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StrategicSupply-Chain Planning

StrategicSupply-Chain Planning

submitted to:

Prof. M.K.Sharma

Submitted by:

Adil Azmi(06/MBA)

Bharati Vivekanand(14/MBA)Dheeraj Yadav(/MBA)

Puneet Panwar(36/MBA)

Sukrita Bhatia(/46/MBA)

Sumit Chaher(/MBA)

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Introduction

Strategic supply-chain planning is that which combines aspects of

business-strategy formulation with aspects of tactical supply-chain

planning .

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.

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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?

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 totalsupply-chain costs.

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One Companys Story

Consider a strategic supply-chain planning exercise at apolyvinyl chloride (PVC) manufacturer that well call AcmeVinyl Co. Acmes North American revenues came from PVCfor 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 1990sabout 4% of those revenues came from Asia. Acme had beenseeing revenue growth for several years, mostly as a result ofacquiring other PVC manufacturers.With fragmented spare capacity around North America, afalling stock price and a need to rationalize the post acquisitionsupply chain, Acmes leaders considered their options.

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The Planning Spectrum

Strategic supply-chain planning falls in the middle of a decision makingspectrum that has business-strategy formulation at oneend and tactical supply-chain planning at the other. (See StrategicSupply-Chain Planning and the Planning Spectrum.) With afocus on fundamental changes in manufacturing and distributioncapacity, it is long-term in scope and impact but can benefitfrom detailed optimization models and advanced planning-andscheduling(APS) technology that is more often associated withmedium- and short-term planning.Used in this strategic context,the tools help determine what would be an appropriate supplychainconfiguration for sourcing and which plants or distributioncenters should be closed or kept open.In contrast, tactical supply-chain planning is short- ormedium-term in scope and impact, with supply-chain plannersusing past demand to make forecasts for the near term and

adjusting these forecasts on the basis of market intelligence orplanned promotions. Used in this context, optimization modelsand APS technology help determine where and when to producewhat items and how to distribute them.

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Planning Processes and Optimization

Although business-strategy formulation also uses toolsand frameworks,

it requires much more creativity than tactical planning. Tactical planners can use optimizationmodels that rely on mathematical techniques, help

companies

meet forecasted demand without exceeding productionand distribution capacity. strategic supply-chain planning can benefit fromappropriately used optimization models because tactical

supply chain models can be extended to include strategic

decisions about closing or opening plants and distributioncenters

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Strategic Supply-Chain Planning and the

Planning Spectrum table

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Use of Optimization for Strategic Supply-

Chain Planning

A variety of industries have successfully implemented optimization-based tools, including one called Strategic Analysis of IntegratedLogistics Systems (SAILS).4 Baxter International Inc. usedSAILS software to evaluate consolidation approaches followingits 1985 acquisition of American Hospital Supply Corp. SAILSalso helped Pet Inc. assess supply-chain synergies from twopotential acquisitions. In another case, a personal-computermanufacturer made successful strategic use of an optimizationmodel for its global manufacturing and distribution network.5GM uses a tool called Production Location Analysis NETworkSystem (PLANETS) to determine what products to produce

and how, when and where to make them.6 The now defunct DigitalEquipment Corp. (DEC) probably lengthened its life by usingsupply-chain models to decrease costs.7

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The Need for a Combined Process

Clumsy integration following mergers or acquisitions points tothe dangers of relying on only one type of decision making.M&Abusiness-strategy formulation rarely entails the use of models tooptimize the supply chain before and after a merger, even thoughmost operating costs reside in the supply chain. In one study,researchers surveyed 700 high-value international mergers andacquisitions occurring from 1996 to 1998 and found that failureto integrate supply chains was the main reason four out of fivedeals failed to enhance shareholder value.8Using an optimization model without a good strategy is similarlylacking. DECs strategic supply-chain planning system ofthe early 1990s improved manufacturing, distribution and service,but, without a robust business strategy, the company ultimatelysuccumbed to acquisition by Compaq Computer Corp.9

