it all starts with strategy

Last month, we discussed the importance of planning, and the critical nature of efforts to align the operational plan with the business strategy. Let's dig into that a bit more, starting with the need for strategic planning.

Some argue that random opportunism is a strategy. By that logic, chaos would be classified as a sophisticated plan. We posit that, while insisting on order might be obsessive-compulsive in a business sense, organized thinking—ahead of the fact—lies somewhere between desirable and absolutely required.

Although supply chain professionals sometimes dismiss strategic planning as someone else's concern, that's a short-sighted view. Many—if not most—strategic planning choices will have implications for supply chain operations and how they're managed.

For example, an early strategic choice lies in whether to be asset-based or non-asset-based—to buy or not to buy, to paraphrase Shakespeare. Some companies consider good investments in real estate and capital equipment to be the cornerstone of their strategies; they will likely build and own warehouse facilities, and possibly also own and operate some transportation assets. By contrast, companies that want to maximize return on investment capital will strive to be asset-light. They will most likely seek to rent or lease as much of their capital equipment as they can.

Similarly, there are strategic choices when growth is an objective. For some organizations, the primary growth engine is acquisition of other companies. For others, joint ventures are prime growth strategic vehicles. Still others prefer to grow with startups. Each of those environments has different implications for managing supply chain operations and planning their specifics.

Growth becomes more complicated when a local company chooses to go national or multinational. One strategy is to follow key customers around the globe. The alternative to that is to simply plant a flagpole and start selling. Once the strategic decision has been made, operations become more complex in execution and more delicate in planning.

The strategic resolution of the "who is our preferred customer" question also complicates routine planning and operations. Some companies actively pursue business with a few large customers. The ultimate end point of this approach can be to wind up with Wal-Mart, Home Depot, and Sears accounting for 95 percent of revenue. Others feel that the largest customer should never control over 10 percent of total capacity. Still others look at the penetration of the top three or five customers, and they work hard to avoid becoming dependent on just a few companies. The supply chain ramifications are enormous.

The supply chain manager needs to understand the growth strategy of the company that controls the chain, not just his or her own. Supply chain management tactics in a company that grows by acquisition will be far different from tactics used by companies that grow organically. And they will be still different in a company that is merely following the lead of its supply chain partners.

Six trends that have changed the game
In addition to outsourcing and offshoring, there are six other trends and practices that have changed the way that supply chain managers strategize, plan, and function. These are: cycle time reduction, postponement, improving return on assets (ROA), compression of distribution channels, partnerships, and shifting of control.

Improved technology, in both communications and transportation, has allowed a rapidity of delivery service that would have been impossible a few decades ago. Cycle time is the interval between the moment a buyer desires a product and the time that he or she receives it. Delivery times that were normal a few decades ago are not considered remotely acceptable today. Management's ability— and supply chain management's capability—to meet current customer expectations has become a dominant competitive challenge.

Postponement is the delay of one or more of the final steps in the assembly, branding, packaging, or passage of title until the latest possible moment. Postponement is not new—it was described in marketing textbooks more than a half-century ago. What is new is its enthusiastic adoption in computer manufacturing as well as other corporate services. Examples include the hardware retailer that blends pigments to create a customized paint color in the store or the vegetable canner that establishes a casing and labeling line at a remote distribution center. Postponement reduces cycle time, but it has other implications as well. By allowing a single generic stock-keeping unit (SKU) to be converted into a variety of items, postponement can dramatically reduce inventory investment as well as the risk of running out of stock.

Improving asset productivity usually involves sale and leaseback of warehouses, material handling equipment, and other corporate assets. Liquidation of excess inventory is another way to improve return on assets. One of the major selling points for logistics service providers is that they can provide logistics assets that never appear on the customer's balance sheet.

Compression of channels means disintermediation, a word that strikes terror in the hearts of many wholesale distributors. Corporate buyers may outsource logistics activities in order to reduce the number of layers in the supply chain.When changing conditions leave the corporation burdened with idle assets, it may be sensible to reverse the outsourcing practice and use the empty trucks and warehouses that are now available, a tactic now named "insourcing."

Some companies seek to support profitable growth through partnerships and strategic alliances. The tradition has been to shop for the lowest price and to engage in frequent bidding contests in order to "keep them honest." The emphasis is on transactions, and the most important thing in the relationship is the initial purchase price. Within the supply chain field, we see occasional, but growing, emphasis on strategic partnerships. These are not based solely on price, but rather on the drive to continuously improve quality and productivity—and total supply chain costs at the unit level.

One of the mega-trends in the supply chain environment over the past 15 years has been the shift of control to retail organizations and the corresponding shift of power away from manufacturers. A few years ago, the logistics service provider focused on keeping his manufacturer client happy. Today, the emphasis has clearly switched to the retail consignee.

Adaptability and survival
Part of the strategic planning process is adapting to the considerable changes that have taken place over the past decades. Not every competitor has been able to adapt successfully. For example, through most of the 20th century, consumer product manufacturers commonly had dozens and sometimes even hundreds of warehouse locations in order to provide convenient service for customers in every city where their products were sold. In the grocery business, food brokers were instrumental in making decisions about warehouse locations. With improved communications and the development of logistics management as a professional activity, most manufacturers found that adequate delivery service could be provided from a much smaller number of locations.

Adaptability combines the ability to observe new trends together with a willingness to change. Those managers who cannot adapt are unlikely to survive. Furthermore, the pace of change today is faster than before. Rapidly advancing technology gives us tools that no one contemplated a few decades ago. The supply chain executive today, wi-fi'd, Bluetoothed, and wired for sound, has learned to use computerized management systems, e-mail, and cellphones (often simultaneously).

Strategic planning is often not about making decisions, but rather about documenting choices that already have been made. A surprising majority of executives are not satisfied that strategic planning is worth the effort. They may be right in the short term and wrong—dead wrong—in the long term.

Unless strategy drives decision-making, it may have only marginal value. If the carefully crafted strategy is empty of meaning, it can even be counterproductive to try to hitch anything else onto it. There is at best no point, and at worst negative value, in having a strategic plan just so you can say you have one.

There may not be a lot of point to trying to build tactical plans if there is not a real, flesh-on-the-bones strategy on which to base them. So, it all begins with strategy. Absent a strategic plan, the only tactics that make sense are staying in your foxhole and keeping your head down.