How To Do Strategic Supply-Chain Planning

Any company that has a global supply chain should consider introducing its strategic left hand to its operational right hand. Strategic supply-chain planning that combines aspects of business-strategy formulation with aspects of tactical supply-chain planning can make each far more valuable to the planning effort than either would be alone. Strategic supply-chain planning is the Pegasus of strategy: It can soar, but it also needs to keep its feet on the ground. Although companies routinely weigh long-term supply-chain-related decisions in light of alternative sources of supply, new geographic markets or new products, various levels of management use different approaches, often in isolation. Senior managers make such decisions as part of formulating business strategy; supply-chain planners, as an extension of their tactical supply-chain planning.

How should companies ensure that relevant supply-chain details inform the business-strategy formulation and that strategic direction and the supply chain are in alignment? They can do so through early communication between senior managers and supply-chain planners, which shortens strategy-implementation time while letting each group pursue its forte: senior managers formulating strategy to maximize shareholder value; supply-chain planners running optimization models to minimize total supply-chain costs.

One Company’s Story

Consider a strategic supply-chain planning exercise at a polyvinyl chloride (PVC) manufacturer that we’ll call Acme Vinyl Co. Acme’s North American revenues came from PVC for building (55%), packaging (15%), consumer goods (10%), the electronic industry (10%), the automotive industry (4%) and from non-PVC products (6%). At the end of the 1990s about 4% of those revenues came from Asia. Acme had been seeing revenue growth for several years, mostly as a result of acquiring other PVC manufacturers.

With fragmented spare capacity around North America, a falling stock price and a need to rationalize the postacquisition supply chain, Acme’s leaders considered their options. Some favored consolidating manufacturing into one or two new mega-plants; others suggested closing existing plants or lines. Management chose to do a strategic supply-chain planning exercise to assist decision making.

The Planning Spectrum

Strategic supply-chain planning falls in the middle of a decision-making spectrum that has business-strategy formulation at one end and tactical supply-chain planning at the other. (See “Strategic Supply-Chain Planning and the Planning Spectrum.”) With a focus on fundamental changes in manufacturing and distribution capacity, it is long-term in scope and impact but can benefit from detailed optimization models and advanced planning-and-scheduling (APS) technology that is more often associated with medium- and short-term planning.

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References

1. Suppliers of APS technologies include SAP, i2 Technologies, Manugistics and Logility.

2. R.L. Breitman and J.M. Lucas, “PLANETS: A Modeling System for Business Planning,” Interfaces 17 (January–February 1987): 94–106.

3. Optimization models can be built into spreadsheets by using the Solver feature within Excel, for instance, or by using add-on software, but these models are not comprehensive enough to take into account the scope and detail needed for a global supply-chain model. For such optimization, the cost of APS software, including implementation, may exceed $1 million.

4. A.M. Geoffrion and R.F. Powers, “Twenty Years of Strategic Distribution System Design: An Evolutionary Perspective,” Interfaces 25 (September–October 1995): 105–127.

5. M.A.. Cohen and H.L. Lee, “Strategic Analysis of Integrated Production-Distribution Systems: Models and Methods,” Operations Research 36, no. 2 (1988): 216–228; and M. Cohen and H. Lee, “Resource Deployment Analysis of Global Manufacturing and Distribution Networks,” Journal of Manufacturing and Operations Management 2, no. 2 (1989): 81–104.

6. R. Breitman and J. Lucas, “PLANETS: A Modeling System for Business Planning,” Interfaces 17 (January–February 1987): 94–106.

7. B. Arntzen, G. Brown, T. P. Harrison and L. Trafton, “Global Supply-Chain Management at Digital Equipment Corporation,” Interfaces 25 (January 1995): 69–93.

8. A. Macdonald and D. Beavis, “Seize the Moment — Radical Supply Chain Integration as a Means of Increasing Shareholder Value and Enabling Acquisitions To Deliver on Their Promises,” Manufacturing Engineer 80, no. 4 (2001): 175–178; C. Farrell and R. Melcher, “The Lofty Price of Getting Hitched,” Business Week, Dec. 7, 1997; and D. Henry, “Mergers: Why Most Big Deals Don’t Pay Off,” Business Week, Oct. 14, 2002, 72–78.

9. B. Arntzen, G. Brown, T.P. Harrison and L. Trafton, “Global Supply-Chain Management at Digital Equipment Corporation,” Interfaces 25 (January 1995): 69–93; J. Muller, “Compaq Will Buy Digital in a Record $9.6b Deal,” Boston Globe, Jan. 27, 1998, p. A1; and “Compaq To Acquire Digital for $9.6 Billion,” Compaq press release, Jan. 26, 1998, New York, http://h18020.www1.hp.com/newsroom/pr/1998/pr260198c.html.

10. D.J. Frayer and R.M. Monczka, “Enhanced Strategic Competitiveness Through Global Supply Chain Management,” Annual Conference Proceedings of the Council of Logistics Management (Oak Brook, Illinois: Council of Logistics Management, October 1997): 433–441.

11. J. Greenbaum, “SCM Is Dead, Long Live SCM,” July 16, 2002, http://itmanagement.earthweb.com/columns/entad/article.php/1407831.

12. A.P. de Geus, “The Living Company” (Harvard Business School Press: Boston, 1997), 69.

13. H. Mintzberg, “The Rise and Fall of Strategic Planning” (New York: Free Press, 1994).

14. See M. Porter, “Competitive Advantage: Creating and Sustaining Superior Performance” (Free Press: New York, 1985); B. Melzer, “The Uncertainty Principle,” CIO Insight, June 1, 2001, www.cioinsight.com; and H. Kahn, “Thinking About the Unthinkable” (New York: Horizon Press, 1962).

15. E. Larsen, “What Is Scenario Planning?” teaching note, Cass Business School, London, 2000; P. Schwarz, “The Art of the Long View: Paths to Strategic Insight for Yourself and Your Company” (New York: Doubleday, 1991); P.J.H. Schoemaker, “Multiple Scenario Development: Its Conceptual and Behavioral Foundation,” Strategic Management Journal 14 (March 1993): 193–213; and P.J.H. Schoemaker, “Scenario Planning: A Tool for Strategic Thinking,” Sloan Management Review 36 (winter 1995): 25–40.

16. T.F. Mandel and I. Wilson, “How Companies Use Scenarios: Practices and Prescriptions,” SRI International, Menlo Park, California, report no. 822, spring 1993.

17. H. Mintzberg, “Planning on the Left Side and Managing on the Right,” Harvard Business Review 54 (July–August 1976): 49–59. Also published as H. Mintzberg, “Planning on the Left Side, Managing on the Right,” in “Mintzberg on Management: Inside Our Strange World of Organizations” (New York, Free Press, 1989), pp. 43–55.