As supply chains become increasingly global, managers are

making more strategic decisions about supply-chain design andreengineering. Thus supply-chain management has evolved froma function garnering little attention or prestige to a highly visibleand respected one.10

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Three Approaches to Scenario Planning

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Scenarios and Scenario Planning

In scenario planning a flexible process for formulating businessstrategy senior managers build internally consistent,alternative views of possible future outcomes, including somethat are unthinkable, as Herman Kahn suggested in his 1950sexamination of Cold War scenarios.14 Typically, to keep the focuson important factors in relation to the long-term future, only afew business scenarios are developed. Building scenarios is more art than

science. The creative inputneeded from managers differs too much from one company toanother for experts to offer more than guidelines.15 (See ThreeApproaches to Scenario Planning.) Leaders creating business

strategy use what if situations based on the plausible interplayof factors expected to have long-term effects. The only constraintis plausibility.

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Erik Larsen, professor of management and systems at LondonsCass Business School, has identified three phases of scenarioplanning. Scenario building involves identifying issues,driving forces and factors that produce uncertainty, then devisingrough scenarios that are further fleshed out. In scenario planning,managers evaluate possible decisions, policies and strategies todetermine their effects in each scenario, modifying and reevalu-ating them as necessary. Scanning the business environmentinvolves checking early indicators of change in the environmentto see which scenario or combination of scenarios is actuallyunfolding, thus enabling managers to revise and refine the decisionsmade earlier in Phase Two.

Consider Acme Vinyls scenario planning in light of Larsensapproach. Acme managers deemed three decisions as likely candidates:first, the rationalization of existing production capacityand the closing of plants or parts of plants, while possiblyexpanding other plants;sec ond, the concentration of productionat one or two new megaplants;and third, the rationalization ofthe companys distribution network, the closing of some distributioncenters and the opening of others.They identified four main drivers affecting the companysprospects: macroeconomic forces that determine growth in thegross national product (GNP) of the United States and Canadaand the growth ofdemand in most secotrs;the efforts ofwesternEuropean governments and the European Union to phase outPVC, partly in response to Greenpeace activism;fluctuating oil

prices and their impact on the cost of raw material (and the companysmargins);and the cycle of prices for PVC goods.The managers also predicted business trends: continued U.S.construction growth;slo wer industrial growth in the UnitedStates, Japan and western Europe;r apid growth from 2000through 2005 in Asia (excluding Japan);a gradual shift from PVCto packaging polymers by major Japanese and western Europeanproducers of household goods, chemicals and constructionmaterials;and a reduced use of PVC compounds in the autoindustry in western Europe.

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After their analysis, the managers developed two business scenarios:a so-called Official Future and one referred to as Sunrise-Sunset. The Official Future reflected senior managers beliefthat, for at least four or five years, the companys business wouldgrow at the same rate as the GNP growth of the United States and

Canada (about 2% per year). Some sectors, such as electronicsand consumer goods, would continue to grow faster than others.Asian demand (excluding Japan) a small proportion of Acmestotal North American production would grow as the GNP ofAsian countries grew and as Acme achieved greater market penetration.Those trends would continue for 20 years, and U.S. government

policies would remain favorable to the PVC industryregardless of which political party was in power. The electronics

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But improvements in tactical supply-chain planning resultingfrom the use of technology from advanced planning-and-schedulingsoftware vendors has created unwarranted expectations that,with similar software, senior leaders could delegate strategic supply-chain planning to supply-chain planners. But senior executivesaloofness from strategic supply-chain planning tools createsthe same problems as ignorance of tactical advanced planningand-scheduling tools. DEC l ikely relied too much on supply-chainplanners. And after Nike Inc.s $400 million APS technology

implementation, $100 mil lion in inventory got misdirected, ultimatelytriggering a $2.5 billion loss in market capitalization.11The reason that senior managers keep aloof is lack of knowledge,and even suspicion.Managers at Royal Dutch/Shell Group,for example, harbored a distrust of optimization models thatbiased the company against using such models in its scenarioplanningprocesses during the early 1980s.12 The extensive detail,rigid structure and managers lack of familiarity with optimizationmodels arent conducive to the freewheeling discussion thatstrategy development needs. Moreover, because managementeducation is focusing less on analytical strategic planning and

operations research, M.B.A.s rising to the senior ranks since themid-1980s have shown less and less interest in the technical sideof management.13Thats why they need input from supply-chain planners whoare familiar with optimization models. Only through a seamless

