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Master of Business Administration – MBA Thesis
Full-Time Program 2010-2011
An effective way to structure
Supply Chain Strategy Directions:
Supply Chain Segmentation and SCOR model help supply
chain strategy set up and identify opportunities.
Author: Frank Liu UvA Student Number: 6225179 Email: frankie1017@gmail.com Thesis Supervisor: Prof. Dr. Jean L. Johnson
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Abstract
The fast changing world has significantly altered the way we conduct business today. Continuous advance in technology and a relative decrease in regulation have also changed our mindset about competition. Supply chain plays a crucial part in supporting corporations’ business strategy; furthermore, the supply chain strategy and resources configuration is one of the hot topics in the managerial environment.
This paper will consist of into two parts - the first part will introduce the SCOR model and explain how to use it in order to discover the disconnection in the chain via supply chain segmentation. The supply-chain operations reference model (SCOR) is the first cross-industry framework for evaluating and improving enterprise-wide supply-chain performance and management; it is a reference model. The purpose of this framework is to describe companies’ process in a way that makes sense to key business partners and stakeholders.
After introducing the basic concepts and methodology of the SCOR model, this paper will discuss how to properly segment the supply chain and apply the SCOR model thus the second part of the paper will focus on supply chain segmentation. Companies compete in today’s highly competitive marketplace, thus supply chains must be engineered to match product characteristics and customers’ (channels) requirements. Furthermore, companies should recognize that they must have more than one supply chain within their company. Each supply chain should have its own strategy in order to successfully cope with customer needs. Supply chain segmentation is the first step in helping companies scoping their supply chain, and it is also a very critical point to the supply chain management and strategy set up.
Finally, the paper will show how to combine supply chain segmentation and the SCOR model in order to correctly set up the supply chain strategy.
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Table of Content
I. Introduction...………..4
II. SCOR Model………...7
A． SCOR- Process ………..8
B． SCOR- Performance………12
C． SCOR- Best Practice
...……….14
D． SCOR- People .……….………...14
E． Using SCOR….………...15
III. Supply Chain segmentation....………16
A． The Role of Supply Chain Segmentation…
.………17
B． Previous Research and Practices...
.………..20
C． Develop a Segmentation Combine with SCOR………...26
IV. Conclusion & Future Research Suggestion
………… …
...…..
.30
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I. Introduction:
Traditional barriers between industries are breaking down – companies are already no longer only competing globally. Furthermore, shorter product lifecycle also forces companies to re-consider their competitive advantage. In order to keep up with the fast moving pace of this scenario and to achieve superior performance, business leaders are shifting towards new business paradigms that allow their companies to work more closely with their traditional or new business partners and to adapt to the fast changing marketplace – this improved integration is the very essence of supply chain management. “Supply chain leaders are reconsidering the cooperation not only between functions within their own companies, but also with other organization from both up-streams and down-streams (Gatorna, 2010)”. This mindset brings along new issues and challenges for the management team.
According to Gartner’s 2012 Annual Survey of Top 25 supply chains in the world, the first ranking company is Apple Inc. The most impressive record is their inventory, which turns 52 times a year; in other words, every 5 days, they replenish their inventory. It not only they have good products or a great marketing strategy, but they are also able to control and align different aspects of vendors’ activities, such as forecast, planning, sourcing, manufacturing, and delivering.
An optimized supply chain has become one of the key competitive advantages for most companies. This topic runs deeper than material movements or logistics point of view, the R&D (Research & Development) department of Samsung was the first to learn and implement the supply chain concepts within their enterprise in 2000. Samsung’s R&D department believes strongly in developing durable, high-end products; moreover, for every product they design and manufacture, they must also
5 be concerned about the material availability, transportation cost, factory capacity, risk management etc. These aspects already change the traditional mindsets of R&D, that the department only needs to “make something from nothing”, giving it a whole new dimension.
. “The next wave of the competition is not only on the product itself, but also on the supply chain. The marketplace will lead to wars between different supply chains, not between the companies anymore.” said the corporate vise presidents of Lenovo, Deguo Liu, therefore a mistake made by one of the vendors in the supply chain may cause a huge lost for the whole chain. This also applies to Apple Inc., which is sending 5 million iPhones5 back to Foxconn because some defects during OEM. Although the situation has not been clarified at the moment, analysts already anticipate it will definitely harm the profit of Foxconn, and might even affect the 3rd quarter of iPhone 5S selling. The previous CEO of Coca-Cola SCMC China, also says “supply chain competitive advantage is different from technology competitive advantage. Product life cycle is getting shorter and shorter nowadays and many technologies today will be easily imitated within a short period of time. However, supply chain competitive advantage is different and more enduring. Once supply chain competitive advantage is formed, it will take competitors a long time catch up because it hardly can be copied.”
