is now ready. Are you?