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and consumer-goods businesses and growth in Asian demandwould eventually slow down.The Sunrise-Sunset scenario anticipated that events in westernEurope and Japan would lead to a downturn in the U.S. andCanadian PVC industry. Concerned about dioxin emissions from

the burning of PVC, state governments would begin to file lawsuitsagainst PVC manufacturers and garbage-incineration companies.Non-PVC polymer production would gain in importance.Meanwhile, a new day would dawn for PVC exports to Asia, wherean overwhelming need for buildings, water and sewer lines wouldincrease demand for 20 years despite environmental issues. The

total market would expand and Acme would see its market penetrationincrease, especially in India, China, Thailand and Indonesia,where Acme might even need to build or acquire plants

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Middle Ground

The ideal process adds a step between business-scenario creation and final decisions: using supply-chain planners optimization models. (See StrategicSupply-Chain Planning Using Scenario Planning.)

For each of the business scenarios, supply chainplanners can create multiple detailed modelscenarios to run with their supply-chain optimizationmodels. The result: a supply-chain configurationthat minimizes the total fixed and variable, long-term supply-chain costs for the particular businessscenario.

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Strategic Supply-Chain Planning Using

Scenario Planning-table

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Phase One: Scenario Building

In Phase One, the strategy team identifies the candidatedecisions and their attendant uncertainties, then outlinesbusiness scenarios. The supply-chain team develops or modifiesits supply-chain model on the basis of input from the strategyteam regarding possible decisions. The two teams then validate

the model. The strategy team garners useful informationabout the supply chain and updates its notions about how long-term supply-chain configurations affect total supply-chain cost.Next, the strategy team fleshes out the business scenarios usingthis information and data-on-demand forecasts, plant locations,distribution centers and so on. Finally, the supply-chain team

develops multiple model scenarios for each business scenario torun through its software.

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Phase Two: Scenario Planning

In Phase Two, the supply-chain teamruns the model scenarios and makes

scenario-specific recommendations.Then the strategy team modifies its poolof possible decisions, finally choosingone that it then shares with other managers.

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Phase Three: Scanning the Business

Environment

In Phase Three, the strategy teamidentifies leading indicators (in the case

of a company like Acme, it might behousing starts) that enable earlydetection of which scenario orcombination of scenarios is actually

unfolding

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Upsides and Downsides

Acme preserved shareholder interests following the exercise andthe merger, its stock price remaining level despite the plungingprices of other chemical stocks during the same period. Havingexecutives who formulate business strategy participate in scenarioplanning was critical to the final decisions, which undoubtedly

would have been different had the company used onlysupply-chain optimization modeling.But even without optimization-based planning, scenarioplanning would have elicited the same decision regarding themerger. The main benefit of optimization lies in refining thedecisions that emerge from scenario planning, including rationalizing

the supply chain.Whenever a company considers a merger, it must evaluate its

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own assets accurately (in addition to its targets) so that its shareholders

get the best deal. Acmes main assets were plants and

long-term customer contracts, and supply-chain modeling and

optimization helped senior managers understand which, in a

merger, could be spun off to increase Acmes value.

Like any othermanagement tool, however, both scenario planningand optimization modeling can have their downside. Some

managers become seduced by colorful future possibilities in scenario

planning when they should be focusing on the trends, underlying

factors and uncertainties relevant to genuinely possible

decisions. Others remain aloof, relying first on consultants andlater ignoring the scenarios when making decisions. Similarly,

development of a strategic supply-chain planning optimization

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model sometimes serves no practical use, becoming unwieldy or

taking too long to complete because of multiple motives.

Still, the joint use of scenario planning and optimization

models is the better road to shareholder value more effectivethan using either approach in isolation. Strategic supply-chain

planning, like Pegasus, is more than the sum of its parts.