It has become clear that a good supply chain has a critical strategic value for business competition, but how to implement the concepts and how to use it to create value rather than only focus on cost saving? Supply chain leaders are reconsidering the linkages, not only between functions within their own company, but with other organizations up and down-streams. More recently, we have witnessed the emergence of network design and excellence in the form of consumer response and other
6 mechanisms such as link material provider, manufacturers, distributors, and retailers. Those seamless supply chains emphasize information and resource sharing, duplication eliminating, and goods flow smoothing. However emphasizing these concepts is not enough, a practical methodology is needed to implement these concepts and make them concrete is needed.
After visiting over a hundred companies in China, I can conclude that the the major challenge of their supply chain is having good ways to identify the disconnection in their chain and decide upon a right solution to correct this. There are several practices for them to apply to their projects; However, most of these companies have difficulties in prioritizing their needs and choosing the right practices to solve their supply chain problems. They frequently implement the practices or methodology intuitively, sometimes because they only want to keep up with the trend and because they are being afraid of lagging behind the competition. However, without a holistic view of the supply chain and without identifying the single point of issue, this sometimes leads to the unwanted results limited effects. Moreover, “one size fits all” approach already cannot meet the complicated demands of today’s economy. Reengineering only a specific process can hardly have positive impact on the whole supply chain and it may even jeopardize performance of some other areas. In short, conducting business is a kind of trade off – there is never a perfect solution, and this especially applies to supply chain field.
In response to this general scenario, a holistic supply chain assessment is needed. This paper will firstly introduce the most commonly used supply chain related model, SCOR model (Supply Chain Operation Reference Model). This model describes supply chain from upstream to downstream completely. Its performance metrics are also based on “end to end” principle of analyzing supply chain performance. This
7 paper mainly draws on existing literature and empirical cases to demonstrate the methodology and how it helps companies setting up supply chain strategies and find out the root causes of their supply chain challenges.
When it comes to creating a supply chain strategy, defining the scope is essential and supply chain segmentation should always be a key topic. The importance has been proved from a real survey conducted by PwC, which interviewed 503 supply chain executives across over seven industries around the world. They identified six interesting findings, and one of six is “supply chain segmentation”. Firstly, they combined the score for both financial performance index and supply chain performance index; based on the results, PwC grouped the “Leaders” and “Laggards” – the top 20% and the bottom 20% of their industry. One of the interesting findings is that “Leaders operate more supply chain segmentation to configure and achieve a
competitive advantage” – Leaders have 40% more supply chain configurations than
the laggards. At the same time, Leaders have around 10% less channels than Laggards have. In other words, Leaders are more focused than Laggards since they operate in fewer channels. This assumption can be further proved by the next statistics result in the same report: Leaders operate up to 50% more configurations per channel than Laggards. This report triggered a very interesting question about “what is supply chain segmentation?” and “what would be the co-relationship between the supply chain segmentation and supply chain strategies or performance.”
Finally, we will describe how to use supply chain segmentation and incorporate the SCOR model. Without clear strategies, even Leaders have a hard time shaping their decisions and implementation.
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II. SCOR Model
The supply chain reference model (SCOR) is the product of Supply Chain Council. This model is widely used and accepted as the cross industry standard for supply chain management. “The SCOR model not only provides the structured vocabulary of definitions of supply chain processes, but also defines a set of measures that can be used to evaluate processes at the level of hierarchy” (Jin Dong, 2006). The emerging process reference model concept is the logical extension of business process re-engineering and other process improvement efforts.
The SCOR model provides a common supply chain framework and standard terminology for evaluating, positioning and implementing supply chain improvements. This model can be illustrated and divided into 4 different P – Process, Performance, Practices and People. The purpose of designing and maintaining this framework is to support the supply chain and its various complexities cross industries. It spans all customer interactions, all physical transactions, and all market interactions. However, the SCOR model does not describe all business process or activities such as sales, marketing (demand generation), product development, research and development, and some elements of post delivery customer supports.
A. SCOR – Process
“Due to its increased complexity, the environment has become more dynamic. Not only do we experience more frequent changes in customers’ preferences, but we also see them in products and processes” (Waehrens, Riis, & Johansen 2011).
The Process (frameworks and definition) describes the supply chain standard management processes and process relationships (figure 1). Interesting to notice that ‘Plan’ is on the top of all other processes and followed by ‘Source’, ‘Make’, ‘Delivery’
9 and ‘Return’ – ‘Plan’ is like the head of a human body, the brain plans and schedules all the activities. The rest of the functions are like hands, helping to implement instructions from the central system. In fact, the supply chain structures of all organizations can be sketched like this. Therefore, the supplier and the suppliers’ suppliers also follow this pattern, and so do the customers. This signifies the first step of alignments on the chain.
Figure 1: SCOR Framework (Source: www.supply-chain.org)
Furthermore, based on those 5 major processes, SCOR identifies two more detailed levels. It not only defines the scope of supply chain, but also gives all the 3-level processes standard descriptions of the individual elements with specific codification.
