Organizational strategy refines the organization’s generic strategy
and clarifies how to direct supply chain strategy. For example, if an organization’s generic strategy
is to be the low-cost leader, its organizational strategy directs how
it needs to function in its environment to offer these low costs. Organizational
strategies that relate directly to supply chain strategy include customer focus and alignment,
the forecast-driven enterprise, the demand-driven enterprise, and product-type-driven strategy.
When designing an organizational strategy, it is best to begin with the end in mind
and let these goals drive all other decisions. The goal should be a plan that can satisfy customers,
grow the organization, thrive against the competition, and make money.
We start with a customer focus and alignment strategy.
Customer focus means that what is best for the customer has priority in this
strategy. It drives every decision. Rather than maximizing quality, price,
or availability exclusively, this strategy seeks the balance that is just right for the customer.
A supply chain includes many independent entities. Each entity expects to make a profit
and will have its own strategies. Failing to align these strategies can hinder end-customer focus.
Therefore, a nucleus firm needs to use its clout with partners
to align these strategies with customer requirements. Moreover, incentives need to be
designed to help persons in each organization work toward these customer-focused goals.
In the next organizational strategy, the forecast-driven enterprise, forecasts of demand
are used to plan production in advance, which is called a push system. However, forecasts are often
wrong. Moreover, when forecasts are based just on orders from the immediate downstream customer,
the lack of information on actual demand can lead to poor decision making.
This can cause the bullwhip effect. It starts like this.
Given no additional information, a customer order for cycle stock,
some additional safety stock, and some additional inventory for a sales promotion
will be interpreted as all being an order for just cycle stock by the upstream supplier.
This supposed increase in customer demand results in a ramp up of production.
At each upstream location, the variability in
order size gets more severe because of things like fixed production or ordering lot sizes.
Similarly, when the next period arrives, if orders are lower than normal,
this drop in demand is also magnified up the chain.
Breaking this cycle of feast and famine requires better visibility in both directions.
Another solution is to become a demand-driven enterprise.
A demand-driven enterprise replaces forecasts with actual demand
data as much as possible. A demand-driven enterprise will use demand-driven planning
to maintain strategic buffers in key locations
rather than spreading inventory throughout the system.
In manufacturing it will use things like fast changeovers
to produce just what is in demand.
DDP’s key ordering process is called demand-driven material requirements planning or DDMRP.
DDMRP translates customer orders directly into MRP component requirements.
Another enabler of demand-driven strategies is moving the push-pull frontier
back up the supply chain at least to manufacturing,
but often also to the first tier of suppliers.
The last organizational strategy, the product-type-driven strategy,
assumes that the organization needs more than one distinct supply chain.
For example, they could have one supply chain for functional products
and one for innovative products. Functional products tend to be low profit margin,
predictable demand items, while innovative products tend to be high profit margin,
unpredictable demand items. Each will have distinct supply chain requirements.
To be profitable, functional products need both predictability and low cost. Predictability can
include minimal variation in quality so there will be few returns. Low cost can be achieved
through high manufacturing utilization rates, tightly controlled inventory, and high turnover.
Conversely, for an innovative product to be profitable, it needs market responsiveness.
Responsiveness can be gained through generous inventory buffers and by using postponement to
delay committing to make final units. Suppliers also need to be responsive.
They need agility to modify capacity and must be committed to aggressive lead time reduction. We
hope you enjoyed this overview of organizational strategies related to supply chain management.