Strategic Supply Chain Management
Aligning supply chain strategies with product uncertainties
Demand uncertainty and supply uncertainty to categorize four main supply chain
strategies.
Supply chain management is the handling of the entire production flow of a
good or service – starting from the raw components all the way delivering the
final product to the consumer.
For this course, we focus on the forward flow of goods and services through a
supply chain (not circular). Inevitably, in a firm or company, you have to deal with
at least two main sources of uncertainty. The first source is demand
uncertainty. Now we are living in a market economy, consumers have different
preferences, seasonal changes, in their demand. Compared to for example a
planned economy, demand uncertainty is there less relevant because everything
was planned. By contrast, in a market-based economy demand uncertainty is
physically relevant for all categories of goods and services. This is the
downstream side of this supply chain uncertainty faced by companies or
manufacturers.
On the other side, there are also supply uncertainties of the key components, for
example you might have heard about the shortages of chips, which has
repercussions for smartphones, auto industries and wider implications for other
industries. Managing a supply chain essentially means dealing with demand
uncertainty as well as supply uncertainty.
Article from Fisher quite insightful, and also quite interesting by the time of its
publication, because it came up with the idea that supply chain strategies have
to be aligned with certain demand characteristics. In very simplistic terms, Fisher
contrasted between functional goods versus innovative goods. These two have
different demand characteristics in terms of stability of demand, product life
cycle, inventory costs, profit margins, and product variety. These two represent
two extremes of demand uncertainties. Then he proposed two strategies for
functional goods versus innovative goods. He proposed that efficient supply
chains should be developed for functional goods, while market responsive supply
chains should be developed for innovative goods.
On the right hand, Lee kind of elaborated on Fisher’s framework by adding
besides demand uncertainties, also important sources of uncertainty on the
supply side. Lee contrasted between stable versus evolving (unstable) supply
characteristics. These two types of processes differ in terms of the number of
reliable sources, reliable suppliers, capacity constraints, time it takes to
changeover, dependability of the lead time. This video will be primarily about the
paper of Lee, because it is essentially an extension of the framework developed
by Fisher.
,Based on these two sources of uncertainty, Lee came up with a categorization of
goods. In the first quadrant, we have functional products (relatively low demand
uncertainty), and stable supply processes. Some of the good examples are
grocery goods, food, oil and gas. Second quadrant we have innovative products
(high demand uncertainty), but with stable supply processes, including fashion
apparel, computers, pop music. So the first two quadrants were basically what
Fishers article was about. Lee added two more quadrants. The third quadrant is
for functional products, but with evolving supply processes, which means that
there could be limited number of supplies available, or there is a very low level of
flexibility in the supply base. These types of products are functional products with
evolving processes, examples are hydro-electric power (depends on weather
conditions), and some food produce, for example seafood. Functional good but
supply process can be fluctuating that can be influenced by many factors. The
last quadrant is innovative products, but also with evolving supply processes,
including telecom, high-end computers, and semiconductor.
,So through this uncertainty framework, Lee differentiated between four types of
goods, and he was also proposing certain strategies. We can basically agree that
for supply chain management, supply chain managers would have an easy life if
he/she is dealing with functional goods with a stable supply process. Inevitably,
there are products in other quadrants. Lee was proposing a few strategies, first
for demand uncertainty reduction, including information sharing. When there was
a lack of information sharing between manufacturers, retailers, and consumers,
then the demand uncertainty gets fluctuated, even amplified, through the supply
chain, which causes a whole lot of problems for all supply chain participants.
Likewise, collaboration replenishment, that suppliers got involved in replenishing
decisions at the retailer’s end. You can increasingly see this called VMI, vendor
management inventory management. Through this type of collaboration on
replenishment, the demand uncertainty can also get reduced, at least not get
amplified through the supply chain. Some other strategy includes digital
communication and the supply chain integration. These four can be used to
smooth out the fluctuation or uncertainties on the demand side.
So demand uncertainty reduction strategies (shifting to left columns)
o Information sharing
o Collaborative replenishment
o Digital communication
o Supply chain integration
Supply uncertainty reduction strategies (shifting to upper columns)
o Information sharing
o Early design collaboration
o Supplier hubs
We can also apply strategies to cope with the supply side uncertainty, including
information sharing, enabling downstream players, like manufacturers or even
customers, to have some information about the number of inventories and WIP
on the supply side. For example Albert Heijn 1+1 gratis program. Have to be
knowledgeable about what the suppliers have on their side, otherwise if they
, promote certain goods without having adequate information about suppliers
inventories, it will for sure cause problems of supply uncertainties. Some other
strategies for supply uncertainty reduction include early design collaboration and
supplier hubs.
With those strategies available, Lee proposed four types of supply chain
strategies. Two of them were already covered by Fisher.
1. Efficient supply chains (Fisher, 1997)
o Clear focus on cost efficiencies, through transparent information on
demand, inventory, WIP, etc. Supply chain partners have pretty much
adequate information about different stages of the process, which enables
them to optimize their operations, delivery, logistics activities, in a way
that can really maximize cost efficiencies.
2. Risk-hedging supply chains (Lee, 2002)
o Essentially very similar to efficient supply chains, only that this is more for
supply chains with unstable supply processes. Besides a clear focus on
cost efficiencies, supply chain partners also try to pool and share
resources, so that risk in supply chain disruptions can be shared,
mitigated, or decreased.
o Pooling and sharing resources so that the risks in supply disruptions can be
shared
3. Responsive supply chains (Fisher, 1997)
o Used for innovative goods with stable supply chains.
o Supply chain partners using make-to-order and mass customization
processes as a means to meet demands. Most of the inventories are not
stored as final product, but on a component level. The manufacturers use
make-to-order when demand information becomes more accurate
postponement
4. Agile supply chains (Lee, 2002)
o A bit like responsive supply chains with adaptations to the context of
unstable supply processes.
o Comparable to responsive, with additional efforts to pool inventory or other
capacity resources to mitigate supply risks.
Logically, based on these demand and supply uncertainty framework, we can find
what is most fitting supply strategies for each type of the goods. For the first
quadrant, functional products with stable process, then efficient supply chains is
probably the most fitting strategy.