Level 1 consists of the five different processes: ‘Plan’, ‘Source’, ‘Make’, ‘Deliver’, and ‘Return’ for the information flow and physical flow. The ‘Plan’ process coordinates the other four – in short, plan process balances the demand and supply of
10 products and resources in all other processes. The ‘Source’ process contains not only procurement aspects, but also ordering, delivering, receipting, and transferring of goods and services to meet the demand of raw material, components, and other services needed in ‘Make’ or ‘Deliver’ processes. The ‘Make’ process contains the activities that add value to products through mixing, separating, forming, machining, and chemical processing. It transforms products from components into a state of finished goods (for the factory itself) or semi-product (for the next production tier). The ‘Deliver’ process can be divided into two parts – it associates both with performing customer-facing order management such as validate orders, reserve inventory and consolidate orders and also focus on fulfillment activities such as transportation and distribution of finished products to the company’s customers. The ‘Return’ process is associated either with the returning the product to its suppliers or with receiving a returned product from customers – it addresses the defects in product, ordering, or manufacturing.
Level 2 introduces more details to the SCOR model and determines the capabilities within Level 1 processes. Level 2 distinguishes between make-to-stock (MTS) products, make-to-order (MTO) products, and engineer-to-order (ETO) products for ‘Source’, ‘Make’, and ‘Delivery’. ‘Return’ process is categorized by Defect, MRO (maintenance, repair, and overhaul), and Excess for both SR (source return) and DR (delivery return). Each Level 1 process is further divided into subcategories depending on the product. The ‘Source’ process (S) e.g. is divided into Source Stocked Product (S1), Source Make-to-order Product (S2), and Source Engineer-to-order product (S3). ‘Manufactory’ and ‘Deliver’ follow the same terminology. ‘Deliver’ process identifies an extra process – Deliver retail products (D4). The ‘Plan’ process contains the overall process Plan supply chain (P1) and one
11 planning process for each of the other Level 1 processes: Plan Source (P2), Plan Make (P3), Plan Deliver (P4), and Plan Return (P5). Furthermore, as mentioned above, the ‘Return’ process actually can be seen as two categories: Source Return (SR) and Deliver Return (DR). Both Source Return and Delivery Return processes are divided into three sub-processes at Level 2: return of defective products, return of MRO (maintenance, repair, and overhaul) products, and return of excess products. Besides all these Level 2 processes, the complete SCOR model also includes the enabling processes. Enabling processes are new the new level 1 process in SCOR V11.0. They are supporting the other processes and defining most of the methodologies and planning and control policies.
Level 3 processes help identify decision points, triggers, and process disconnections. It describes in more detail the Level 2 processes. Level 3 processes are sequential steps – these processes are listed in a sequence that helps companies if they are performed in a certain order. Moreover, companies always develop their standard process description of activities under Level 3 processes. We can see it generally as industry, product, location, or technology specific and call it Level 4 processes (not listed in SCOR model). For example M2.4 (package product under MTO), the level 4 process will describe how the product should be packaged such as “Package larger groups of items in a single pack” or “Electronic batch recording / configuration”. The hierarchy of the SCOR processes can observed in Figure 2 below.
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Figure2 Hierarchy of SCOR processes Source: Supply Chain Council
SCOR – Performance
“Performance measurement is critical to the success of almost any organization because it creates understanding, molds behavior and improves competitiveness” (Fawcett and Cooper, 1998). There are two types of elements in this section: Performance attributes and Metrics of the SCOR model.
The aim of any supply chain operation is to add value for customers and to contribute to competitive advantages by being able to satisfy the requirement of its customers and enable the internal control of its capital efficiency. Attributes can be strategic directions for company to achieve. In other words, any of attributes itself cannot be measured; it is used to set strategic direction. Company always can combine one or several targets together as their strategy. However, it is not realistic to have it all for one supply chain strategy. Attributes are the trade off; the aim is to keep the balance and find the best formula.
There are five attributes in the SCOR model: Reliability, Responsiveness, Agility, Cost, and Assets Management Efficiency (see Table 1 on the next page), and each
13 attribute is a grouping of metrics used to express a strategy. The customer-facing performance attribute is divided into Reliability, Responsiveness, and Flexibility and the internal-facing attributes are Cost and Assets Management – all of which, to a greater or lesser extent, will affect customers’ satisfaction and business competiveness.
Metric is the standard measurement of the performance processes, and it is also diagnostic in the SCOR. Ideally, the result from the metrics can let companies benchmark themselves against others and influence future applications development efforts to ensure fit with manufacturers’ needs.
