Developing a Supply Chain Strategy

Supply chain strategy occupies an important place in an organization’s strategic planning system. Let’s break down the types of supply chain strategies in detail according to their level in the strategic planning system.

 

The main types of supply chain strategies

 

1. Corporate strategy is a general plan of management of the organization, representing a set of decisions concerning the choice of branches and geographical regions of activity of the organization, acquisition or exit from this or that business, distribution of key resources between various spheres of activity, etc. We can say that corporate strategy reflects decisions on the choice of strategic business areas of the organization. In essence, corporate strategy solves the investor’s problem – how to distribute investments in assets in order to maximize the economic return on them. When developing corporate strategy, a key role is played by understanding the trends in markets and the economy as a whole.

 

2. Business strategy is a plan for the development of a separate area of the organization. For each area (direction) of the organization formulates its own strategy. It defines the mission and objectives of the direction, as well as ways and means of achieving competitiveness of the relevant products or services. Business strategy details the corporate strategy for a particular business area and describes the strategic plan for its development. Business strategy, in turn, contains functional strategies that describe certain aspects of business strategy.

 

3. Functional strategy is a set of activities and programs of individual functional areas and departments of the organization. Each functional area within the organization (marketing, production, finance, product and service design and development) determines how it contributes to the strategic goals of the organization. The functional strategy is the basis for action within the business. In particular, the marketing strategy is focused on the choice and justification of the product portfolio of the organization and the target markets, financial strategy – the choice of sources of financing the activities of the organization and assessing the cost of capital, the strategy of development and development of products and services – the creation and preparation for launching new products and developing new technologies. Operational strategy should help to implement the marketing strategy and the strategy of design and development of new products, taking into account the limitations dictated by the financial strategy.

 

4. Operational strategy, therefore, is one of the functional strategies of the organization. It deals with such components as managing production capacity, managing supply chain position and relationships with counterparties in the supply chain, managing production and management technology, and managing organizational development and competencies in the organization.

 

Supply chain strategy, in turn, can be presented as one of the components of operational strategy, dealing with the management of the production capacity of supply chain links, as well as the management of the position and interaction of links in the supply chain among themselves.

 

Production capacity is the maximum possible output of products or services by an organization over a planned period. For example, the production of tons of products per year, pieces of products per month, hours of services per quarter, etc.

 

Decisions on productive capacity of the organization can be divided into two groups: decisions on configuration of productive capacity and decisions on development of productive capacity.

 

When managing production capacity at the strategic level, the following decisions on its configuration are made:

 

  1. The overall level of capacity (including reserve capacity, important for enterprise flexibility, process speed, and cost levels);
  2. Distribution of capacity across production and/or service sites (i.e. the extent to which operations are centralized or distributed, and whether vertical integration and cooperative supply chains have been established);
  3. The specialization of production and service sites in the production of the relevant product group or type of services rendered;
  4. physical location of the sites in the world, country or region.

 

Decisions on the development of production capacity reflect three main moments:

 

  • The moment of change in production capacity;
  • the scale of incremental change in production capacity;
  • The time it takes to change production capacity.

 

In terms of the moment of change in production capacity, there are two main strategic approaches:

 

  • capacity outpaces demand, that is, capacity is brought on line ahead of projected demand for products/services; capacity “catches up” with demand, that is, capacity is brought on line based on customer orders received that regularly exceed available capacity;
  • the imbalance between the available capacity and the demand for products is smoothed with the help of formed stocks (stocks are formed during the period when the capacity exceeds the demand and are consumed during the period when the demand exceeds the capacity).

 

Each of these approaches has its own advantages and disadvantages.

 

The scale of capacity change implies two main approaches:

 

  • changing capacity in large steps, commissioning large facilities;
  • smooth change of capacity through commissioning of small capacity units, in fact – the strategy of following capacity as closely as possible to the value of demand for products/services.
  • The time required to change production capacity must be taken into account when choosing the size of the planning horizon when forming strategic plans.

Decisions to manage an enterprise’s position in the supply chain

 

They mean the choice by an enterprise of its direct control zone in the supply chain. And this zone of control (links of a chain of deliveries which the organization owns) can be located at the beginning of a chain of deliveries (the first stages – extraction and primary processing of raw materials), in the middle or at the very end (retail trade). A variant with full vertical integration is also possible, when the organization controls absolutely all links in the supply chain: from raw material extraction to the end consumer, though such a wide coverage is not common in practice. Accordingly, the enterprise chooses in which of the links (in which of the links) of a chain of deliveries to the greatest degree provides stable competitiveness.

 

When selecting a position in the supply chain, the enterprise must also decide on the need to differentiate its supply chain management depending on the market it serves. Different markets may have different requirements in terms of a set of competitiveness factors. It is quite possible to build several supply chains independent from each other, focused on different key success factors (speed of delivery, acceptable costs, product quality, etc.)

Supply chain configuration

The enterprise chooses its location in the supply chain – which links in the supply chain it will directly control through ownership relationships, and which neighboring links in the supply chain it will need to cooperate with. At the same time, there is a link (enterprise) in each supply chain that has the greatest influence on the configuration and organization of the supply chain. In international literature, such an enterprise is sometimes referred to as a channel master. Accordingly, the question of what role the enterprise will play in the supply chain, whether it will set the tone for supply chain practices or be in a subordinate position, following the rules established for the supply chain by its most influential link, is not unimportant for each enterprise in the supply chain.

 

Another important point is to decide how to respond to those dynamic forces that affect the enterprise in the supply chain (changes in customer demand, material flow dynamics, changes in the balance of power in the supply chain, information flow dynamics), i.e. how the enterprise strategically aligns its supply chain policy in terms of managing demand, inventory, purchasing, production, distribution, etc.

 

There are two main groups of decisions in the configuration of supply chains: decisions on the management of its position in the supply chain and decisions on the choice of the type of relationships with counterparties (suppliers, customers) in the supply chain.

The choice of the type of relationships with neighbors in the supply chain

This is no less important than the positioning of the company in the supply chain. Here we are talking about strategic decisions such as:

 

  • choosing a strategy by number of counterparties (e.g., suppliers) – whether to choose a strategy of multiple sources of supply or a single source of supply even when alternative sources are available;
  • choice of type of relationship, which should be sought in interaction with counterparties. The range of relationship types can cover partnerships or even alliances, on the one hand, and the cultivation of fierce competition between suppliers for orders of the organization, on the other hand. When there is a partnership with a counterparty, the organization explores options for its suppliers in order to ensure a more reliable resource base in the long term.

 

Ultimately, the organization’s task in terms of supply chain strategy development is to create such a configuration of the supply chain that would support the achievement and retention of the target values of competitiveness factors. To this end, in the areas of strategic decision-making (production capacity and supply chain configuration management), the organization decides on the composition of necessary tangible and intangible resources, as well as the composition and properties of operational processes. Resources and processes together form the so-called operational capabilities of the enterprise. The development of an enterprise’s operational capabilities is one of the main objectives of strategic supply chain management.

Prof.Fazal Rehman Shamil (Available for Professional Discussions)
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