Growing Importance of Supply Chain Optimization

In the simplest of terms, supply chain optimization pertains to running your supply chain to get the products to the customer, in the right quantity, at the right place, at the right time, while minimizing your cost & carbon footprint.  So essentially, you need to meet or exceed your customer service expectations while ensuring that you minimize your costs and minimize the carbon footprint of your supply chain. While the definition is simple, achieving this is extremely challenging for mid and large-size companies. Supply chain complexity has increased exponentially in the last decade across industries. Hundreds (and sometimes thousands) of processes operate within a supply chain to help execute the supply chain. Often, there are multiple supply chains embedded within one supply chain for large corporations. For a supply chain to be truly optimal, every element of the supply chain needs to work in sync with the other. But let us take a step back to understand why supply chains exist. All the elements of the definition above point in one direction- fulfilling the expectations of an end customer. Supply chains exist and collaborate with other functions to help fulfill that customer expectation. A key question then arises - how do you determine what will help enhance your customer experience? The initial answers to this question start evolving at the corporate strategy level. Supply chain strategy, ideally, then gets derived from the corporate strategy. And your supply chain strategy acts as a key input when it comes to formulating your supply chain optimization requirements. This article will review how you can arrive at your supply chain optimization decisions, starting with your corporate strategy. We will use a framework called the strategy operations continuum [1]. Deciphering the strategy operations continuum To illustrate this linkage, we can go through an example where we will use the strategy continuum approach shown below. The strategy continuum framework below postulates that a good supply chain strategy helps you bridge the gap between your overall strategy and operational practice. This is a really useful framework to evaluate your existing supply chain strategy but also helps you capture the role supply chain optimization methods can play in supporting corporate strategy. This article discusses how to arrive at optimization-related decisions from corporate strategy. Please refer to this other article for an overview of analytics methods that can be leveraged to address these optimization decisions. Figure 1 : Strategy Operations Continuum The framework in figure 1 may look complicated at first but is essentially easy to decipher. At a high level, it shows that supply chain strategy bridges overall strategy and operational practices. Within supply chain strategy are three different layers-Principles, Imperatives, and choices. The best way to go deeper into the framework above is through an example. Drilling down to the analytics decisions Let us assume that the overall strategy of a fictional organization, which is a midwest-based regional supermarket chain, is to provide low-cost products to its customers along with a good service level (good service in this scenario will be to replenish quickly and keep shelves stocked). Also, let us assume that we have observed two operational practices for this company: One is leasing Warehouses closer to its stores, and the second is creating optimized transportation routes using transportation planning tools. Now we will first use the strategy continuum framework to evaluate the existing Supply Chain strategy and then see how supply chain optimization can help contribute to the overall supply chain strategy. Figure 2 illustrates the journey in this example. Figure 2:  Deciphering optimization needs from supply chain strategy Using the strategy operations continuum, there are two ways to bridge the strategy gap. You can either move from top to bottom, asking the question "How?" or move from bottom to top, asking the question "Why?". To understand this better, we will use the example shown in the illustration above. As mentioned earlier, the company's overall strategy is-"Offer low-cost products and good service". Now, if we are moving from top to bottom, we need to ask-"How?". How can we offer low-cost products and good service? Well, one way is to fulfill demand in the most cost-efficient way-which is our supply chain principal in the supply chain strategy. Remember that more principles can feed into the overall strategy; hence, the framework has a "thematic range" arrow. That arrow suggests that you can have multiple principles in the same layer. So even though I show only "fulfill demand in the most cost-efficient way" as one of the supply chain principles, that is not the only one feeding into the overall strategy. Any additional principles will add to the thematic range. So, once you have decided that your supply chain principle is "fulfill demand in the most cost-efficient way," you need to again ask the question how? Well, one of the things we can do to fulfill demand in the most cost-efficient way is to minimize distribution cost  -and that is imperative as per the framework (again, there can be more than one imperative, and you can add them across the Thematic Range). You again ask "how?" to get to a choice: "Build and run an efficient distribution network." Now, if you ask the next how, it will lead you to your Operational practices- "lease distribution centers close to stores" and optimization decisions like "create optimized delivery routes." Now that you have followed the Top to Bottom "How?" approach, you can easily see that you can move from Bottom to Top using the "Why?" approach. Creating an optimized delivery route is an optimization decision. There are additional optimization decision parameters as well that associate with the operational practice of an efficient distribution network. The fundamental aspect of this article is to illustrate that there should be a strong linkage between your tactical optimization approaches and your supply chain strategy.

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[1] : Rethinking your supply chain strategy: MIT CTL: https://ctl.mit.edu/sites/default/files/RPF2014.pdf