Moreover, those metrics in the SCOR are helping to measure the ability of supply chain to achieve the above strategic attributes. It is similar to the hierarchical concepts of its process levels, there are three different levels associated with performance attributes, used for diagnostic. For example, the level two metrics serve as diagnostics for level one metrics. This means that the lower level metrics (level one is the highest level) can be regarded as the decomposition for the higher level of metrics. Most importantly, the SCOR model combines the ideas of processes and those metrics. Any metric has its own formula, and all the calculations can correspond to a group of processes. Companies can easily collect the needed data from their ERP (Enterprise Resource Planning) system and simulate any desired results. In other words, the metric structure of the SCOR model can explain performance gaps or improvements for higher level metrics and identify the root causes from the process point of view.
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Table 1: The five attributes of SCOR models
B. SCOR – Best Practice
The third component part of SCOR model are practices. The practices listed in SCOR are meant for identification purpose only. It suggests that practices can be implemented once a company uses the metrics to identify the root causes or specific supply chain attributes (strategies) also from a process point of view. For example, one company may face a “high mix low volume issue”. This issue can affect not only the procurement cost, supplier management, and manufactory capacities, but also will have a great impact on the supply chain agilities which will directly reflect the ability of a company to react to an uncertain upside and downside in demand. For example, after diagnosing phase, a company identifies the root cause for high mix & low volume issue which caused the “uncertain spikes” in the demand and supply charts as
Attribute Strategy
C
ustom
er Foc
us
Reliability (RL) Consistently getting the orders right, product meets quality requirements
Responsiveness (RS)
The consistent speed of providing products/services to customers
Agility (AG) The ability to respond to changes in the market (external influences) Inte rna l F oc us
Cost (CO) The cost associated with managing and operating the supply chain
Assets (AM) The effectiveness in managing the supply chain’s assets in support of fulfillment
15 the company’s lack of a mature planning process. Therefore, the “P”, planning process, can be referred. The best practices listed in SCOR may suggest S&OP (Sales and Operation Planning) as the solution to solve this problem. “P” planning process is the Level 1 process. This best practices is listed in the level 2 of P1 (Planning supply chain) which can be divided into four different parts in level 3: demand planning (P1.1), supply planning (P1.2), balanced demand and supply (P1.3), and escalate to top level (P1.4). SCOR model states the basic explanation and definition of how to approach a problem.
C. SCOR- People
The last part of SCOR is the “People”. The people section exists starting from version 10.0 and it incorporates a standard for describing skills required to perform tasks and manage processes. The key elements of the people section are Skills, Experience, Aptitudes, and Trainings. The purpose of this session is let the company who wants to recruit suitable supply chain related employees or project team with a guidance about required criteria such as the field of experience, required training, or preferred certification.
D. Using SCOR
It is important to understand that SCOR model only describes the processes, but not prescribing also how to use it. It is crucial to know in what circumstance that model can be useful to enterprises. After more than 15 years of global research from the Supply Chain Council, there have been identified 9 scenarios for enterprises to use SCOR as a tool implementing supply chain transformation:
1. Building a technology investment plan
2. Creating and implementing a Supply Chain Strategy
16 4. Setting up a comprehensive metrics for monitoring performance
5. Improving Sales & Operations Planning
6. Optimizing ERP system & maximizing use of existing Technology 7. Achieving Operational Excellence
8. Merger & Acquisitions
9. Building up their internal excellence team
(Source: Bolstorff & Rosenbaum, 2012)
For example, based on interviewing over 100 companies in China, most of the companies require SCOR for at least six out of nine reasons listed above. The most frequent encountered reason is “Creating and implementing Supply Chain Strategy”. There are two major reasons for this situation; the first reason is most of organization view supply chain too narrowly. Companies still regard supply chain as merely procurement or final mile delivery in China. “Without a holistic view of supply chain with other processes, it is hardly can set up a clear supply chain strategy” (Richards 1997). The second reason states that it is hard to implement the supply chain strategy due to an incorrect segmentation of their supply chain, thus trying to use one solution to serve all demands.
Independent of the scenario, the SCOR model links process elements, metrics and the best practices. Most “Using SCOR projects” follow the following basic five steps to implement: define the scope, identify the root cause, identify the solution, design the solution, and launch the reformed projects. Defining scope would the initial part of all strategy implementation. Business process reengineering or process mapping helps to capture the “As-is” state of a process, and to derive the wanted “To-be” as the future state. Benchmark after metrics calculations quantify the operational performance of similar companies or industry and build up internal targets according to enterprises’ own competitive requirements. Last, based on the process gaps or internal targets after benchmarking, company will identify the management
17 practices and software solutions to forming the future project portfolio, and then conduct implementation.
To sum up, SCOR is a reference model. The framework and attributes give organization a guideline to structure the supply chain strategies.
