Planning the Supply Chain
Before you can engineer and manage a supply chain, you need to plan what it's supposed to do. Planning gives you an opportunity to set goals, evaluate options, and make decisions — and ensures that you invest your time and money wisely.
In This Chapter
What you will learn
- Setting high-level targets for supply and demand
- Focusing on your customers' needs
- Developing plans for source, make, deliver, and return
Balancing Supply and Demand
Make-to-stock, make-to-order, and engineer-to-order
Supply chain planning is not a one-time event; planning is an ongoing and iterative process that ensures your supply chain adapts to changes in your business.
The fundamental question at the heart of every supply chain plan is "How are we going to balance supply with demand?" There are three main approaches to balancing supply and demand:
Products are ready before an order arrives. You forecast demand and push products toward customers. Example: cars on a dealership lot.
Design is complete but nothing is made until an order arrives. The order pulls products through the chain. Example: custom-colour car ordered from the factory.
A fully custom product — design can't begin until specs arrive. Example: a car modified with a custom kennel compartment for a customer's dog.
When your supply chain plan is based on a make-to-stock approach, you start by forecasting how much you think customers are going to buy. This forecast drives all your manufacturing and distribution planning. The work is done and the products are ready to go before you receive an order from a customer. This approach is sometimes called a push system because you're pushing products out toward your customers even though they haven't yet placed orders.
When your supply chain plan is built on a make-to-order approach, all your manufacturing and distribution services are standing by, waiting for an order to come in. The product design work is complete, but you don't make or move a product until you get the order for it. This approach is an example of a pull system because an order has to pull the products through the supply chain.
When your supply chain plan uses an engineer-to-order approach, you are making a customized product for each order, so you can't finish the product design until your customer gives you the specifications. The final engineering work, manufacturing, and distribution are triggered by the customer order. Like make-to-order, engineer-to-order is a pull system.
You could drive to your local car dealership and buy any of the cars on the lot. Each car was manufactured based on a forecast — the manufacturer guessed that someone would want to buy it. After the manufacturer forecasted the demand, they pushed inventory into the dealer's supply chain. All those cars came from a make-to-stock supply chain.
You may not like any of the cars in stock. Maybe you want red paint, tan interior, and the high-end entertainment package. The dealership will order it from the factory. That is a make-to-order supply chain — the flow of material, information, and money is quite different from a make-to-stock chain.
Suddenly, your friend wants a similar car, but with the rear seat converted to a kennel for her Newfoundland. The factory doesn't offer this as a standard feature, but has agreed to do it. The manufacturer has to design the kennel compartment and source all the materials. The manufacturer wouldn't have designed the kennel until a customer ordered it and provided her requirements. This is an engineer-to-order supply chain.
Make-to-stock, make-to-order, and engineer-to-order are different ways to plan a supply chain. A company can have more than one supply chain, and many companies operate all three types of supply chains while using many of the same supply chain assets.
The first planning decision is whether to push or pull. Make-to-stock pushes products toward customers based on a forecast. Make-to-order and engineer-to-order wait for the customer's order to pull production. Each approach suits different customers and products.
Aligning Resources with Requirements
People, facilities, machines, inventory — and their constraints
Supply chain plans are built around goals, or requirements. Whether your plan is based on a make-to-stock, make-to-order, or engineer-to-order process, planning always starts by identifying a requirement. The plan you create explains how you intend to meet that requirement while taking all your resources and constraints into account.
Anything you use to make a supply chain work is a resource. People are resources. Facilities are resources. Machines are resources. Inventory is a resource.
Every resource has constraints — things it can do and things it can't do. The constraints may be physical limitations, or they may be limits imposed on the supply chain by financial, safety, and policy rules. Here are some examples of constraints that may exist for your supply chain resources:
- Employees can work only 40 hours per week unless you pay overtime.
- A machine can operate for only 1,000 hours before it needs to be serviced.
- Operators must be certified on a piece of equipment before they can use it.
- Finished-goods inventory can't be stored outside during the winter.
