Part 2 of the five-part series “Designing Resilient Distribution Networks“
In the first article in this series, we explored forecast-driven (push) and demand-driven (pull) supply chains and the bullwhip effect produced by variability in demand. The upper half of the figure below illustrates a forecast-driven enterprise and the lower half a demand-driven enterprise.
Once an order is confirmed (note that the order confirmation point is the same), the time to ship is typically lower for a forecast-driven enterprise because it has the inventory. A demand-driven enterprise has a higher lead time to ship, even though the expected arrival date at the customer site is the same. While in both cases, adhering to all compliance regulations is a must, the time available to carry out those activities is less in a demand-driven enterprise. This makes it critical to align the decision making and execution capabilities so that orders will be serviced on time without compromising on principles of being demand-driven.
Broadly, the decision-making capabilities can be categorized into Planning and Enabling, while the execution capabilities can be categorized into sourcing, manufacturing, delivering, and returning.
Planning and enabling
Since a resilient distribution network is a demand-driven supply chain in spirit but also includes certain push components, the first key decision criterion is to determine the point at which the push comes into play. If an organization manufactures a variety of products, it could decide to deploy something called a product-driven supply chain strategy, where the type of product determines the level where pull translates to push. For example, high-value and niche products could be entirely demand-driven with a longer lead time to fulfill, and low-value and fast-moving products could be stocked up to a certain extent. Similarly, seasonal products can have a higher push level in the demand season and be entirely demand-driven in the offseason.
|Manufacturing Type||Production Costs||Inventory Carrying Costs||Planning Costs|
|Make to stock||Low||High||Moderate to high|
|Assemble to order||Moderate||Low||Low|
|Make to order||High||Low||Low|
|Configure to order||Moderate||Moderate||Moderate|
|Engineer to order||Situational||Situational||Situational|
This table provides guidelines regarding costs associated with manufacturing depending on the enterprise or product type. You can choose one of these strategies or a combination of them. For example, consider the case of an enterprise manufacturing four different types of electric motors. For the sake of simplicity, various components of the motor can be categorized into three key buckets: stator, rotor, and commutator. All four motors may use the same stator, three may use the same rotor, while the commutator may be specific to each.
In such a case, the planning and enabling team can adopt a different strategy at the component level. It can design a demand-driven supply chain, where the final motor assembly uses a configure-to-order strategy, whereas the subcomponents use a different strategy. Since the same stator is used by all four motor types, that component may follow a make-to-stock strategy, since its movement will be faster. At the same time, it may want to follow a make-to-order strategy for the commutator, as it is specific to only one type of product and might be slow-moving. There may also be motors that follow a customer specification that changes for each order, and they may follow an engineer-to-order approach.
Thus, while the overall supply chain is demand-driven, certain components of the supply chain follow a push (forecast based) approach, making the supply chain resilient. The point at which the supply chain moves from pull-based to push-based is the foremost point for planning and enabling to consider.
Once the planning functions have been defined, you need to take care of the execution functions and ensure that they are well aligned. The key areas to consider are Sourcing, Manufacturing, Delivering, and Returning. Competitive advantage and core competency play key roles in defining execution strategies.
Competitive advantage allows an organization to perform a specific function better than its competition. It is something its competition cannot replicate in a short period of time and is usually not easily replicable. For example, the motor manufacturer’s competitive advantage might be its patents on a more energy-efficient type of stator. The competition cannot replicate this in a short period of time, so it allows the enterprise to have an edge over its competition.
Core competencies are the foundation of an organization’s competitiveness. In simpler words, they are those parts of the value chain that differentiate what they do. For example, while a motor manufacturing company has the source raw materials, manufactures the motors, ships them, and has an efficient return mechanism, the only area that differentiates it might be its state-of-the-art manufacturing facility. Thus, manufacturing becomes its competitive advantage; while the other three execution functions are essential parts of the chain, they can be outsourced or subcontracted.
Once these decisions are made and aligned with the overall planning, the second step of designing a resilient supply chain is complete.
This five-part series, “Designing Resilient Distribution Networks,” focuses on five key aspects that are essential for modern distribution networks to incorporate. Bookmark the series page to catch up on any blogs you may have missed and watch for new installments.