III. Supply Chain Segmentation
After introducing the basic concept and methodology of SCOR model, this paper will discuss about how to segment the supply chain and combine it with ideas portrayed by the SCOR model. The second part of the paper will focus on supply chain segmentation. In response to the scenario that many companies cite, that “it is hard to implement supply chain strategies”. Supply Chain segmentation plays a very important role in today’s supply chain strategy setting up. “Supply chain segmentation aligns specific corporate goals with focused virtual pathways through a larger, more complex supply chain.” (Deb Bhattacharjee)
There is no exception, companies try to control their operational cost efficiently, deliver greater value to their customers based on their need, and form the competitive advantage to set the distance away from their competitors. “Demanding customers from different segments, in hundreds of markets with unique requirements — ‘one-size-fits-all’ supply chain strategy is hard to meet shareholders and customers expectation. Supply chain segmentation enables companies to deal with complex supply chains — decreasing operational cost and delivering greater value to their customers.” (Jüttner, Christopher, & Susan Baker 2007)
“The basic concept of supply chain segmentation is that an organization’s supply chains can be “segmented” into various dimensions such as customer, channel, distributors, products, or markets, in order to configure and utilize the limited resources or assets” (Gattorna 1998). It leads to better order management, production
18 efficiency (reducing the throughput time), higher margin (cost reduction) or market share (increase service level) for supply chains because they are designed to meet the requirements of a specific product, distribution, or subjected dimensions. It contributes to better resources configuration within an organization.
The Role of Supply Chain Segmentation
“The first step in devising an effective supply-chain strategy is therefore to consider the nature of the demand for the products one's company supplies” (Fisher 1997). Straighten the chain would be the initial step to a sound strategy, and it will lead to a clear resources configuration. In other words, if we can see configuration as the present of strategy setting up, the supply chain segmentation will be seen as one of the vital mechanism in forming the strategy. It is the cause-and-effect relationship because only if company can define (segment) supply chains clearly first, the management team can allocate the resources to the right places.
Evidence is supported by PricewaterhouseCoopers’s (PwC) Global Supply Chain Annual Survey 2013. PwC, one of the "Big Four" accountancy firm measured by 2012 revenue, acquired PRTM (a management consulting specialized in supply chain operation) in June 2011 – it strengthens the leading position of supply chain world.
In this survey, one of the interesting finding is related to the benefits of supply chain configuration which is highly correlated to segmentation. The duration of survey is from May to July 2012, and PwC interviewed 503 supply chain executives around the world (Asia, Europe, and America) across major industry sectors such as automotive, pharmaceutical, life science, technology, telecom, chemical, retail & customer goods, and industrial products. A key objective of the study was to link responses to key performance outcomes, to separate the Leaders (top 20% among the
19 study group) and Laggards (the last 20% of the study group) by the combination scores of both those companies’ financial performance index and supply chain performance index based on SCOR metrics (Figure 3 below).
Figure 3 Industry leaders & Laggards. Source: PwC 2013 global supply chain survey
This report identifies six key traits of highly effective supply chain management. One of the six key traits is about the supply chain segmentation. They found leader companies tailor their supply chain to the needs of different customer segments (figure 3). The survey shows: on the one hand, the leaders has more than 40% of the supply chain configurations to lagers, and the other hand that the lagers have 10%more of the channels than leaders have. Furthermore, the leaders have 50% more configurations per channel than the lagers. This means that the leader companies are more focused because of lesser channels, but more configure their resources to utilize their current resources and assets to meet their customer needs.
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Figure 3 illustrate the different between leaders and laggards in the respect of supply chain configuration Source: PwC 2013 global supply chain survey
In short, based on the statistics, supply chain configuration can help companies stay ahead of the competition. Supply chain segmentation triggers the right direction to distribute the limited resources. Segmentation is not just a network strategy, or an inventory strategy, or a fulfillment or manufacturing strategy. Supply chain segmentation will be the bridge to connect the strategy and the concept implementation via resources configuration. It fosters end-to-end strategy for each supply chain that has implications from the customer through to the supplier. The aim is utilizing the same physical assets to serve customers and differentiate service, segmenting their supply chains by means of information and decision making within a management framework to achieve the maximum value for both the customers and the enterprise, eventually achieve the desired outcome.
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A. Previous Research and Practices
Due to the fact that companies did not have a full understanding of supply chain segmentation and configuration, before 1980s’ company resources had to serve different markets based on customers’ requirements leading to organizations having difficulties in balancing their capacities from diverse business objectives and further led to “diseconomy of scale”. “Thus customers who needed specialized products quickly but unpredictably tended to be underserved, while customers for more commodity-like products were overcharged” explained by Fuller et al. 1993.