The connection among the items in this list is that each item limits the capacity of your supply chain resources. So your supply chain plan needs to take all these constraints into account. A plan that assumes a 45-hour work week but doesn't include the additional cost of overtime may cause you to miss your financial targets. A plan that involves storing inventory outside while you wait for customers to pick it up may work during the summer but not during the winter. Constraints are not always obvious; it takes research and judgement to understand all of the constraints that affect a supply chain's performance. Identifying and managing hidden constraints is critical for effective planning.
Suppose that your requirement is to make 100 widgets per day. You need to figure out what resources are required to meet that requirement and what constraints exist for those resources. You will need manufacturing equipment, skilled employees, raw materials from your suppliers, and many other resources. Each of these resources is subject to constraints; perhaps the manufacturing equipment can only produce 10 widgets per hour, the raw materials won't be delivered for five weeks, and your employees are only available on Tuesdays. Your supply chain plan needs to explain how you will meet your requirements with the resources you have available.
Figure 6-1: Supply chain planning model. The model shows how all planning factors connect: Plan your production system → Plan your products → Plan your delivery system → Analyze your customers → Align resources with requirements → Plan for returns → Manage constraints. All factors are subject to constraints throughout.
Every supply chain plan is only as good as its understanding of constraints. Resources without constraints are assumptions — and assumptions lead to missed targets. Identifying hidden constraints is one of the most valuable things a supply chain planner can do.
Analyzing Your Customers
Market segmentation, personas, and key customer analysis
I define a supply chain as "a complex system made up of people, processes, and technologies that is engineered and managed to deliver value to a customer." Supply chain planners tend to focus on the people, processes, and technologies. But good supply chain planning also requires that you align plans with the needs of your customers, who are the source of every dollar that flows into your supply chain. Each customer is unique, with specific needs, preferences, and constraints. The better you understand your customers, the better chance you have of ensuring that your supply chain delivers the value they expect.
Some customers have specific needs or tastes and are willing to wait — and pay — for a custom product that's just perfect for them. These customers would be dissatisfied with a generic product, even if it were cheaper and immediately available. If you have customers like these, you probably need to have an engineer-to-order supply chain. Other customers are more interested in getting the lowest cost, which might lead you to implement a make-to-order supply chain because it minimizes inventory cost. Still other customers need to have your product immediately, which forces you to implement a make-to-stock supply chain. Understanding your customers' needs helps you make better decisions about your supply chain.
There are three common ways to analyze customers and their needs:
Bob is a single man who works 60 hours a week and has an active social life outside work. He's short on time, so he's drawn to hacks that can solve problems quickly and easily. For him, washing clothes is a chore, but a necessary one. He buys his laundry soap in a drugstore near his urban apartment.
You can create groups of customers by segmenting them based on demographic characteristics. If your customers are people, their demographics may include where they live, how much money they make, and how old their children are. If your customers are businesses, their demographics may include their industry classification, annual revenue, and the number of employees. Once you have defined your customer segments, you can check to ensure that your supply chain plan will align with each segment's needs.
A third way to define customer requirements is to identify the actual customers who are most likely to buy your products, your key customers. By studying your key customers you can get a better idea of what they want or need, how much they will buy, and how much they are willing to pay.
A Customer Relationship Management (CRM) system can provide useful data for studying your customers by tracking purchases and other interactions with customers. CRM data can be used to create personas, to analyze market segments, or to study key customer behaviors. Additionally, many CRM systems allow you to run experiments that provide insights into customers' preferences. For example, you could gather data through A/B tests where you try offering two versions of a promotion to see which one is more likely to encourage a customer to place an order.
Your customers determine your supply chain design. Use market segmentation, personas, and key customer analysis to understand exactly who you're building for — then design a supply chain that profitably delivers what they value.
