When one size does not fit all
Picking up on the questions posed in the previous step. Over the years there has been a surprisingly consistent response from the classes I teach, regardless of their background (e.g. Executives of Masters students). Invariably the majority of the class believe the correct answer is (3), with the odd person citing (1) or (2).
I started to ask this question as after working for a FTSE 100 company over a number of years, it became apparent that their employees were not clear on the primary objective of the company. As harsh as it may sound, the primary objective of a stock listed company is to maximise the return to its shareholders. It is a slightly ‘trick’ question as the way in which a company can achieve this, is by delivering customer value at lowest possible supply chain cost. In order to do this, it is essential to understand the demand pattern or profile. Given that different products have different demand profiles, which require different supply chain responses, this leads to the need to develop a differentiated or segmented supply chain strategy. A ‘one size fits all approach’ to supply chain strategy is unlikely to minimise supply chain cost as it makes all demand look more unpredictable than it actually is. This means that bigger and costly buffers have to be put in place across the supply chain to act as a buffer against the uncertainty of demand to maintain supply.
For more than 15 years, I have worked with companies to help them understand their different demand patterns and develop appropriate supply chain responses. It begins by understanding the basic demand patterns for each of their products, and then developing the right supply chain response for each demand pattern.
A good business strategy creates a base level of demand for its products and services that accounts for 70-80% of all demand. This is important as it enables the business to develop a lower cost ‘lean’ supply chain response and provides stability for the business. The business then has the management headroom, to be able to more proactively manage the 20-30% demand that truly requires a more ‘agile’ or ‘fully flexible’ response.
Unfortunately, too many businesses do not consider the supply chain as they develop their business strategy. They develop strategies for growth that create unpredictable demand, that requires a costlier supply chain response for the majority of demand. This leads to issues with product availability and ultimately higher prices.
If you would like to find out more about the supply chain segmentation, please read the PDF ‘Thriving in a Turbulent World’ in the Downloads area below.
© University of Warwick