Therefore, researchers start to the “prototype” needs of segmentation starting from “manufacturing process” point of view to overcome conflicting objectives. Wickham Skinner states in his article: ‘‘The focused factory approach offers the opportunity to stop compromising each element of the production system in the typical general-purpose, do-all plant, which satisfies no strategy, no market, and no task.’’. Furthermore, as the business and operation management concepts progressed, organizations realized that cost or price are not the only important factors to be sustainable in the market, but are the only one of several possible order qualifying characteristics. In order to build up the competitive advantage and distinct from other competitors in the markets, Fisher (1997) stressed “the importance of matching market requirements and value stream objectives” from a supply chain point of view. In other words, organizations also need to offer a service in combination with the product and specified with reliability, responsiveness, agility, and asset management from five SCOR key performance indicators (five attributes).
As mentioned before, a reasoned supply chain strategy or management cannot be optimized all five simultaneously and independently. ‘Strategy is a trade-off has to be made based on market and customer requirements’ (Fisher, 1997). Based on this,
22 organizations need to focus the multiple value streams and alternative market requirements because if everything is manufactured by a single factory, then compromising must occur due to the conflicting objectives.
Fisher graphed a general concept of supply chain segmentation from a product characteristic view. In Figure 4, he illustrated a general concept of matching the appropriate supply chain management strategy to product characteristics. He firstly segregated products into two categories: innovative/fashionable products and functional products. The functional product is relative stable and has its features such as mature, low product variety, predictable demand, established product categories, low margins, and low forecasting errors. Mark cups or white T-shirt can be regarded as functional products. The innovative product has the opposite characteristics such as early life cycle stage, high product variety, unpredictable demand, new product categories, high margins, and high forecasting error. The innovative/fashionable products require a responsive supply chain in order to cope with demand uncertainty and short product life cycles. In order to enhance the responsiveness, organizations usually work on reducing excessive and unnecessary variety, buffer inventory of parts, using leading indicators, using common parts and postponement method. The relatively predictable nature of demand for the functional products facilitates a more efficient supply chain. However, Figure 4 illustrates “only the two extreme types of product characteristics; in the real-world there is a wide range of products in different degrees of functional and fashionable characteristics” (Aitken, Childerhouses & Towill 2003). Furthermore, the time issues are not be taken into consideration in these characteristics because products maturity will change over time through their product life cycles. However, the customer requirements change drastically according to those changes. Nevertheless, Fisher’s research is a cornerstone of focused supply chain
23 philosophy and is one important starting point.
Figure 4: Matching supply chain with product characteristics Source: Fisher, 1997
Besides functional and innovational products segmentation, there are still many potential variants of a given product or ways of segmentation. The production volume mix can be another example: high-volume, low-margin products or low-volume, high-margin products. The supply chain strategy or segments will be different. Some practitioners such as Ernest & Young (Table 3) identified different ways of segmentation related to risk, process, customer requirement based, or market driven based supply chain segmentation.
• Supply chain risk- and resilience-based segmentation:
The main purpose of this supply chain is to examine resiliency of the supply chain itself and plans for risk-mitigation strategies. Cisco is one of the good examples during the flooding in Thailand – they successfully segmented their sourcing plan based on risk, and they suffered much less compared to other competitors when most of the suppliers were shutting down because of the flood. As mentioned before, catastrophic disasters like earthquakes, volcano eruptions, tsunamis, and the floods can never be predicted thus companies would benefit greatly from a carefully segmented supply chain capable of managing the sourcing plans and options.
24 • Manufacturing process based segmentation
This segmentation tunes for different production and execution methods and can be helpful in achieving synergies among multiple divisions. For example, based on the SCOR model, companies can segment MTO (make to order), MTS (make to stock), and ETO (engineer to order) for their ‘Make’ processes. It will help companies tailor their resources to their production and may shorten the lead time and better utilize the production capacities. Of course, only the manufacturing processes adjustment may not cause obvious impacts independently. It still needs to be based on different business strategies (customer needs) and to be coordinated with other departments such as procurement or logistics.
• Customer service needs based segmentation:
This groups customers with similar fulfillment needs and then develops distinct supply chain operations to meet those particular requirements. For example, for certain products, customers have higher expectation on responsiveness; therefore, shorter lead time and instant availability should be place more emphasize on this kind of requirements. The inventory policy of build-to-stock (BTS) could be a good way to higher the service level. At the same time, the focus is more on configurability and a build-to-order (BTO) path when customers more care about the project based production. It is about the service-level agreements (SLAs) with differentiated by standard, high-quality and premium service levels. Another might be demand predictability from customers; some customers may buy products for which demand is volatile and unpredictable, while another group may buy products for which replenishment characteristics are relatively consistent. However, this method should still depend on the product type and the product life cycle. It is because “the customer
25 tastes change with the different stage of maturity for specific kind of products. The standard of service level would be changed go with it as well” (Jüttner, Christopher, Baker 2007)
• Market or geographical-driven segmentation:
Companies differentiate supply chains based on the geopolitical nature of the markets, peculiarities of the channels, characteristics of consumers. In general, the idea is basically based on market demand or customer needs from geographic point of view.