Planning Your Products
How product characteristics shape supply chain requirements
Part of supply chain planning is being clear about what you are going to make and how you'll make it. The supply chain for a product can change based on demand-related factors. For example, product designs often change based on customer feedback. Supply chains can also be changed based on supply-related factors. For example, resources and constraints may dictate that you make changes to your product. Knowing which materials are readily available, where to get them, and how much they cost are important factors in making design decisions for many products. Product characteristics often evolve over time, and those characteristics should be incorporated into your supply chain planning.
A good example of how product characteristics need to be considered during supply chain planning comes from the catalytic converter that goes into the exhaust system of a car. There are two metals that can be used as the catalyst in a catalytic converter: platinum and palladium. When platinum becomes expensive, automakers opt for catalytic convertors that are made from palladium. When palladium becomes expensive, automakers switch to platinum catalytic convertors. In other words, as the prices for platinum and palladium fluctuate, automakers change the design of their cars and re-plan the supply chain for their catalytic convertors.
Another good example of how product characteristics can influence supply chain requirements occurs in the fast-food business. The seasonings used by national fast-food chains sometimes differ depending on where each restaurant is located. Although the logo, uniforms, and menus may look exactly the same wherever you go, there is a supply chain for the seasonings used in restaurants in different regions.
Yet another example of how products affect the supply chain is package size and quantity. Knowing whether you're going to be packaging a box of crayons for individual sale or shipping them in huge tubs can be an important factor in determining the requirements of your supply chain and defining the resources you need. Small boxes need to be easy for store associates to handle. Large tubs need to be compatible with the material handling equipment at each step in the downstream supply chain.
A bill of material lists all the parts that go into a product, and can help you identify many of the resources that should be included in your supply chain plan.
Products and supply chains co-evolve. As material prices shift, customer feedback arrives, or packaging requirements change, your product design changes — and your supply chain plan must change with it. Plan for that flexibility from the start.
Planning Your Production Systems
Centralized vs distributed production — and work-in-process inventory
Your production plan determines when, where, and how to make products so that you can meet your requirements without violating your production constraints.
You could plan to ship all the raw materials to a single facility and manufacture your products there, for example. This is an example of centralized production. When manufacturing requires large investments in capital equipment (such as expensive factories), a plan for centralized production may make sense. Centralized production tends to make manufacturing more efficient but often leads to long delivery times and high transportation costs.
When customer or product requirements demand short lead times and low transportation costs, a distributed production plan may make more sense. Distributed production involves manufacturing products at multiple sites to satisfy demand in each region.
If one of your manufacturing facilities does not have the capacity to manufacture your entire product, you could split the manufacturing process among several factories. Splitting manufacturing steps across multiple factories can be a good way to increase your access to resources and overcome constraints (such as not having enough space or enough people) in each production facility. Splitting manufacturing can also give you access to local expertise and lower-cost resources.
One of the issues to consider when splitting up the steps in a manufacturing process is the impact it will have on inventory. Partially assembled products in between manufacturing steps are called work-in-process inventory, or WIP (pronounced like "whip"). The further one manufacturing step is from the next one, the more WIP you are likely to accumulate between the steps. So the benefits that come from dividing a manufacturing process need to be weighed against the potential that it creates for increasing WIP.
3D printing has the potential to make distributed production a good option for many products that are manufactured centrally today.
Centralised production is efficient but slow. Distributed production is fast but complex. The right answer depends on your customer requirements. And whenever you split manufacturing steps, always evaluate the WIP inventory that builds up between them.
Planning Your Delivery Systems
Logistics networks and getting products to customers
Making your products is one thing; getting them to your customers is quite another. Factors such as the locations involved, the characteristics of your product, and the needs of your customers can constrain your delivery system. The work of delivery (which includes moving and storing products) is called logistics. The collection of resources that you use to do this work is a logistics (or distribution) network.
Logistics networks come in many shapes and sizes. If you're making small widgets and selling them directly to consumers via the Internet, for example, you might put an e-commerce fulfillment center next to your factory. That arrangement makes it easy to ship products to your customers when they place an order. In this case, your logistics network starts at your suppliers, flows through your factory to your fulfillment center, and ends with your customers. Any resource that you use along the way to move or store the products is part of your logistics network.
