Global Supply Chain Strategy: Decision Points
As a former sea captain, I will never forget the first time I approached a junction buoy. This buoy is essentially a fork in the road, floating on the water, which marks where a waterway splits into two channels and indicates the preferred channel to transit. The options were: steer to the preferred channel and arrive at the destination in three hours; or steer to the non-preferred channel and arrive in two hours, but I would have to navigate past a number of potential hazards below the surface.
This example of a tactical decision, where a single person makes a choice based on a limited scope of variables, is fundamentally similar to strategic supply chain analysis. Except in strategic analysis, multiple groups of decision makers can have conflicting interests since there can be an impact across departments and business units.
It is well understood that holding safety stock at every node in a supply chain is a widespread approach to managing demand and lead time variability, but investors typically only reward maximized use of capital. In a similar notion, modeling software tools have lots of levers and knobs to adjust when optimizing aspects of a supply chain on cost, but determining the optimal enterprise solution also requires critical input from key stakeholders inside and outside a company to truly meet business objectives.
The below two global supply chain strategy examples illustrate the decision makers and decision variables needed to ensure the chosen solution is optimal for the business.
A typical question raised is whether to source goods internationally or domestically. In most instances sourcing internationally from low-cost manufacturing countries appears to provide the lowest price. However, when variability from lead time of long, global supply chains becomes too volatile and appears to significantly affect service levels with potential stock outs, the domestic sourcing option looks less risky. Whereas, some may not want to hold inventory and prefer the flexibility of pushing the risk and ownership of moving goods internationally to the supplier.
From a key stakeholder perspective, influential decision maker’s input can significantly impact the sourcing strategy. If a company is driven by mostly autonomous merchants of an organization, their objectives would likely be weighted heavier for making sure stock outs never happen. Conversely, if an organization is driven by enterprise financial performance the sourcing decision would tilt towards minimizing the amount of time working capital is locked up in the supply chain. Ultimately, the sourcing decision point can be distilled down to whether the unit cost is lower for the buyer or seller, but deciding on how to calculate the lead time and inventory costs will be determined by the nature of the company and have an impact on the total results.
Lastly, for a new product being sourced the following decision makers’ participation should be considered for a broader point of view on costs: global sourcing, finance, IT, logistics procurement, legal, risk, brokerage and logistics service providers.
Challenging the basic global supply chain distribution network can be, well, a challenge. When companies focus on optimizing their networks for substantial cost and time savings, they are forced to widen their analysis outside of their own organization’s network. The optimal result would increase control, visibility, on time delivery while decreasing costs.
The buyer and supplier need to agree to analyze and design a new distribution program with their logistics service provider, which would be an alternative to taking ownership of goods at origin as well as a vendor managed inventory (VMI) model. It would be conceptually similar to DC bypass and merge-in-transit programs, with the addition that the supplier also leverages the buyers’ transportation rates and destination logistics services.
For a change of this magnitude, the buyer has to ensure its merchants are comfortable with altering their current processes. You need to demonstrate and prove flexible allocation will be possible and lead times will be reliable. This enables goods to be allocated and distributed while still in transit, instead of waiting for receipt of goods into physical inventory.
The result is that the buyer will not have to own the inventory until an order is made. At this time the ownership changes. This also eliminates the need for the supplier’s destination distribution process and costs for physical cargo handling and increases speed to market and payment.
Getting back to the sea captain story, I eventually took the non-preferred channel after speaking to a few local fisherman who provided their input on how to navigate through this channel and helped me save time and fuel. Similarly in global supply chain strategy, the difference between calculated savings potential and realized, actual savings in global supply chain strategy is having the input of key groups of decision makers inside and outside a company. It will add significant value to the analysis of a global supply chain strategy that is both compelling and aligned with an enterprise’s business objectives.