BYD, (an electric car manufacturer in China) selling strategy can considered as an example from my personal consulting experience. This company tries to sell the same type of car to east coast and west area in China – two geographical areas that for which BYD has completed different business and supply chain strategies. The east coast consumers in China will care more about the interior decoration and entertainment appliances because east coast of China is more developed. They care more about quality of life, and especially they need to have better entertainment systems during almost three hours of traffic jam within a day. On the other side, west area of China is a very vast place and sometimes faces extreme weather. People there are relatively poor and under developed compared to the east coast people. Therefore, cost and safety is the major concern when they choose a car. Due to the different customer needs, BYD separated the same series car into different supply chain segmentations.
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Table 3 The different ways of segmentation Source: Ernest & Young
Based on the way of segmentation from researches and practitioners, we can conclude that every organization contains not only a single supply chain, but multiple ones within any company. Each supply chain could be focused on manufacturing process, geographic markets, risk, service level. No matter what kinds of segments, the requirements should ideally be aligned with fellow supply chain members in a seamless manner. The focused factory’ (Skinner, 1974) states that “too many companies do too many things with one plant and one organization”. It is also feasible to operate several supply chains through a single factory location, but emphasis must be placed on segregating the management and operation of each supply chain. It clearly responses to the PwC’s research above that the Leader companies configure more their resources to meet the needs, rather than to create more assets coping with different supply chains. Therefore, careful consideration must be given to which resources can be effectively shared so as to gain from economies of scale and which resources must be tailored for specific supply chain requirements so as to avoid resource wasting effects.
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B. Develop A Segmentation Combine with SCOR
After introducing the concepts and possible segmentations ways, this paper leads to an interesting question. Is it possible to align the ideas of managing process, customer service level, geographical markets, product life cycle, and supply chain strategies all together? How can company to use the segmentation concepts and SCOR to set up clear supply chain strategies?
Before starting to answer this question, we should recognize the correlation between customer and products. We can observe that all the segments are related to these two categories. Different customers have different needs, and each product may also serve different customers. The end goal is to make operation more efficient and cater to customers’ needs. Configuration is the way to distribute the limited resources. Therefore, our segmentation must be also starting from this idea. This will be the first step of supply chain segmentation. The second step will involve in the manufacturing processes and product life cycle. The strategy and service levels will be formed initially.
Table 4 helps to illustrate the first step of the segmentation. The horizontal axis represents the customers / geographical market. The customers / geographical market can be channels and also separated from regions. Different channels have different service level requirements. Even within the same channel, belonging to the different regions, the requirements may also be differed.
The horizontal axis can simply combine the customer (channel) characteristics by different areas.
The vertical axis represents the product group. It roughly classified four product groups. Each crossover between horizontal and vertical axis with a “X” formulates the supply chain. For example, the Retail Markets South / Cake can be regarded as one
28 supply chain. On the other hand, the Retail Market North / Cake column is empty which means there is no cake business at that channel and region. Therefore, there are total 26 supply chains in “Food Company ABC”.
Food Company ABC
Customer / Market Channels Retail Market Direct selling Bakery School Home Delivery South East North South East North South East North South East North
Cake X X X X X X X X Semi- X X X X X X X X X X Product Bread X X X X Soft drinks X X X X
Table 4 The supply chain segmentation
Since the resources are limited and each supply chain characteristics are differed, the supply chain strategy should be different from other supply chains. The next step is combine the product life cycle and manufacturing process to forming the likely supply chain strategies based on the SCOR’s five KPI (Key Performance Index). We should select one of the supply chains based on the methods we mentioned on Table 4 as an example. The strategy can be simply identified based on Table 5.
This table 5 can be reviewed as a pattern of decisions to determine what a business strategy is likely to be based on supply chain patterns in the SCOR framework. It starts from rows top to bottom, left to right, and if there is no entry to right of feature, choose the likely priority; otherwise look at features on next lower row. From the first row, there are five categories. The first column is so called “build strategy” with “Buy” & “Make” two different choices. Column two and three
29 represent the SCOR Level 2 process and four stages of product lifecycle. The last column is the likely priority of the supply chain strategy to be applied.
The buy strategies such as such Nike’s or most of garment companies don’t actually produce their products but rather let their suppliers responsible for this. It utilizes high-powered market incentives. In other words, buy strategies usually focus on outsourced production, including possibly outsourced inventory management (or no inventory). It can be combined with the different models (BTS, late lifecycle). Furthermore, if organizations buy materials the priority has already been assets, in most cases because no companies want to own inventory or manufacturing plants or equipment. “However, problems accompany the buy choice, such as under investment in fix assets required for high quality and low cost” (Hong; Reddy; & Sarkar 2000). In the same time, the make choice loses the high-powered market incentives, but gains in making a proper level of investment for producing high quality and low cost supplies. If Build strategy is not relevant, proceed to model strategy.