But if you're selling your widgets through a big-box store, your factory probably needs to ship them by the truckload to your stores. If you're sending widgets to stores internationally, you may need to ship them by the containerload. Depending on where you ship the products, you may need to think about issues such as tariffs and international trade rules. In each case, you have a different logistics network and need different resources to support your logistics processes.
Chapter 9 provides more information about what's involved in delivering a product. This material can be useful for defining the resources and constraints that need to be addressed in a supply chain plan.
Your logistics network is not one-size-fits-all. The right network depends on your product, your customers, and your channels. Direct-to-consumer, big-box retail, and international distribution each require a fundamentally different set of resources and logistics processes.
Planning for Returns
Reverse supply chains, recycling, and remanufacturing
When you plan your supply chain, you need to account for returns. Returns are normal in most businesses, but they're often overlooked during the planning process. Depending on the industry, 5 to 10 percent of all the products sold may be returned by customers, and in e-commerce, this figure can be 30 percent or higher.
The network for returned products is called a reverse supply chain because the flow goes from the customer back to your company. Reverse supply chains, however, involve more than just customers returning products they don't need, don't want, or are dissatisfied with. Reverse supply chains can also be used to repair, remanufacture, or recycle products, as well as ensure that hazardous products are disposed of safely. As in any other supply chain, the goals of a reverse supply chain include minimizing costs and maximizing the value; the value of a reverse supply chain is often the amount of money that is recovered from returned products.
A well-planned reverse supply chain recovers value at every step — rather than writing off returned products as a loss.
Many e-commerce retailers go out of their way to make it easy for customers to return products because they believe that doing so will increase sales (and profitability) in the long run.
Companies that make computers, for example, have reverse supply chains. If you buy a computer that stops working during the warranty period, you can usually send it back to the manufacturer. The manufacturer wants to make the return fast and easy for you as a customer so that you buy more of its products in the future. It may even send you a new replacement computer. But now the company has an almost-new computer that doesn't work. If it does nothing with the returned computer, the defective computer is a write-off. The company, however, may be able to recover most of the value of the returned asset by planning the reverse supply chain properly. It can run a series of tests, repair the defects, and then resell the computer as a refurbished unit, for example.
A well-planned reverse supply chain for returned products creates value in two ways: It keeps customers happy, and it reduces losses from disposing of damaged or defective products.
Another strategy for reverse supply chains focuses on recycling. Many products contain valuable materials that can be recovered when the product is no longer needed or when it reaches the end of its life. Electronics devices, for example, often contain precious metals such as silver and gold. A common reverse supply chain is the network of junkyards and scrap recyclers that collect everything from old cans to old cars to be melted down and turned into new products.
In some industries, a well-planned reverse supply chain can create new business opportunities. Automobiles, airplanes, and heavy equipment have many components that can be remanufactured. These used components, called cores, become raw materials for a remanufacturing process that makes like-new parts. Remanufactured parts typically are much cheaper to make than new parts, even though they usually meet the same technical specifications. The savings can be passed along to customers, who get discounts for buying remanufactured parts.
In addition to being good for business, reverse supply chains can benefit the environment, especially for products that contain harmful chemicals (as batteries and some electronics devices do). Given the opportunity to recapture value from used products and the environmental benefits, many companies are striving to design closed-loop supply chains, which means that all their products can be recycled.
By planning your returns properly, you can minimize the amount of waste created throughout the life cycles of your products.
A properly planned reverse supply chain can actually create an additional source of supply and, at the same time, increase profits.
Returns are not a cost to minimise — they are a value recovery opportunity. A well-planned reverse supply chain keeps customers happy, reduces losses, recovers materials, and in some industries creates entirely new revenue streams through remanufacturing and recycling.
Chapter 1 Quiz
Test your understanding before moving on to Chapter 2
Answer all 10 questions drawn from the chapter content. You need at least 7 correct answers (70%) to pass. Review the sections above before starting if you need to.