What is the key to delivering a seamless customer experience? A bimodal supply chain strategy
Yesterday, we explored how linear supply chain strategies have become outdated and replaced with bimodal supply chains. Now it is time to explore how these are being put into practice within industry.
A great example is the tyre industry: over the last few years, it has been plagued by increased competition, mounting customer service expectations, profitability challenges, and a growing diversity in channels — such as retail stores, online access, automotive OEMs, etc. — with different needs for these different channels and market segments. A one-size-fits-all Mode 1 supply chain strategy focusing on operational excellence, efficiency and eliminating waste alone at the cost of other desirable qualities such as responsiveness, flexibility, and risk management can quickly turn from a short-term market advantage into a long-term competitive disadvantage.
Automotive OEMs provide longer forecast visibility, stable demand and a large volume of orders, but they also demand lower price. The tyre replacement market, on the other hand, provides shorter lead times, lower order volumes and high demand variability—and the profit differs widely depending upon the product and sales channels. Because brand loyalty on the customer side is a continuous challenge, ensuring that product is available at the point of sale is critical to profitability. Tyre manufacturers are faced with two extremes: the automotive OEMs that provide several months of forward visibility, and the direct consumers who need instant gratification when they enter retail stores.
Being “customer-centric” and leveraging the bimodal supply chain strategy, a leading tyre manufacturer in Europe has been able to meet the higher service level expectations for different clusters (automotive OEMs, tyre replacement market) in line with its corporate goal. By marrying the service expectations from the different channels with the cost to serve, the tyre manufacturer has been able to profitably match its supply chain to the specific needs of its customer segments.
For its automotive OEM business, which provides stable demand signal and 3-6 months of advanced commitment, the tyre manufacturer adopted the Mode 1 strategy and deployed inventory further upstream at its plants. This has helped reduce inventory cost due to inventory pooling, resulting in a lower cost-to-serve for its automotive OEM business, which has lower margins.
For its tyre replacement business, which is characterised by short lead times, the tyre manufacturer has leveraged the Mode 2 strategy, which keeps inventory at its regional DC/central DC to enable responsiveness and capture market share. This results in increased inventory costs relative to the automotive OEM business, but is balanced by higher margins in the tyre replacement business. This is because higher service levels will result in increased costs, which are then recouped through higher pricing. Moreover, the allocation planning and order promising business processes are also aligned by reserving supply for the different segments, so as to maintain the necessary service level commitments to each segment.
To summarise, each channel, customer and product segment represents a unique value to the organisation. The bimodal supply chain enables different profitable response strategies that encompass the entire gamut of supply chain business processes, including demand planning, inventory planning, manufacturing planning, allocation planning, order promising, etc. These various response strategies are designed to serve the diverse channels, customers and products based on the cost-to-serve, via multiple virtual supply chains, while still using the same physical supply chain grid. By aligning the physical supply chain with different market segments, the tyre manufacturer has been able to make profitable trade-offs between service levels, inventory and cost-to-serve and has realised a double-digit percentage point improvement in its on-time delivery metric.
Another company achieving success using the bimodal supply chain strategy is a Spanish apparel company. The Spanish clothing manufacturer has a corporate strategy of getting fashion apparel into stores rapidly. For its fashion-conscious customers, it uses the Mode 2 supply chain strategy – leveraging the more responsive European suppliers in order to get fashions into stores rapidly. The European suppliers are more expensive relative to the Eastern European counterparts. However, by being receptive to its fashion-conscious consumers, the retailer is able to command the necessary premiums that come with fashion items. Yet, for staple items with predictable demand, it uses Mode 1 strategy of partnering with Eastern European suppliers, which have longer lead times, but lower costs. Depending on the life cycle stage, customer etc., the company has the flexibility to move the products from one Mode to the other. Thus, Mode 1 and Mode 2 work in a unified fashion to achieve the overarching corporate business strategy.
The bimodal supply chain strategy is an organisational initiative that requires a combination of people, process, governance and best-of-breed technology. For decades, supply chain professionals using Mode 1 have been rewarded for being firefighters, operationally excellent and risk-averse. Moving to a bimodal supply chain will require a change in mindset, organisation and more holistic cross-functional metrics. Mode 2 rewards people who are innovators, strategic thinkers, risk takers and who take a proactive approach to issue prevention, rather than reactive stance in issue resolution. Putting the right performance metrics and policies in place that reward the Mode 2 process behaviours is key to anchoring this new culture in the organisation. Strong executive leadership and articulation of tangible and intangible benefits and goals through top-down and bottom-up communication is critical to making this culture part of the corporate DNA.
Best-of-breed technology has come a long way, and best-in-class companies are now leveraging decision-support technology to enable the bimodal supply chain strategy. Essentially, they are leveraging the same physical assets to create bimodal virtual supply chains that match different value propositions to different clusters with corresponding costs-to-serve. As seen from the customer case studies, the bimodal supply chain strategy has resulted in significant benefits for best-in-class companies, including increased margins, competitive advantage and market share, higher shareholder value, and faster time to market.
Written by Salim Shaikh, Sr.Director, Global Industry Strategy at JDA
Follow @SupplyChainD on Twitter.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”