Model strategy – Engineer to Order, Build to Order, Build to Stock – each have a different purpose and focus within the supply chain organization, and have distinct strategic purposes. Once company chooses ETO – Engineer to Order environment, cost, assets and flexibility are generally not a competitive issue at all, leaving reliability and response. If it is Build-to-Order then organizations may have made a decision to “build on order” so organizations are holding little or no inventory. Reliability is paramount usually in these circumstances. Within the BTS strategy, consider the lifecycle of the material, to understand how the final planning strategy is influenced by degree of material in place. If the product is at the lifecycle start of a material, the major issue is usually growing quickly, or Agility. If the product has competitors in the market, companies normally will slowly shift to having the best
30 cost model, or being most reliable supplier. Late phase products, which are commodity, start to have intense focus on cost and assets because the reliability, responsiveness and flexibility are fairly even across suppliers. Lastly, EOL product is the last stage of product lifecycle. The mould or related production equipments maybe face out during this stage. The companies should start to prioritize holding little or no assets and reducing the cost.
Table 5 combines the segmentation on SCOR frame, product lifecycle, sourcing strategy, and SCOR KPIs.
Based on the two steps segmentation, we combine from the geographical market to product lifecycle segmentation and SCOR frameworks. Companies can find the target prioritized strategy directions to individual supply chain based on SCOR five different attributes. By utilizing SCOR process frame work, organization can easily decompose the metrics based on the strategy directions to respondent processes level. It will help to find out the true root causes and the specific process need to be adjusted. According to those processes need to be fixed, the management team can forming the projects lists and make up a long term project implementation steps by prioritizing the projects. The limited resources within companies will be used more effectively by the
31 configuration; the most important of all, that the management team can select suitable practices or methodologies to implement their strategies, rather than applying without guidance.
IV. Conclusion & Future Research Suggestion
A company’s operations strategy must be consistent with and support the business strategy. Configuring limited resources and applying suitable practices or methodologies are major topics in order to implement sound operations strategies. Supply Chain segmentation helps to scope and identify the configuration and prioritization the wanted strategies and the SCOR framework helps to dig out the root causes by using the process point of view. This paper combines two concepts and tries to enable companies identify sound practices necessary to implement supply chain strategies.
As introduced, the supply-chain operations reference model (SCOR) is the first cross-industry framework for evaluating and improving enterprise wide supply chain performances and management. The purpose of this model or framework is to describe companies’ processes and set up a decomposable performance metrics into process level that make sense to key managers or key business partners.
The Supply chain segmentation is the first step to help companies scoping their supply chain and it will be also the very critical point to the supply chain management and strategy set up. Companies should recognize that they have more than one supply chain within their company and should engineered to match product characteristics and customers’ (channels) requirements. At the same time, each supply chain should have its own strategy to respond better to customer needs.
32 still need to be addressed by future research on this topic. First, the methods of customer or product grouping in the supply chain segmentation are complicated. Take customer group as an example - it can be seen into two directions: strategic or operational. From the strategic point of view, it can be considered as the definition of product group, the role of the product group, and the strategy of the product group. From operational point of view, it can be segmented into product policy and product combinations. As long as these factors are taken in to account, the analysis is more stick to reality but more complex. Moreover, the detail level of the groups also could be another topic for research. No matter it is product group or customer group in the segmentation, if the grouping is too rough, the analysis is not presentable. If the grouping is too detail, the result will be very sensitive and cause fluctuation easily. It will be hard to structure a long term supply chain strategies. Some practitioners suggest using the market or customer group definition from ERP (enterprise resource planning) systems. The benefit is that segment can be repeatable once it is fixed from the same standard, thus it is easier to load data and to calculate repeatedly.
Furthermore, the concept of benchmark cannot be overlooked because benchmark is the way to enable strategy become quantifiable in numbers from a slogan. Benchmarks should be incorporated after the segmentation. Even the organizations picture the “strategy direction priorities” based on the five attributes in SCOR, they should still set up their own competitive requirements based on their current capacities and market. It would be one of the important elements for benchmarking. Only if the management team can make gaps countable between as-is situation and to-be, companies really have the chance to fill up the difference.
Last, the concepts of segmentation frequency should be viewed as another emerging trend. The strategy altering would be more and more present in the future.
33 We realize that there is no single supply chain strategy that is applicable to all product types. Rather we have found that not only product design, but also supply chains should be engineered to match customer requirements. However, it is also not a one time job to segment or design organizations’ strategy. The tastes of customers and markets change faster than ever before and all their corresponding factors change with it. It has been shown that these will significantly impact strategy making. The process and models also may not be applicable for the same product. Product lifecycle is an evidence to reflect the market demands and this is especially relevant for supply chain management today. As a product proceeds through its life cycle the demand characteristics change, therefore it has to be an obvious requirement to adapt the supply chain strategy in order to maintain competitiveness.
34
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